Seeing a share price explode after investing is undeniably satisfying, but so is receiving a steady second income from dividend stocks.
Having extra money materialise in a bank account without having to lift a finger opens the door to a better lifestyle. Meanwhile, it also lays the critical foundations of a personal pension fund. And may even allow investors to unlock an earlier retirement.
The Footsie is home to many high-quality income stocks. But there’s a lot more to it than just buying high-yield shares. After all, dividends aren’t always sustainable. And the last thing any investor wants is to own an income stock that doesn’t provide any income. With that said, here are some key factors to consider before investing.
Dividend stocks with maturity
As strange as it seems, the age of a business can be a useful indicator of dividend sustainability. Mature enterprises often lack impressive growth due to their sheer size. But sometimes, these businesses still generate an excessive amount of cash, far beyond what they can use for internal investments.
With no better use of the funds, shareholders reap the benefits through sizable dividends and buybacks. And since a mature company is likely to hold a dominant position within its sector, this income is often sustainable and resilient.
While uncommon, younger firms can sometimes offer dividends to shareholders as well. However, given the uphill battle of trying to defeat an industry titan, this capital should likely be reinvested instead. After all, capitalising on growth opportunities is seldom cheap.
It’s also worth pointing out that their smaller size means fewer resources are available to weather any economic disruption. Even young dividend stocks with healthy balance sheets are more likely to press ‘pause’ or cut their shareholder payouts when times are tough than a mature business.
Management matters
One problem that can sometimes arise within mature companies is management complacency. There’s the risk of arrogance forming among a leadership team with the assumption of being too big to fail. But as previously highlighted, young enterprises are constantly trying to dethrone industry leaders. And if appropriate action isn’t taken to defend their market share, even the most popular dividend stocks can become duds.
A perfect example of this would be BT. For years, competing telecommunications and internet providers have been chipping away at its market share, with management pretty much doing nothing until very recently. And the damage can clearly be seen in the financials, with revenue, profits, and dividends falling almost every year since 2016.
The bottom line
Talented management and business maturity are obviously not the only factors to look at. But, in my opinion, they serve as an excellent first step along the journey of enquiry and can quickly eliminate unsuitable dividend stocks from consideration.
