Hi fellow investors,
This is Charlie Tian again. Today I want to talk about dividend investing. A dividend can be a very important part of income for retirees, especially today because the interest rate is so low and you can make a constant cash flow.
To get a constant cash flow, you want to invest in high dividend companies. These high dividend companies may even grow their dividend over time and this way you will have a higher dividend over time. I want to give you some examples here on GuruFocus.com.
If you come to the company Johnson & Johnson (JNJ, Financial), which is a very good dividend stock, you can find more details under the dividend tab. Johnson & Johnson has been increasing its dividend since 1963. Currently, the dividend yield of Johnson & Johnson is 2.7%.
An important ratio here to look at is the growth rate. Their five-year dividend growth rate is about 6.3%. Assuming you buy today and Johnson & Johnson continues to grow its dividend at the current rate, after five years your yield on cost will be 3.58%. Of course, the higher they increase the dividend, the higher your yield on cost will be.
So how do you know if your dividend is safe? The first place to look would be the amount of time they have been increasing their dividend. Another thing to look at would be whether or not the company is making enough money to cover the dividend.
For this you can look at the dividend payout ratio. It is calculated by dividend per share divided by earnings per share. Looking at one of the charts available you can see that Johson & Johnson's dividends per share are largely lower than the cash flow per share. This leads me to believe that the dividend payouts are safe.
You can also see the dividend yield history on GuruFocus. This shows you how the yield can be different at times due to the changes in the stock price. You want to invest in these types of companies when the yield is at historical highs. In 2011, there was a peak for Johnson & Johnson and right now it is lower at 2.7%. That is still not bad compared to other companies.
Another company we can look at is Chevron (CVX, Financial). As an oil and gas company, it has been paying dividends since 1982. The current dividend yield is at 5.7% and is higher than that of Johnson & Johnson. The growth rate is not that high, but its yield on cost is over 6%. If you had a million dollars in Chevron, this would gain you more than $60,000 dollars a year income.
You still will want to see if the dividend payouts are safe looking towards the future. Due to the price of oil losing favorability in the last few years, you can see that the free cash flow and earnings have both come down dramatically, especially with the recent decline. At this point it is unclear whether or not the dividends are safe.
Again I hope that you enjoyed this video. I hope that I answered your questions regarding dividend investing. If you have any questions, please feel free to leave them below and I will answer them as soon as possible.
See you next time,
Charlie Tian
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