When people think about share investing, most likely they think about making profits through share price gains.
What may be more impressive is the potential recurring income you could earn many years from now…without having to lift a finger to earn it.
Others may have to worry if their retirement savings will last them, but your passive dividend income keeps coming year in and year out.
Take a second to imagine yourself in retirement three or four decades from now.
Would you want potentially thousands of dollars of new money income landing in your bank account like clockwork several times a year?
Yes? (I thought so).
You can even give your stocks to your children and they can carry on earning well after you, too!
Now you can see why dividend stocks are loved by Foolish investors. But how do you spot the good stocks that can keep paying for decades?
Here are five of the things you should look for in a great dividend stock and five stocks that have them.
1) Dividend growth history
Has the stock paid a steady, usually rising dividend over the past 5 -10 years (at least) with no extreme cuts or interruptions in payment? Commonwealth Bank of Australia (ASX: CBA) has increased its dividend per share in nine of the past ten years. (2009 slipped a little due to the GFC).
2) Earnings power and extra cash to pay (and raise) dividends
Paid dividends are usually a certain percentage of earnings, so you also want to see net profits rising every year. SEEK Limited (ASX: SEK), operator of the highly profitable seek.com.au, has increased earnings an average annual 21% in the past five years. Dividends have risen almost 27% annually over the same time. Wonderful!
3) High return on equity
Return on equity (ROE) is the net profit divided by shareholder equity of a company (assets minus liabilities). A high ROE shows the management is expertly putting company assets to work to make you even more money in the future.
Retailing giant Woolworths Limited (ASX: WOW) regularly has a high ROE well over 20%, which makes the retailer a great money earner.
4) Share buybacks
Dividends are paid per share, so if the company actively reinvests its profits back into the company by buying its own shares, then the number of outstanding shares decreases. Now, each remaining share gets a bigger cut of the total dividends paid. Done many times over the years and your shares could be earning more and more dividends without doing anything.
Biopharmaceutical company CSL Limited (ASX: CSL) just announced a share buyback last October- its eighth in the past nine years! Each time the dividend per share rises. The company's consistent profits make it a good dividend stock candidate.
5) Special capital returns
Sometimes a company gives back surplus money directly to shareholders if a better way to invest the money can't be found. On top of the regular dividends paid twice a year, the company can declare a one-off "special dividend".
Suncorp Group Ltd (ASX: SUN) built up a heap of surplus capital in recent years and has paid out a special dividend every year for the past three years on top of the regular dividend (which it raised as well). The insurer and banker intends to return more capital to shareholders in the near future, so you may not want to miss out.
