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06 December 2023 15h15
Source: Banco Carregosa

7 tips for choosing companies that pay dividends

7 tips for choosing companies that pay dividends
 7 tips for choosing companies that pay dividends


Investing in shares of companies that pay good dividends is a way of reducing the risk of your investment. Discover the 7 factors to have in mind when making your selection. 


This is the goal of all investors, but it’s not an easy task. It can be a challenge to find companies that regularly pay out a significant dividend. The good news is that there are some indicators that can help you find them. Discover 7 factors that can help you make the right choice. 



1. Dividend history, a sign of confidence

Companies with a consistent history of paying dividends are more likely to continue to do so in the future. 


Analyse (at least) the last 5 to 10 years to identify regular payment patterns and consistency in amounts paid out. If you find them, it’s a sign of competent management, financial stability and commitment to shareholders. It may also be useful to compare how other companies in the same sector perform to get a broader perspective. 



2. Payout ratio, to get to know the company

This ratio is important to investors because it shows how much of the company’s profits are being used to pay dividends. It’s a way of knowing whether the company is making a consistent profit, keeping some to reinvest in the business and some to pay out to shareholders.


A moderate payout ratio (between 40% and 60%) suggests that the company is managing to balance dividend payments with reinvestment. A higher ratio may indicate that the company is paying out most of its profits, which may be unsustainable in the long run, especially in financially difficult times. On the other hand, a very low payout ratio may indicate that the company is not adequately rewarding shareholders. 

Investors can look at this ratio in the company’s financial reports to assess the sustainability of dividends over time.



3. Dividend yield, to maximise passive income

Dividend yield is a quick and easy to interpret measure that relates dividend payments to share price. It helps to identify companies that offer attractive dividends relative to their share price. 


Compare the dividend yields of several comparable companies to see which offer more favourable dividends relative to the market price. A high figure may indicate that the company is making solid profits and is willing to pay out a large proportion of its earnings to shareholders. This may be even more attractive to those looking for passive investments. 



4. Balance sheet, a sign of financial health

A company’s balance sheet is another tool used by investors to assess its financial health before making an investment decision. This measure provides a detailed overview of the company’s assets, liabilities and net worth over a given period, which is essential for knowing the company’s ability to pay consistent dividends over time.


Companies with strong assets and low debt are more likely to maintain stable dividend payments even in difficult economic times. On the other hand, a fragile and unbalanced balance sheet with debt levels above the sector or peer group may suggest the opposite. Therefore, analyse the composition of assets to ensure that the company has valuable assets such as real estate, trademarks or patents. Also look at short and long-term liabilities to find out the level of debt.



5. Sustainable growth, with the future in mind

Companies that show signs of sustainable growth are likely to increase their dividends over time. That’s why it is important to assess the company’s history, current situation and future prospects. It is hard to guess, but there are some clues that can help. 


For example, a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis may be useful to see if the company has competitive and sustainable advantages that will enable it to lead the market and make increasing profits. An assessment of strengths, such as solid and consistent results, weaknesses, such as debt levels or profit volatility, opportunities, such as market expansion plans or new product launches, and threats, such as competition, provides a holistic picture of a company's viability as a dividend payer.



6. Mature sectors, for greater stability

Investing in companies in stable and mature sectors is a prudent strategy for investors. Public services, healthcare and basic necessities enjoy steady demand regardless of economic fluctuations as these companies provide products and services that people need on a daily basis. Therefore, the analysis of stable markets and the consideration of the other factors mentioned above can help in the search for companies that pay dividends.



7. Continuous monitoring, so you know when to hold and when to sell investments

Investors need to continually monitor their investments in companies that pay dividends, because the financial market is dynamic and subject to change. Regular monitoring of company performance, industry news and economic events helps investors make informed decisions about whether to hold or sell their holdings. 


Pay particular attention to factors such as leverage, profit margins and cash flow, which can reverse expected returns. On the other hand, this monitoring can also help identify opportunities. Companies that may be temporarily undervalued may still have good long-term prospects in terms of dividend payments.



Banco Carregosa, specialised financial support 

These are the main factors to consider when selecting companies that pay good dividends. However, it is important to rely on specialised professionals to review investment strategies, especially in times of greater volatility or significant changes in your financial circumstances. You can rely on the Banco Carregosa team to help you make informed decisions and ensure that your investments are fully in line with your long-term financial goals.