New Investors: How to Get a Pay Raise Every Year
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As the current stock market downturn shows, stock prices are unpredictable. Therefore, you cannot reliably predict that you can make money from stock price appreciation without speculating on what stock prices might do. Another way to make money from stocks is through dividend income. New investors can increase their chances of getting a raise each year by investing in a diversified portfolio of carefully chosen, quality dividend-paying stocks.
For example, just last week I wrote that three dividend stocks, Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM), canadian tire (TSX: CTC.A), and Algonquin Power & Utilities, are good to consider this month. Over the past week, their stock prices have gone up and down as shown below. They apparently move in step with news or short-term market sentiment. It is therefore quite useless for new investors to look too closely at the short-term price movement. However, over the long term, you can expect them to move with the fundamentals of the underlying companies. If companies make more money per share over time, you can expect their stock prices to rise over time.
In the chart above, Canadian Tire is the only stock that rose over this period. It turns out that the strong dividend stock increased its dividend by 25% and, as a result, jumped 6% on Thursday! This is surprising news, as the company announced the dividend increase, which is for September, in advance. Perhaps, in this market downturn, management is trying to demonstrate the strength and stability of the company’s financial situation. The increase in the dividend has certainly boosted investor confidence, at least in the short term.
Then how To do do you get a raise every year?
How New Investors Can Get a Pay Raise Every Year
Companies in the same sector are exposed to similar risks. When these risks materialize, their revenues can be significantly impacted. Therefore, buying and holding a basket of diversified dividend-growing stocks increases your chances of getting a pay raise from dividends each year.
For example, when macroeconomic risks reach a certain level for the Canadian economy, the regulator, the Office of the Superintendent of Financial Institutions (OSFI), would prevent federally regulated financial institutions from increasing their dividends. So during the era of the global financial crisis in 2007 and the COVID-19 pandemic in 2020, CIBC and its peers only maintained their dividends.
When reviewing individual dividend stocks, new investors can consult the following checklist to increase their chances of getting dividend increases. First, the dividend-paying stock must have a history of maintaining or increasing its dividend. Of course, growing dividends in a healthy way is always better, but any stock that can safely maintain its dividend is commendable.
Second, the more stable the stock’s earnings or cash flow, the better. For example, utility stocks like Algonquin have fairly stable earnings to protect their dividends. Generally, the greater the unpredictability of earnings, the lower the payout ratio should be. This is why cyclical companies such as industrial stocks paying dividends generally have low payout ratios.
If you’re not sure what’s considered a healthy payout ratio for a company, look at the payout ratios of its peers. It should align with the industry payout ratio.
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