Pointers For Cash Flow Investing
I have always been a proponent of investing in stocks that gives consistent dividend, no matter the sector. It helps keep your focus off the short term movement of the market and reduces your risk as compared to capital gain investing(which is to buy a stock below retail valuation and wait for its assets to appreciate). Point to note, you should never invest in a stock just because its current dividend payout is attractive, more research has to be done.
This puts fundamental analysis to good use. Past data matters, despite all the naysayers out there. To judge the potentiality and sustainability of a company, we have no other way but to base it on past data. So here are four useful pointers to look out for to help you make an all rounded decision on your cash flow investing journey.
Business model- You have to be familiar with how the company generates income. Know the company's position in the market and its position relative to its competitors. Put the competitors side by side in a table and compare their fundamentals.
Cash reserve- Make sure the company is consistently maintaining a healthy cash reserve. Dig back five years of the company's balance sheets and make sure their cash reserved are well managed. Consistent increments of cash for a company is a sign of strong performance. It shows that the company is having more cash than time to figure out what to do with it. Also to me, with a strong cash reserve, companies will have more flexibility to pay down debt, buy back shares, increase dividend, or even acquire other companies. That is why cash in hand per share is a metric for potentiality.
Net debt- Debt will reduce earning powers which might indirectly pose as an additional deterrent for dividend growth. That is why net debt to equity is always a must have metric for me in my research.
Dividend payout ratio: If you have an understanding of how much of the generated cash will the company pay out as dividend, you can indirectly judge the dividend growth aspect of it. Company that is doing "easy" payouts are the ones with low payout ratios combined with healthy yields. These are the companies that have the potential to increase their dividend payout in the future.
You always want to get a full understanding a company before you invest. These four pointers give you very pragmatic beacons to out look for when you are doing your research.