Increase your income

When you're looking to boost your income, you usually focus on companies that pay generous dividends. However, there are other strategies for boosting cash flow. Let's take a look at these different approaches and their advantages and disadvantages. To do this, let's start by reviewing the key ratios used to evaluate the dividends paid by companies.

How to differentiate between companies in terms of dividends

There are several key indicators that investors can use to form an opinion of the dividends paid by an organization. The most commonly used figures are as follows:

•  THE dividend yield Dividend yield: This is the ratio between the total amount of dividends paid per share over a year and the share price, expressed as a percentage. For example, if a company pays a dividend of 1$ per share and the share price is 50$, the dividend yield will be 2%. Companies with high dividend yields are generally considered more attractive. 
• Dividend growth rate This is the rate at which a company's dividends increase or decrease from one year to the next. For example, if a fictitious company "XYZ" pays a dividend of 1$ per share in the 1st year and 1.05$ per share the following year. Its dividend growth rate is (1.05 - 1) / 1 = 0.05, or 5%. A high growth rate is considered positive, as it indicates that the company's profits are growing and that it is in a position to distribute more of its earnings to shareholders.
• THE payout ratio Dividend payout ratio: This is the percentage of a company's profits that is paid out in the form of dividends. It is calculated by dividing dividends paid by the company's net profits. For example, if company "XYZ" generated net profits of 100,000 $ during the last year and paid out 25,000 $ in dividends. The payout ratio is 25,000 / 100,000 = 0.25, or 25%. High payout ratios may indicate that the company is using a large proportion of its profits to pay dividends, which may leave less room for future investment or debt reduction. Converselyirms with a low payout ratio have more flexibility to increase their dividends in the future. 
• Dividend stability This is the length of time a company has paid its dividends. Companies with a history of stable dividend payments are considered more reliable. For example, consider company "ABC", which paid a generous dividend yield of 5% 10 years ago. Its competitor "XYZ" seemed a priori less attractive, with a yield of only 2%. However, "ABC" suddenly ran into financial difficulties and stopped paying dividends until today. "XYZ", on the other hand, continued to pay its shareholders throughout the period. The earnings offered by "XYZ" are not only more reliable, they are also ultimately greater than those of "ABC", despite what the initial situation might have suggested.

Strategies for increasing revenue

There are several strategies for maximizing returns by investing in dividend-paying companies. Here are some of the most commonly used:

• Invest in companies with high dividend yields This strategy involves investing in high-yield companies to generate maximum immediate income. Advantages: high returns on investment, source of regular income (if all goes well...). Disadvantages: riskier strategy (beware of the yield trap, explained in my work). Example of a high-performance company: IBM.
• Invest in companies with strong dividend growth This strategy involves investing in companies that regularly increase their dividends, so as to benefit from increasing returns over time. Advantages: increasing returns over time, source of regular income, security of investing in healthy, stable companies. Disadvantages: higher valuation, lower returns. Example of a company with high dividend growth: Microsoft.
• Invest in companies with low payout ratios This strategy consists of investing in companies that have a strong market position. low payout ratioThe advantages: potential for higher dividends in the future. Advantages: potential for higher dividends in the future, source of regular income, often less expensive (but not always, especially in the case of technos). Disadvantages: lower returns. Example of a company with a low payout ratio: Apple.
• Invest in companies with a history of stable dividend payments This strategy involves investing in companies with a history of stable dividend payments, so as to benefit from a regular, reliable source of income. Advantages: regular, reliable source of income, security of investing in healthy, stable companies. Disadvantages: low potential for dividend increases in the future. Example of a company with a stable dividend: Consolidated Edison.
• Investing in companies in theDividends Aristocrats"These are companies that have increased their dividends every year for at least 25 consecutive years. These companies are considered financially solid and stable, with sound financial fundamentals and a long-term vision. Advantages: steady, stable and even progressive returns. Disadvantages: lower returns and higher valuations. Example of a "Dividend Aristocrat": Procter & Gamble.

Conclusion

Investing in high-dividend-growth, low-payout, high-yield, stable-dividend and growing-dividend companies are different approaches to increasing income. High dividend growth companies offer increasing returns over time, low payout ratio companies have the potential to increase dividends in the future, high yield companies offer substantial immediate income, and stable dividend companies offer steady, reliable income. Aristocrats mix the benefits of growth to those of stability.

Finally, it should be noted that, in principle, the above-mentioned strategies are generally designed to be managed on a buy-and-hold basis. This is because.., this principle, we are able to move the return on purchase cost over the years. However, this idea is only valid if dividends continue to rise. If they do, all the good theories fall apart. 

It's therefore important not only to monitor what the company is doing with its distributions, but also to anticipate its decisions by keeping an eye on its fundamentals. If need be, you'll need to know part with its shares. Paradoxically, this counter-intuitive step, if taken intelligently, can increase income even further.