Kids are known to ask ‘where do babies come from?’ That question is usually met with a long silence and then an awkward response, which in my case was, from Kaiser Permanente.
But the answer to the question ‘where do dividends come from?’ is a lot more straightforward.
Dividends are paid out of profits. If a company pays dividends but doesn’t generate a profit during the quarter (most companies pay dividends quarterly), then they tap into cash on the balance sheet.
As a dividend investor, the one thing that you should always look for is how much cash a company has on its balance sheet and the free cash flow it generates every quarter. Solid dividend-paying companies have ample cash on their balance sheets and healthy free cash flow.
Free Cash Flow
Free Cash Flow is the cash generated by a company that is available to pay out as dividends, buy back shares, pay down debts, or acquire other companies is called Free Cash Flow (FCF).
Free cash flow = Net cash from operations (net of interest and tax) – capital expenses.
Let’s take a look at Cisco, my portfolio company.
Cisco keeps increasing its FCF per share every year. This shows that its financials are healthy and the dividend is safe. Cisco has grown its dividend every single year for the past 9 years at the rate of 12% for the past 5 years.
Let’s do the numbers.
|Value: $9,101||Loss: -$34|
|Return: ▼0.37%||Dividends: $2|
My portfolio, along with the market, retreated to end the week. I was leaning towards investing $250 in Wells Fargo but ended up buying ONEOK instead. This was a dollar-cost average play on my part as I tend to do that when the broader market is up but a company in my portfolio is down.
|Value: $9,101||Gain: +$893|
|Return: ▲26%||Link to portfolio: M1 Finance|
This all-time portfolio takes into account the gains and dividends I have re-invested.
Projected Dividend Income
|Annual: $427||Monthly: $36|