Want to know the secret to predicting a company’s future profitability? In this insightful episode, I cover the one key factor to determine a stock’s profitability. Discover what stocks and shares are, how dividends serve as a tangible return on investment, and why investing in quality dividend stocks can be an excellent strategy for long-term success.
Get ready to dive into real-life examples of companies with a consistent history of paying dividends, such as Johnson & Johnson, Pepsi, and Coca-Cola. I also look at the elite club of Dividend Aristocrats and Dividend Kings – stocks that have increased dividends for 25 and 50 years, respectively. Plus, learn about the 12 Rules of Simply Investing, designed to save you time, minimize risk, and maximize gains. Join me on this journey to unlocking the true power of dividends and pave your way to financial success!
I cover the following topics in this episode:
– What is a stock or share?
– What is a dividend?
– Proof of profitability
– Real-life stock examples
00:00
Before you invest, take a look at this one key factor that can help you predict future profitability for any company or stock. Hi, my name is Kanwal Sarai andwelcome to the Simply Investing Dividend Podcast. In this episode, we’re going to cover four topics. We’re going to start with what is a stock or a share, thenwe’re going to look at what is a dividend. After that we will look at proof of profitability, the one key factor I mentioned in the beginning. So we’re going to go indetail on that. And the last topic is going to be some real life examples, and so we’ll take a look at those.
00:46
Let’s get started first with our topic number one What is a stock or a share? So a stock or a share for the purpose of this podcast, this episode, means the exactsame thing. So some people will say I have five shares in Walmart, or they’ll say I have stock in Coca-Cola. It means the same thing. So what exactly is it? Well, astock or a share represents ownership in a company. So let’s take a look, for example, at Walmart. Walmart has a little over 2.6 billion shares outstanding. If youwere to buy all of the shares, you would own the entire company. Now, if you bought just five shares, or 10 or 100, you are still considered part owner of thecompany And as part owner of the company, you’re entitled to share in the profits of this company. And those profits come to you in the form of dividends. Andthat’s topic number two What is a dividend? So, like I said, a dividend is the company sharing its profits with you, the shareholder. So let’s say, for example, acompany is paying a dividend of $1 per share and you own a thousand shares, you will receive $1,000 every year for as long as you own those shares and as longas the company continues to pay the dividend, and in this case it’s an annual dividend of $1 per share. Now you can spend those dividends if you wish or you canreinvest them. Those dividends are deposited as cash into your trading account. So it’s up to you. You can reinvest them or you can spend them if you wish. Nowit’s important to note in this example you know you own a thousand shares, the company is paying a dividend of $1. You’ll receive $1,000 every year, regardlessof the stock price or regardless of what happens in the stock market. So the stock price can go up, it can go down, but as long as you own those shares and as longas the company is continuing to pay the dividend, like in this example, then you will receive $1,000 cash deposited into your trading account every single year.
03:15
Now let’s get on to our next topic The key factor that helps to determine proof of profitability, because this is going to help you figure out is the companyprofitable and will it continue to be profitable. So what is proof of profitability? And the answer is it’s the dividend. Now I’m going to share with you a quote whichI think is really important here, from Kelly Wright. So he is a financial analyst, or expert, if you will, and I’m going to share with you exactly what he says. So this isa direct quote from Kelly Wright, and he says from our perspective and experience, the cash dividend is the more attractive profit path when investing in thestock market. Okay, so let’s take a look at that again here. This is important From our perspective and experience, the cash dividend is the more attractive profitpath when investing in the stock market.
04:34
In the first instance, the cash dividend is just that cash in hand, a tangible return on investment. Unless the company is committing outright fraud, a practice thatwill typically be short lived. The cash dividend is evidence that the company is indeed generating profits. A company cannot pay that which they do not have, sothis is extremely powerful. So let’s take a look at our next slide here. Okay, and I’m just going to summarize just two points here from the quote from KellyWright.
05:17
A dividend is tangible. It must be paid from cash. And where does the cash come from? It comes from profits, from the earnings, and we typically we will look atearnings per share. So that’s how a company is able to pay the shareholders. They have to make money, they have to make profit in order to pay a dividend to theshareholders.
05:43
Now you might be thinking well, doesn’t the dividend drop when the stock price drops? So let’s take a look. Okay, so that’s a valid question. So we’re going to takea look at a real life example with a company called ADP. It’s an American company, founded in 1949, headquartered in New Jersey, and they have 60,000 fulltime employees. So let’s take a look at this price graph up on the screen. So you can see here this is the 45 year history of ADP, and the blue line or the purple linerepresents the stock price, and so you can see the stock price goes up and down. If you look carefully enough, you’ll see that there’s places in time where thestock price dropped by $5, 10, 15, even $20 a share, and that is a huge drop in the stock price.
06:46
But what happens to the dividend? So that’s represented by the orange line on the screen And you can see that the dividend keeps going up every single year. Itjust keeps going up And you can see this is a 45 year history. In fact, the company has increased the dividend consecutively for 48 years. So how can a companycontinue to pay the dividend and continue to increase the dividend every year when its stock price drops? And you can see it in the graph The stock price dropsquite a few times, right?
07:23
Stock prices go up and down all the time. How can they continue to pay a dividend when the stock price drops? And the answer is that the dividends are not paidfrom the stock price. The dividends are paid from earnings, and that’s where the money comes from. Like I said before, the company has to be able to make aprofit and Then they can afford to pay the dividend to the shareholders. Okay, so now in this graph We’re looking at the same company, ADP, same time period,45 years, and again you can see the stock price going up and down.
08:02
But now the orange line Represents the earnings, the earnings per share, and you can see there’s a couple of times Over the last 45 years that the earnings havedropped a little bit. So Probably one, two, three, four, five sort of major periods in time where the earnings had dropped. But that’s not bad. Out of a 45 yearperiod. What we’re looking for here is the long-term trend. And what is the long-term trend with the earnings? We can see that it’s going up. So you can see theorange line here. The earnings per share over the last 45 years Continues to go up. So as long as the company Continues to be profitable, continues to makemoney, then they can afford to pay the dividend to the shareholders.
08:58
Here’s another important point here. And increasing dividend also helps. Let’s go back one second. And increasing dividend also helps to increase the share price.Now how does it do that? so Keep in mind, the dividend is the return on your investment. While you hold on to your shares and I’ve said this before the stockprice can go up and down. Doesn’t matter as long as you own, the note, those shares, if you don’t sell those shares. As long as you hold on to them, you will keepgetting dividends, and that dividend is the return on your investment While you hold on to your shares.
09:41
So let’s take a look at That dividend yield. It’s really simple It’s the annual dividend divided by the share price. Now, to be more specific, it’s the annual dividenddivided by your purchase price, and that’s going to tell us what is the return on your investment. So let’s take a look at this example. We have a company that’spaying a dividend of $1 That’s an annual dividend per share and let’s say you were to buy the shares today at $20 a piece. So that’s the share price, or yourpurchase price today is $20 a piece. So we simply take the $1 dividend divided by 20 and we want to express that as a percentage and You can see it comes out to5%. So 5% is Your dividend yield. It is your return on your investment While you hold on to the shares. And again, the stock market can go up and down. Shareprices can go up and down, but your purchase price doesn’t change because you bought the shares at $20 and As long as the company is paying a dividend in thisexample, your dividend yield is 5%. So that’s a 5% annual return on your investment while you hold on to those shares.
10:58
Now let’s see what happens to the dividend yield When the company increases the dividend. So now the company has increased the dividend to $1.50. So itstarted at $1, now it’s at $1.50. Your purchase price is still $20. That hasn’t changed. So now if we take $1.50 divided by 20 Express as a percentage, we can seeit’s 7.5%.
11:24
Now one more example let’s say the company increases the dividend to $2. So now we take $2, which is the new dividend Divided by your share price or thepurchase price, which is 20. So 2 divided by 20 Express as a percentage is 10%. So can you see what’s happening here? What’s happening to the dividend yield?every time the company increases its dividend, your dividend yield is going up. So in this example, you started off making 5% a year. Then, when the companyincreased the dividend, you were making 7.5%. Then, when they increase the dividend again, you’re now making 10% return on your investment.
12:09
So what’s happening here is every time the dividend goes up, the dividend yield goes up and that attracts more investors. And when more investors are attractedto the company, it’s gonna drive up the share price. So why are more investors attracted to this company? Well, in this example, the dividend went from 5% to7.5% to 10. So when the dividend yield goes up, investors are smart. They know that they can make more money. In this example, they can make 7.5%, 10%. Theycan make more than what they would make in a bank account or in a term deposit. So they will take their money, their capital, and put it towards good qualitydividend stocks that are paying a higher dividend yield.
13:05
So let’s take a look at an example here. I’m gonna go back to the same example with ADP, automatic Data Processing Company. So we’re looking at the 45 yearhistory. We’ve seen this before. The same graph. Look at what’s happening to the stock price, which is in blue, as the dividend, which is the orange line, goes up.So the dividend goes up. Every year. You can see it rising Along with it. The stock price is going up, okay. So we’re looking at long-term trends and that’s what wewanna look at. We wanna see over the long-term, the share price starts to creep up as the dividend is increased. So that’s a good thing for us as dividendinvestors.
13:55
Here’s one more quote before we jump to our last topic in this episode. This comes to us from Tom Connolly, a long-time dividend investor, and he says dividendincreases are a sign that companies are comfortable, their future profit will be resilient. And that is absolutely true. The companies will crunch the numbers.They’ll have their accountants and financial analysts crunch the numbers and they will know before they announce a dividend increase that they can pay thathigher dividend to the shareholders. So they know they’ve got enough cash to support an increased dividend. Why? Because they know that that’s gonna helpsupport the stock price. And the opposite is true. When a company announces a dividend reduction or they cut the dividend, the stock price drops immediately.Right, and nobody wants that and the company doesn’t want that. So they’re very careful and they’ve done their homework before they announce a dividendincrease. So when you see a company increase its dividend, that’s a positive sign that their future profit will be resilient.
15:14
Now we move on to our last topic and I wanna share with you some real-life examples of a few companies. So we’re gonna start with Johnson Johnson, and nowwe’re looking at a 50-year history. So again, the stock price is represented in blue and you can see stock prices go up and down all the time, in this case withJohnson Johnson, again, we see big drops $5, $10, $15 a share where the stock price drops. But what’s happening to the dividend And you can see that on thescreen the orange line is the dividend. The dividend keeps going up every single year And, like I said before, as the dividend grows in the long-term, so does theshare price, And the share price starts to creep up. So this is all good news for dividend investors like us. The next company I wanna show you is Pepsi, and samething here We can see the share price in blue Again. It goes up and down. We see drops in the share price, but over the long-term, as the dividend keeps growing,the share price keeps growing. So that’s a good position to be in in the long-term, because not only have you collected the increasing dividends year after yearafter year, you then have the option, if you need the money in the future, that you’ll be able to sell the shares at a higher price than what you paid for.
16:42
Okay, so let’s take a look at six examples here We’ve touched on some of these companies. So ADP automatic data processing you can see up on the screen herehas had 48 years of consecutive dividend increases. Coca-cola 62 years. Johnson Johnson 62 years. Lowe’s 60. Pepsi 51. Black Decker 55 years of consecutivedividend increases.
17:12
Now, nobody can predict the future. We don’t know what the stock market is going to do next week, next month, next year. We don’t know if the companies willincrease dividends or reduce them or eliminate them. The future is unpredictable. However, when we take a look at companies like these, we can have a highdegree of confidence that companies like these will continue to pay us a dividend in the future and increase the dividend into the future.
17:43
So, for those of you that are interested, take a look at dividend aristocrats. These are companies that have increased their dividends consecutively for 25 years ormore, and in the US today, there are 65 of those companies that are out there. The Dividend Kings are companies that have increased their dividendconsecutively for 50 years or more, and again today in the US, as of this recording, there’s 48 companies out there that are. We refer to them as Dividend Kings.So it’s worthwhile taking a look into those companies.
18:22
And here’s another quote. I’m going to paraphrase this one. This is coming from Geraldine Wase And she says A clever accountant can make earnings appeargreat or not so great, depending on the season or the objective. However, there can be no hiding a cash dividend. It is either paid or it is not paid, and that isextremely powerful. You can’t hide the fact that you have to pay a dividend as a company to the shareholders, so clever accountants can adjust the earnings asthey see fit. However, the dividend is tangible and it’s tangible proof of profitability.
19:11
When it comes to looking at dividend paying stocks Now, does this mean that you can go out and buy it? you should go out and buy any company that pays adividend today, and the answer is no. So now our approach to investing is to invest safely and reliably for the long term. So when we say long term, when I saylong term, i’m not talking about weeks, months or years. I’m talking about decades, and so we invest for the long term. As you saw in this episode, when you lookat those graphs, we’re looking at 45, 50 year graphs and we wanna see a long term trend of the dividend going up. So you can’t see that if you’re only looking at aone month window, you have to look at the long term.
20:01
Now my approach, what I teach, is to invest in quality dividend stocks when they are priced low, cause it’s important. When you buy the stock, you don’t wannapay a very high price for it. You wanna buy it when the stock is priced low. So how do you know, when you’re looking at a stock, if it’s a quality stock and how doyou know that it’s priced low? So for that I created what I call the 12 rules of simply investing. Now, these rules are designed to save you time, to reduce your riskand to maximize your gains. So think of these as a checklist. So if any company fails even one rule, you skip it. Move on to something else. Before you invest in anystock, it has to pass all of the 12 rules, not just some of the rules. So for those of you that are watching this, you can see the 12 rules on the screen If you’relistening to the audio version. I’m gonna go through the 12 rules right now.
21:00
Rule number one do you understand how the company is making money? If you don’t skip it, move on to something else. Rule number two 20 years from now, willpeople still need its products and services? Rule number three does the company have a low cost competitive advantage? Rule number four is it recession proof?If it’s not, skip it, move on to something else. Rule number five is the company profitable, and we talked about it in this episode today the proof of profitability,which leads us to rule number six does the company grow its dividend? Rule number seven can the company afford to pay the dividend? And rule number eight isthe debt less than 70%.
21:42
Rule number nine we wanna avoid any company with a recent dividend cut. Again, we talked about it in this episode. A dividend increase is positive news, adividend cut is negative news. So rule number nine says avoid companies with a dividend cut. Rule number 10, does it buy back its own shares? Rule number 11, isthe stock priced low? And so rule number 11 has three parts to it. We check the PE ratio, we check the current deal to the 20 year average, and then we check theprice to book ratio as well. And then rule number 12, keep your emotions out of investing.
22:18
I know it’s easier said than done, but it’s really important not to get caught up in the hype and not to get caught up with what everyone else is saying or doing, butto apply the 12 rules intelligently. And if a company fails even one rule, skip it, move on to something else. So for those of you that are interested in learning more.I created the Simply Investing course. It’s an online course, it’s self-paced and it covers the 12 rules. We cover a lot more than that as well.
22:53
The course is divided into 10 modules, so we start with the investing basics, then we cover the 12 rules, then I show you how to apply the 12 rules to any stockanywhere in the world. I also provide you with a Google Sheet where you can enter all the numbers in, and then the Google Sheet will highlight the rules that passand the rules that fail. I also show you how to use a Simply Investing Platform. I will take you step by step in placing your first stock order. I will show you how tobuild and track your portfolio when to sell, which is just as important as knowing when to buy. We’re going to look at reducing your fees and risk, especially whenit comes to mutual funds, index funds and ETFs. I’m going to give you an action plan to get started and then, lastly, i will answer your most frequently askedquestions.
23:44
Now, for those of you that are interested, i spent two years building a platform, simply Investing Platform.
23:50
It is a research tool, it’s a web app, and in the platform. We apply these rules to over 6,000 companies in the US and Canada every single day, so when you log intothe platform, you can immediately see which companies pass the rules, which ones fail, which companies are priced low so you can consider them for purchase,and which companies are priced high so you can avoid them for now. So for those of you that are listening or watching this podcast, write down this coupon codeSAVE10. Save10 is going to give you 10% off of all of our products and services on our website, so that includes the course, the platform. I also do personalassessments, so if you want to talk to me, we can get on a Zoom call and we do personal assessments and there as well, you can save 10%. If you enjoyed thisepisode, be sure to click on the subscribe button, hit the like button as well, and for more information, take a look at our website, simplyinvestingcom. Thanks for watching.
