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Cheap shares, good dividends?

I have been reading that companies with good dividends are the ones that I should be adding to my portfolio. Some are pretty expensive and I was wondering if cheaper shares pay good dividends. If so, which ones?

You have opened up a can of worms here, so let me tackle the matter step by step.

First, you should know all of the long ranging studies of returns from shares shows that dividends make up 50 per cent of the overall return from shares.

This has made me like buying companies with a good history of dividends.

Of course, they can divert from history, but it hasn’t been a bad strategy over time.

I know of smart, long-term investors who look at top 20 or top 30 companies, then look at their dividend yield and then investigate their history of paying good dividends. It creates a pretty good looking portfolio of shares.

Be careful that as share prices fall and, say, dividends don’t change, it can push up the yield. If the company is in long-term trouble, the dividend could be drastically reduced or even disappear in the following year.

That’s why I like quality companies.

One last point I would like to make about expensive shares. If you buy a $40 share and it goes up by 10 per cent, you make $4. If it’s a $4 share, you make 40 cents. Think of what you are investing — say, $100K for simplicity. If you buy a $40 or a $4 share and both rise by 10 per cent, then on $100K, you still make $10K no matter what shares you buy. Investigate the company and compare its price to its potential value — that’s better than picking shares on price.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

 

Published on: Thursday, January 28, 2010

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