Business models shifting
It is not only investors who are seeing the appeal of dividend-focused models. An increasing number of oil and gas exploration and production (E&P) companies are shifting their business strategies, with the majority moving from the growth-through-drilling approach toward the income-and-dividend model.
In November, intermediate player Whitecap Resources (TSX:WCP) announced a change in corporate strategy, stating that it will focus on “paying sustainable dividends,” while a month later Pace Oil & Gas (TSX:PCE), AvenEx Energy (TSX:AVF) and Charger Energy (TSXV:CHX) confirmed plans to merge into a dividend-focused company.
With the momentum behind resource plays waning, it is clear that some companies see increased payouts to shareholders as key to protecting their valuations.
What to look for
Investors should be mindful of certain criteria when beginning to invest in dividend-yielding stocks. For example, investors are best off only considering companies that boast a proven record of steadily increasing dividends over a long period of time, according to a division of The New York Times.
It is also important to ensure that a prospective investment has a dividend-payout ratio of 50 percent or less, with the remaining funds being invested back into the business for future growth
Investors should also look for companies that have generated positive earnings for at least the past three years. While that might be somewhat unrealistic considering the current junior oil and gas landscape, investors must remember that the dividend model is based on protecting investments, not reaping high profits through risky stock picks.
Finally, investors should look for companies that yield a dividend of between 3 and 6 percent and have little or no corporate debt.
However, while these tips may be helpful in picking out the winners from the losers, it is ultimately up to investors to do their own due diligence.
Pat McKeough, a professional investment analyst, highlighted in a recent article that it is essential to avoid judging — or investing — in a company based solely on the fact that it pays a dividend, adding that investors should be wary of focusing entirely on high-dividend yields as they can sometimes be a sign of danger.