Purchasing stocks from a steady and reliable dividend payer is one of the best ways to get a decent passive income on a regular basis.
There are dozens of finance-related websites out there that advise readers to gain financial freedom by investing in ventures that guarantee routine dividends. (See: http://www.philstockworld.com/2016/05/14/best-way-for-buying-options-of-stocks-for-monthly-dividend/) Again, some top bloggers on the topic have also tabled their personal dividend benefits to egg on other individuals to follow suit. However, all of these posts bring up certain ubiquitous names such as Walmart (WMT), 3M (MMM), Wells Fargo (WFC), among other well-established companies. It is undeniable that these leading blue-chip companies offer wonderful dividend opportunities.
While investing in these top companies for regular dividends is a prudent step toward increased financial freedom, it is far wiser to embrace a more rewarding investment strategy. Although everyone would like to put their hard-earned money in a financially promising (stable) company, you are advised to shun these high-ranking names. This is primarily because you ought to have more interest in the long-term cumulative returns rather than in steady dividend payouts.
Despite the irrefutable reality that investing in such high-flying firms guarantees one a solid stream of dividend, they have a few negatives that are worth thinking about before you choose where to put your money for long-term returns. These thinly veiled drawbacks that many dividend seekers fail to see include:
1. Small and Slowed Revenue Growth
Revenue growth determines the rate which stock prices increase over time. While it is true that corporate behemoths listed above do grow, they do so at a very slow rate. The huge size of these chart-topping corporations makes it harder for them to grow within a given time. For instance, none of the firms listed above grew beyond 5% in the most recent years. As such, you ought to shun investing in these massive companies since their big size reduces your future cumulative returns.
2. Acquired Growth
Since established companies rely on old markets, they usually seek to grow by going for new acquisitions. While growing through new acquisitions is not a bad thing, it comes with a few dangers. Some of the major risks occasioned by acquired growth include frequent layoffs, cultural discrepancies, and integration puzzles. Therefore, it is more discreet to put your money in smaller companies with natural growth projectiles.
3. Operational Complexities
Many high-profile corporations such as JNJ own a chain of other smaller companies. The intricate structures of these leading firms make it hard to manage them. These managerial complexities slow down revenue growth which in turn reduces your long-term returns. It is far better to invest in smaller companies that have less complicated operational structures.
4. Inflated Payouts
Huge companies have exaggerated six-digit payment packages for their top employees just for show, not because they are keen improving or growing the organizations in question. Coke’s colossal personnel compensation plan is clear case in point.
5. Poor Consumer Trends
Recent surveys on the trending consumer habits show that a worrying number of punters may be shunning established companies. For instance, many individuals in the 21st century have started eating right and avoid junk foods; and companies such as Coke undoubtedly risk massive losses in the near future.
6. Huge Taxes
Moreover, most big firms give dividends in the form of cash, which still attracts lofty taxes within a remarkably short time. If your post-retirement dividends are still heavily taxed, for example, then your investment may not guarantee the financial freedom you initially wanted.
As such, you should give priority to little-known but capable companies that are set to offer the best dividend payouts in the tricky 21st-century economic situation. Go for smaller startups that have sound managements and consumer statistics smiling their way. Since finding these better investment opportunities won’t be easy, highlighted below are perfect examples small but high-growth companies that promise better long-term returns.
1. Whole Foods
While this new industry will hardly go beyond a dividend yield of 5%, – that they’re on the right side of history makes them prime candidates for unprecedented growth. With international mavericks such as John Mackey and Walter rob steering the better health’ trend, you can expect to enjoy double-digit growth on investment returns in a matter of a decade or so.
This is another venture into which you can put your money and comfortably wait for handsome long-term returns. While the company offers 1.3% dividend yields presently, the future looks very bright. With an able founder in charge, Howard Schultz, your money is in the hands of a seasoned corporate guru with a host of celebrated investment decisions to his name. With extensive managerial checks and efficient customer support teams, Starbuck’s dividends are no doubt expected to increase within an unbelievably short time. A company that has already grown will have a very slow revenue growth rate in future and your dividends won’t improve a bit. Starbuck is one of the fast growing companies – and their long-term dividend payouts are set to increase as they grow, too.
A rough look at how people are fast moving from handling hard cash to digitalized transactions just gives you an insightful glimpse into the wild possibilities of growth companies like MasterCard are set to enjoy in the next few years. Even though the dividend payouts are less than 1%, this percentage currently, a comprehensive calculation will reveal that the dismal figures are expected to hit all-time highs such as 50% or 60% revenue growth in the next 5 years. Now that the company has invested in the less traveled lucrative area that is not heavily prospected by other more moneyed corporations, MasterCard is likely to entrench itself against any stiff competition in the few years to come. A company like MasterCard is most likely the dream of tomorrow’s dividend seekers.
As the facts and statistics discussed above clearly show, it is sensible to shun mega companies that offer handsome dividend payouts now, but have unchangeably dismal revenue growth prospects. Choose smaller companies that may be offering less dividend percentages presently but promise a steadily increasing total revenue return in the near future. Don’t go for Walmart or Coke – pick MasterCard or Starbuck instead!