Dividends4Life: Your Dividend Investment Needs A Moat

Your Dividend Investment Needs A Moat

Posted by D4L | Tuesday, July 30, 2013 | | 0 comments »

When looking at dividends and the sustainability of those dividends, I always look to the characteristics of the underlying business that I am invested in to determine the durability of the dividends and the likely level of dividend increases. The existence of moats play a big role in that process. At its most basic, the idea of a moat refers to the advantages that a business possesses to help keep out invaders from overrunning their "fortress" so to speak. In other words, it's the set of tools and competitive advantages that a business possesses to repel competitors from completely commoditizing their business, damaging revenue growth, margins and profitability.

Moats are significant for dividend growth. A company with no moat or a subpar moat will soon find their business overrun with competitors, if they are experiencing significant revenue growth. Success generally attracts competition. Prices will get pushed down and the business may experience revenue declines and profit issues. If its lucky and the market the business is in is growing strongly, it may continue to retain its share of the growth. If its unlucky the consequences may be far worse.

Source: Seeking Alpha

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