How You Can Legally Raid the Cash Boxes of the Stock Market

Yesterday I revealed my three top tips for small-cap investing success.

These three simple principles guide my decision on whether to recommend a speculative investment.

If you consider and apply that advice, you’ll set yourself up to boost your win rate in small-cap shares.

Today I want to let you in on a fourth secret. It’s a simple characteristic shared by successful emerging companies.

And it’s all about the need for companies to attract dividend-hungry investors.

You see, shareholders are a fickle bunch. Often it’s not enough for a company to reward them with share price appreciation. They want to get their hands on the company’s profits in cash. That means many investors gravitate towards stocks that pay dividends.

That’s true in markets around the world. But it’s especially true in Australia. Dividends typically bring investors here a bonus tax credit.

I’m sure you know why investors have been swinging this way. Lower central bank interest rates mean lower savings and term deposit interest rates.

That has forced investors to take bigger risks to maintain the same income level.

That means you should keep your eye out for stocks that can grow and pay rising dividends. If you spot them before the rest of the market cottons on, you’ve most likely found a golden opportunity.

Only one area of the market can meet investor demand for big growth and tasty dividends – small-cap stocks.

Companies that fit this bill are rare. I call them ‘Turbo Caps’.

These are the profitable, or soon-to-be profitable small-cap stocks that are about to pay or increase their dividend.

So, how can you identify a ‘Turbo Cap’ stock? I look for three key indicators:

• Healthy cash flows from paying money to suppliers and receiving money from customers. This is crucial. It’s hard for companies to pay dividends from an empty bank account.
• Rising revenues — and in turn, rising profits — from a genuine, growing business.
• A dividend payout of only a fraction of the company’s profits.

When I find a stock with those characteristics, it usually tells me that dividend growth could be on the cards.

That means bigger payouts for shareholders. And that means more investors will want to own the stock — which pushes up its price.

Read the rest of this article at Money Morning