When evaluating dividend stocks, many investors focus only on dividend yield. However, sustainable dividends can only come from sustainable businesses.

One simple way to improve your investment decisions is to think like a banker. This mindset shifts the focus from short-term payouts to long-term financial strength.

Imagine you are a mortgage officer at a bank, and two borrowers walk in, each applying for a RM1 million home loan. Mr A earns a high salary and has a strong credit history. Mr B earns less and has a weaker repayment record.

Who would you approve? Naturally, Mr A – because banks assess income-generating ability and financial behaviour, not hope.

The same principle applies to dividend investing. Good dividend stocks are backed by companies with reliable earnings and disciplined financial management.

Investing through the lens of a banker

Banks lend money to earn recurring income from interest. Dividend investors invest capital to earn recurring dividend income.

Before approving a loan, banks carefully review financial documents. Likewise, investors should review a company’s financial results before buying its shares.

Banks prefer reliable borrowers with strong repayment ability. Investors should prefer companies with solid fundamentals that can sustain dividends over time.

Adopting this banker’s mindset helps investors make more objective decisions. It is especially useful for those investing for long-term cash flow rather than short-term price gains.

However…

There are more than 900 companies listed on Bursa Malaysia. Most retail investors simply do not have the time to analyse every business in depth.

As a result, many end up chasing tips, reacting to rumours, or speculating on short-term price movements. While this behaviour increases volatility, it also creates opportunities for disciplined investors.

Just as a bank would never lend without checking financial documents, investing without understanding a company’s financials carries unnecessary risk.

What makes a good-quality stock

Dividend investors generally look for companies that can sustain or grow dividends over time. Such businesses often share several key characteristics:

• Consistent revenue growth signals steady demand and long-term business strength.
• Stable or improving profit margins suggest efficiency, competitiveness, and good cost control.
• Consistent growth in net profit or earnings supports a company’s ability to keep paying dividends.
• A cash conversion ratio above 1 shows that accounting profits are being turned into real cash.
• Consistent operating cash flow is critical, because dividends are paid in cash.
• Strong cash flow also supports expansion, debt repayment, and long-term sustainability.

Using annual reports

If you want to build a strong dividend portfolio in Malaysia, annual reports are essential: a long-term review helps filter out weak businesses and one-off performers.

A simple 10-year checklist can guide your analysis. Look at revenue growth, profit margins, net earnings, operating cash flow, and the company’s dividend track record.

This approach keeps your focus on business quality rather than headline yield. After all, high yields mean little if they cannot be sustained.

Long-term fundamentals

Dividend investing is most effective when decisions are based on long-term financial strength. Business fundamentals and sustainable cash flows matter more than market noise.

So, instead of speculating, think like a banker. Assess a company’s ability to generate recurring income, just as a bank assesses a borrower’s ability to repay.

This article first appeared in KCLau.com.

Ian Tai is a financial content writer, dividend investor, and author of many articles on finance featured on KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’ and ‘Small Cap Asia’ in Singapore.