What Does a Dividend Say About a Company?

On 2011/06/27, in Blog, by Miranda Marquit

Some investors, when picking stocks, like dividend paying stocks. This is because a company that pays a dividend generally had certain characteristics. These characteristics can make a company a good investment – beyond the virtues that the dividends have for income investing. Here are some of the things you can infer about a company from its dividend:

Financial Strength

One of the most important things you can learn about a company from its dividend is its strength. A company can’t pay a dividend if it doesn’t have cash. The payment of a dividend is usually an indicator that it has some cash to spare. (You do have to be careful, though; in some cases a very attractive dividend is an indication of the opposite, with a management desperate to find investors to shore up the company finances.) A regular dividend that remains stable, or increases every year (like what you see with dividend aristocrats), is usually an indication that the company knows what it’s doing financially.

Stability

A regular dividend can also indicate that the company is stable. A reasonable yield of between 3% and 6% usually means that there is a degree of stability in the company. This is especially true if the payouts have remained the same, or risen, over time. If dividends are being slashed, or if there is an erratic history of payouts, it can be an indication of instability.

Concern for Shareholders

The payment of a dividend can also signal that the company cares for the wellbeing of shareholders. This is important if you want to a company that has your financial interests at heart. Consider: There are a number of things that the company can do with that cash. Instead of putting it into some other venture, or boosting executive pay, the company is choosing to share it with shareholders. This can be a good sign – especially if you want to be a shareholder.

Picking Dividend Stocks

As you can see, even if you aren’t choosing a stock for its dividend, looking at the dividend, and the dividend history, can help you get an overall feel for the company’s likely performance. A company that pays a dividend usually has strong fundamentals, and if the dividend has remained mostly intact through market corrections and setbacks, that is an even stronger indication that your choice is likely to offer solid returns over time. Carefully consider your options, you might find that a dividend stock makes a great investment on its own – on top of providing you with regular income.


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