A dividend is a distribution of a company’s profits to its shareholders. Dividends are declared by a company’s board of directors and paid out at varying intervals, such as monthly, quarterly, annually, or on an ad-hoc basis. Not all companies pay dividends. Other capital allocation options available to companies include repurchasing shares and investing in projects that support growth.
In addition to yield, investors should consider the following when evaluating dividend-paying equities:
- Is the dividend sustainable? This can be determined by the dividend payout ratio. A ratio over 100% means the company is distributing more money to shareholders than it earns, increasing the likelihood the dividend is reduced.
- Does the company have a track record of growing its dividend? Regular and sustainable dividend increases can enhance investors’ confidence in a company’s finances and growth prospects.
Many great companies do not pay big dividends
Many of the world’s largest companies earn high returns on their capital (RoC). To compound those returns for shareholders, these companies retain a relatively high proportion of their earnings to reinvest in their businesses. These companies can deliver impressive long-term shareholder returns despite their lower dividend payout ratios and yields.
We compare representative samples of these two categories of companies (higher and lower RoC) in the chart to the right.
source https://rosenbergdri.ca/an-introduction-to-dividends/
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