Everything you need to know about dividends
Dividends are a portion of a company's profits distributed to its shareholders. Unlike capital gains, which result from the appreciation of a stock's value, dividends provide a direct cash payout to investors. Some companies distribute dividends regularly, offering shareholders a steady income stream.
Dividends provide a steady stream of income to investors
Dividends by themselves don’t make a company a good investment, nor does the lack of dividends make a company a bad investment
A company uses its cash to pay out dividends
Companies with high returns and low growth perspectives are best candidates for paying out dividends
Typically, companies with high growth opportunities are better off re-investing into the business at higher prices
Companies can either increase or reduce their dividend payout over time
What is the ex-div date?
The ex-dividend date, or ex-div date, is a crucial milestone for investors. To be eligible for an upcoming dividend payment, an investor must own shares before the ex-dividend date. If shares are bought on or after this date, the buyer will not receive the next dividend payment. Note that buying the stock before the ex-dividend date with the sole purpose of getting the dividend and the selling the stock doesn’t work, as stocks tend to drop in value with the dividend amount on the ex-div date.
What is a Payout Ratio?
The payout ratio is a key metric that indicates the percentage of a company's earnings allocated to dividends. Calculated by dividing dividends per share by earnings per share, a lower payout ratio suggests that a company retains more of its profits for reinvestment or future dividends, while a higher ratio indicates a larger portion is being distributed to shareholders.
What a low vs. high payout ratio is dependent on the industry, for example REITs have high payout ratios whereas IT companies have low ones.
Dividend Streaks and Dividend Kings:
A dividend streak refers to the number of consecutive years a company has been consistently paying dividends. Companies with an impressive track record of increasing dividends annually are often referred to as "Dividend Kings" or "Dividend Aristocrats." These designations highlight a company's commitment to returning value to its shareholders over the long term.
Using the pevaluator screener, one can filter companies by their dividend streak, finding companies that consistently return value to shareholders by increasing their payout.
When is Getting a Dividend Good vs. Bad?
The decision of whether receiving a dividend is advantageous or not depends on an investor's financial goals. Dividends can be attractive for income-focused investors seeking regular payouts. However, growth-oriented investors may prefer companies that reinvest profits for future expansion, even if it means forgoing immediate dividend income.
Dividends vs. Share Buybacks: When to Choose One Over the Other?
Dividends and share buybacks are two common methods companies use to return value to shareholders. Dividends provide regular income, while share buybacks reduce the number of outstanding shares, potentially increasing the value of remaining shares. The choice between the two depends on the company's financial strategy, growth prospects, and the preferences of its investors. When the stock is undervalued in management’s opinion, share buybacks might be more suited for long-term goals. Reducing the number of shares outstanding also means lower future dividend payments, as the number of shareholders is reduced.
Should I consider dividends when valuating companies?
This is down to investor preference. Some people prefer high growth companies, others prefer companies that pay a dividend that is well sustained by earnings and is consistently increased. If you’re in the latter group, you might certainly want to pay a premium for such a high-quality dividend stock.
With pevaluator, you can create a market model that prices these in and comes up with investment ideas tailored to those preferences. In such a model, a company like Broadcom ($AVGO) will be valued higher than NVIDIA ($NVDA) because it has a higher dividend yield and a longer dividend increase streak.
