To An Investor, A Dividend Is A Valuable Thing!Summary: This section of the site looks at the way companies pay a dividend, how that payment is viewed by the stock market and investors and the impact on valuation. Clearly, dividend policy is very important to the market - and it should therefore be important to us all! Analysts use a number of methods to value and assess companies. The way a company returns money to shareholders offers useful insights into the valuation and potential return an investor might receive. It is also used a reflection of the industry or sector the company is in. The companies in some sectors literally throw off cash! For example, with a high oil price, the 'majors' literally pump money from the ground. There is an almost limitless demand for their product but supply is not so elastic and so there is often more demand than supply and a strong or rising price. Such companies are expected to pay out a portion of these profits every year to investors and are therefore some of the main holdings in 'income' funds around the world. There are a number of ratios based on accounting methods which are used to calculate returns relative to the dividend being paid. These can help to estimate the future cash flow to the investor from a stock. In the UK, for example, they are usually paid every six months. The first is known as an interim dividend, whilst the second is known as the final dividend. These payments can be the same size or of different amounts. If the interim and final dividends are for different amounts though, it is usually the final which is the larger sum. Since dividend payments from a holding can be a large or at least significant portion of long term returns, it is useful for an investor to gain a working knowledge of this subject. It is worth noting that as a stock market rises, the capital gains being accrued by investors tend to make company directors less inclined to make payments from their cash reserves. This means that annual dividend payments often stand still for a number of years while the company value is rising. The income paid out is therefore a smaller element of an investors annual return. The return on the majority of collective investment funds is not usually impacted much by individual corporation's dividend policies. This is because of the large number of holdings such a fund would control. However, there are investment funds (mutual funds / unit trusts / sicavs) that only select corporations that pay above average returns. These funds are designed to pay out a proportion of their income each year - and therefore are targeted at investors that need to draw an annual income. These investors might be the retired or nearly retired on a fixed income, or anyone with known expenditures due for which the income from the fund will help to pay. The following pages will look at the issue in more depth:
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