Dividend Guidance

When you own a business, you expect a return on your investment in the form of revenue and, subsequently, net profit. When investing in stocks, the expectation of return is the same, only the means of obtaining it are different. The ultimate goal of the investor is earnings growth. There are two main sources of its achievement: an increase in the price of shares of the company in which you invest and the cash dividends that the company pays. Let’s understand the basic concepts regarding dividends.

What are dividends?

This is the distribution of a company’s earnings among its shareholders as decided by the board of directors. This usually takes the form of paying cash dividends to each shareholder’s account. It is customary to measure these payments in terms of dividends per share, that is, how much profit is actually paid to the shareholder on each share. To calculate dividends per share, you need to divide the entire amount allocated for their payments by the number of shares outstanding.

What is dividend yield?

Since dividends are one of the forms of income generation, their size is usually compared with other alternative sources, for example, a risk-free rate. To do this, the dividend yield is calculated, which is the dividend per share expressed as a percentage of the dividend-paying company stock price. In other words, it can be described as the ratio of annual dividend to share price.

What do payments depend on?

A quarterly dividend is common. Bristol-Myers Squibb Co (BMY) does this like many other companies. However, depending on their policies, companies may pay out at different intervals or not at all, as Amazon (AMZN) does. Of the large companies, Meta Platforms (META) and Alphabet (GOOGL) also did not pay dividends. And if Google is going to share for the first time on June 17, then Meta did it already in February. The truth is purely symbolic — 50 cents per share worth $472 — the yield was only 0.11%. Why don’t all companies pay dividends? Many companies do not pay dividends and instead retain earnings to be invested back into the company. And we will touch on this later.

Also, sometimes special dividends may be paid, for example, if the company’s financial results turn out to be significantly strong. For example, on May 1 John B. Sanfilippo & Son, Inc. (NASDAQ: JBSS) announced a special cash dividend of $1.00 per share. Details can be read in this article.

What is the Payout Ratio?

The dividend payout ratio is the share of net profit paid out to shareholders in the form of dividends. If the value of this ratio is very high, and even above 100%, this indicates a high risk of instability of future payments of the same level. On the contrary, an extremely low ratio signals that the company prefers to reinvest profits or, for example, use share repurchase programs to increase shareholder value. There is no ideal value for the payout ratio, so this indicator can serve as an additional point in company analysis for the most meticulous investors.

We provide all these indicators, as well as the average dividend yield for periods of 3-5 years, the dividend strike (how many years in a row dividends are paid) and the dividend track record in the dividend section on each company’s page.

Total Return

The ultimate goal of every investor is to see growth in their portfolios. The final increase consists of rising stock prices and dividend payments. And we know that many investors prefer dividend-paying companies for their portfolios because they value the stability and reliability of such payments.

However, take a look at our recent pick of Dividend Aristocrats — there are 11 companies whose dividend yield currently exceeds 5%, that is, higher than the risk-free rate. There you will find both UPS with a yield of 5.5%, and BMY, which we already talked about today, with a value of 5.6% in the dividend yield column. Western Union (WU) pays more than 8%, and the holding company CVR Energy (CVI) from the Energy sector generally brings in a cosmic 15%, sending 65% of its profits to the dividends.
But if you look at the Return column, which is responsible for the average annual growth of shares, you will see the values ​​are mostly around zero! And this is in 5 years. That is, BMY stock shareholders have consistently received high dividends, which provide almost 4% annual returns on average over the past 5 years, while the share price has not changed nearly at all in these 5 years. The same GOOGL, which has not yet paid a single dividend, has an average return from share price growth of more than 20%. What matters is whose total return is higher!

Opinion

We have no right to tell you that buying dividend-paying stocks is a bad idea if you value stability and consistency, and this also correspondent to your philosophy. However, in our methodology, there was no place for assessing dividend metrics for 2 reasons. Firstly, we did not find confirmation of the hypotheses regarding the relationship between dividend growth rate and the market outperforming. And secondly, borrowing an idea from Buffett’s early books, we are more impressed by those companies that have a high return on equity (ROE) and reinvest profits back into the business, understanding how to multiply each dollar of profit extracted. A mature company that allocates most of its profits to dividends has most likely reached its ceiling, and its shares are unlikely to experience rapid growth in the future, which means there is most likely no place for them in our portfolios.

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