What do dividends tell us?
Paying dividends sends a clear, powerful message about a company's future prospects and performance, and its willingness and ability to pay steady dividends over time provides a solid demonstration of financial strength.
Key takeaways. Dividend payments represent portions of profits companies share with their stockholders, usually on an annual or quarterly basis. The dividend you receive is based on the number of shares you own and the percentage of profit a company will use for dividends.
Importance of Stock Dividend
They are a strategic tool for companies to communicate their positive outlook and growth potential to their shareholders. By opting for stock dividends, a company demonstrates its confidence in its ability to generate future profits and maintain a robust financial standing.
Dividend Yield = Dividends Per Share / Price Per Share
Convert the decimal to a percentage, and you get a dividend yield of 3%. That means you would earn 3% in dividends per year from an investment in the company's stock at this price—assuming the dividend payout remained unchanged.
The dividend payout ratio evaluates the percentage of profits earned that a company pays out to its shareholders, while the retention ratio represents the percentage of profits earned that are retained by or reinvested in the company.
If the company is performing well and cash flows are improving, there is more room to pay shareholders higher dividends. In this context, a dividend hike is a positive indicator of company performance.
The average dividend yield on S&P 500 index companies that pay a dividend historically fluctuates somewhere between 2% and 5%, depending on market conditions. 7 In general, it pays to do your homework on stocks yielding more than 8% to find out what is truly going on with the company.
Dividend yield is a stock's annual dividend payments to shareholders expressed as a percentage of the stock's current price. This number tells you what you can expect in future income from a stock based on the price you could buy it for today, assuming the dividend remains unchanged.
A high dividend yield isn't always a good thing — some are unsustainable, and others are just the result of a low stock price.
One downside to investing in stocks for the dividend is an eventual cap on returns. The dividend stock may pay out a sizable rate of return, but even the highest yielding stocks with any sort of stability don't pay out more than ~10% annually in today's low interest rate environment, except in rare circ*mstances.
Is it better to be paid in dividends?
Deciding whether to pay yourself a salary or dividends depends on a range of factors, such as the CT rate, the profile of the company and its shareholders. While dividends will often be the best option, paying bonuses could offer tax relief and cash flow advantages for some companies.
Stocks can buck a downward market, but most don't. On the other hand, dividends are usually paid whether the broad market is up or down.
Five of the primary reasons why dividends matter for investors include the fact they substantially increase stock investing profits, provide an extra metric for fundamental analysis, reduce overall portfolio risk, offer tax advantages, and help to preserve the purchasing power of capital.
Companies that offer dividends provide investors with a regular income as the stock price moves up and down in the market. Companies that don't offer dividends are typically reinvesting revenues into the growth of the company itself, which can eventually lead to greater increases in share price and value for investors.
| Stock | Trailing annual dividend yield* |
|---|---|
| Crown Castle Inc. (CCI) | 5.9% |
| Pfizer Inc. (PFE) | 5.9% |
| Boston Properties Inc. (BXP) | 6.2% |
| Kinder Morgan Inc. (KMI) | 6.2% |
Generally speaking, a dividend payout ratio of 30-50% is considered healthy, while anything over 50% could be unsustainable.
A payout ratio that is between 75% to 95% is considered very high. It implies that the company is bordering towards declaring almost all the money it makes as dividends. This increases the risk of the company cutting its dividends because our formula is forward looking.
In the end, both Coca-Cola and PepsiCo are solid dividend stocks with strong brands and loyal customer bases. The key is to choose the one that best aligns with your investment goals and risk tolerance.
Dividend Yield
Apple's annual dividend in 2021 was $0.88 ($0.22 paid quarterly). Based on Apple's stock price as of March 1, 2022 of around $163 per share, the dividend yield is approximately 0.50%.
| Dividend Stock | Current Dividend Yield* | Analysts' Implied Upside* |
|---|---|---|
| JPMorgan Chase & Co. (ticker: JPM) | 2.3% | 2.8% |
| Home Depot Inc. (HD) | 2.5% | 10.5% |
| Procter & Gamble Co. (PG) | 2.4% | 15.4% |
| Johnson & Johnson (JNJ) | 3.1% | 25.3% |
Are dividends taxed?
They're paid out of the earnings and profits of the corporation. Dividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates.
Dividends are typically issued quarterly but can also be disbursed monthly or annually. Distributions are announced in advance and determined by the company's board of directors. Companies pay dividends for a variety of reasons, most often to show their financial stability and to keep or attract investors.
Generally speaking, double-digit dividend yields are indeed too good to be true. They are often either being paid by unstable companies, or simply represent too much of a company's earnings to be sustainable. Of course, there are some exceptions.
Dividend Kings are companies that have paid and raised their dividend for at least 50 years. Some standouts to consider now include Altria, Kenvue, Coca-Cola, 3M, and Walmart.
| Stock | Market Capitalization | 12-month Trailing Dividend Yield |
|---|---|---|
| Gladstone Investment Corp. (GAIN) | $500 million | 6.9% |
| Modiv Industrial Inc. (MDV) | $112 million | 7.7% |
| LTC Properties Inc. (LTC) | $1.3 billion | 7.2% |
| Realty Income Corp. (O) | $44 billion | 6.4% |
