Too shy to ask about this important investment feature? A dividend yield is a portion of a company’s profits that is paid out to shareholders. Each year, the directors must decide how much of the annual profit will be paid out to shareholders in the form of dividends – usually quarterly – and how much will be retained for growth. the company.
For example, if profits (after taxes) are $100,000 and $50,000 are paid out in cash distributions, the director can only keep $50,000 for growth. This is why some companies grow fast but pay low dividends (usually technology companies) while others pay high dividends but have lower growth (like utilities).
The dividend yield of each stock or index is measured by the dividend yield. is paid annually, the last payment of dividends on .
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Companies are not required to pay dividends
It is important to understand that companies do not have to pay dividends. Just because they paid one this year, doesn’t mean they have to the next year. A company may vary its dividend according to the profit of the previous year; or need to retain more of their profits to use in maintaining or expanding their business; or if it has more money than it needs and wants to make an additional one-time payment to shareholders (often called a special dividend). So we need to consider it.
To get a more complete picture, dividends can be calculated based on the amount that the company has paid out in the last 12 calendar months (sometimes called trailing or historical yield) or on the amount that it is expected to pay out. Next 12 months (forecast or forecast).
Subsequent results represent actual payouts – but past dividends may not last. Forecast results reflect all the changes expected by analysts – but forecasts are not reliable. Investors should look at both, and should not rely only on one of the decisions: you need to think about the long-term prospects of dividends for the company, including all the signals sent the market.
Red flags you should watch out for
A company with a high yield may be cheap, but this may indicate that investors are expecting a dividend cut. In other words, sometimes the results are high only because no one believes that it is actually paid. At the same time, strong sales of current products may still be attractive if dividends are expected to grow rapidly in the coming years.
It is true that companies generally prefer not to cut their dividends. A dividend cut is almost always an obvious sign that something is wrong, and often leads to board members falling on their swords (or being pushed). But it can happen.
Therefore, it is important to monitor the security of the dividend, to test its sustainability – especially if the yield is large compared to the rest of the sector.
Understanding production rates and payments
There are several ways to determine dividend duration. You can look at the “dividend cover” or the “payout ratio”. Dividend coverage measures the tax rate by which the profits that can be distributed are greater than the payments. You calculate it by dividing the income by the total payout, or alternatively, you can divide the income by the distribution by the dividend – or it will give you the same result.
A company that makes $10m in profits and distributes $1m in dividends has a cover of ten and a company that makes $25m but pays out $12.5m in dividends only has a cover of two.
Although the coverage differs from sector to sector, theoretically the higher the number, the safer the dividend. Dividends that are properly covered usually indicate that a company has sufficient capital to pay dividends. But this does not necessarily mean that the company can pay dividends, let alone the real ones.
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