What is a good dividend per share?
What constitutes a good dividend per share is a subjective matter. There is no fixed answer to the question as dividend per share is an absolute number, and it’s not sensible to compare absolute numbers with each other or some benchmark. It’s because companies can have different payout policies with a massive difference in the applied resources. In simple words, comparing DPS for one company with another company or benchmark does not make sense.
Is a higher dividend good or low?
For some investors, a higher dividend per share cannot be good as they want a capital appreciation of their investment rather frequent dividends, limiting the company’s growth potential. On the other hand, some investors want regular and higher dividend payments as they need to finance their expenses with receipt of the dividend. So, we can conclude if an investor is sensitive to the dividend, a higher dividend per share is good. On the other hand, if an investor belongs to a clientele with more capital appreciation, low DPS is good.
So, most investors consider regular receipt of dividends a good signal from the stock, although it may not be true in all cases. However, it can be reinvested if you get a regular dividend and can even help diversify the stock portfolio. Further, there is an element of enhanced liquidity in the case of regular dividend receipt. So, let’s assume that a higher dividend is good and understand the concept of assessing a good dividend.
One can assess the adequacy of the dividend per share announced by the company by analyzing different dividend matrices that include dividend yield, dividend payout, dividend payment trend, dividend coverage, etc. These are the relative measures that help to compare companies in terms of dividends.
What is the Dividend yield ratio?
The dividend yield ratio shows the company’s amount as a dividend compared to the current share price. This helps an investor to calculate the percentage of the return received on the current investment.
It’s important to note that the dividend received is not a final return. There is an element of capital appreciation realized when an investor sells the security. However, it’s an excellent measure of the short-term return distributed by the company among its shareholder.
Comparing dividend yield ratios of two companies to assess performance can be misleading if you are not considering an element of liquidity. So, it’s important to note that dividend yield is not a complete return. It’s just the distribution of the return. Different companies may have different policies for dividend distribution. So, it does not mean the company with a higher dividend yield performs better, but we can say the company with a higher total return is performing better.
How much is the dividend yield ratio considered to be good?
Generally, 2% to 6% of the dividend yield ratio is considered good in the stock market. A higher dividend yield ratio is considered good as it signals strong financial conditions of the company. Further, dividend yield varies from sector to sector as some sectors have like health care, real estate, utilities, and telecommunication have norms for higher dividend yield. On the other hand, some industrial or consumer discretionary sectors are expected to maintain lower dividend yields.
How to compare the dividend yield
The dividend yield ratio of the company can be compared with the dividend yield of the S&P 500. In the stock market, the average dividend yield of these blue-chip stocks is considered a useful benchmark for assessing the dividend yield of other companies. The historical dividend yield of these companies has been 2%. So, the stock paying dividend yield of more than 2% seems fine.
Further, the dividend yield ratio of the company can be compared with the return generated by US treasury bills. This benchmark seems to be more relevant because the investors with frequent income either invest in the treasury bills or the stocks with attractive dividend yields. However, investment in stock and treasury bills carries much difference in terms of risk and return.
In addition to this, the company’s dividend yield can be compared with the dividend yield of the peer company. It’s been observed that companies operating in the same industry with the same capital size and resources have similar dividend yields.
What’s the Importance of the dividend yield ratio in terms of liquidity
Higher dividend yield ratio signals to the shareholders that the company is experiencing greater financial health and can distribute higher returns. The amount received for the dividend can be reinvested in buying more shares, and the investor does not have to commit for a longer period. So, the Importance of the dividend yield increases when an investor is sensitive to the liquidity of the returns.
What is the dividend payout ratio?
The dividend payout ratio measures the proportion of the payout from the total earning of the company. In other words, it helps to calculate the proportion of the earning that has been distributed among shareholders. The reverse of the payout ratio is the retention ratio that measures how much money is retained by the company for growth and expansion purposes.
The dividend payout is the same as dividend yield with perspective to the desired liquidity of the investor. So, investors with the regular need of the dividend are attracted for the stock that has enhanced higher payout same as a higher dividend yield.
Why do some companies maintain less dividend payout?
The company in the growth phase would not like to distribute earnings in the form of dividends as they need money to grow and expand. Hence, they maintain less dividend payout and retain most of the earnings in their business. In addition to this, the company may have a clientele of shareholders that want a capital appreciation of the money rather than dividend payments after frequent intervals. So, these companies also maintain lower payout despite the fact they have good profitability.
What are different dividend-paying policies, and how are they different?
The companies have different dividend-paying policies that include stable dividend policy, residual dividend policy, and the hybrid dividend policy. Let’s discuss the features of the policies and how they differ from each other.
A stable dividend policy is when a company adopts to pay a dividend each year, irrespective of whether the bottom line of the profit and loss statement is positive/negative. The adopting company of this policy believes that their shares are held by the shareholders sensitive to the dividend.
On the other hand, the residual policy of dividend is when the company first pays for the working capital requirements. CAPEX then distributes remaining reserves in the form of a dividend. The residual policy is closer to the business sense as the first protocol must be given to the business needs. However, this policy might result in volatility of the dividends and is only suitable when the company believes clientele of the shareholders believes in capital appreciation.
What is dividend coverage?
The dividend cover ratio measures capacity of the company’s earnings to pay the dividend. It’s calculated by dividing the net income of the company by the dividend paid during the year. If dividend coverage is equal to 1, it means the company has paid all of the year’s earnings. If the dividend cover is greater than 1, the company has generated excess profit for the dividend payment. On the other hand, if the dividend cover is less than one, the company has not generated a profit equal to the dividend payment. This can be an alarming situation as the company is paying from the reserves, which might get depleted if the same practice is continued.
Overall, there is no fixed amount of dividend, which can be stated as a good dividend per share. It’s up to the clientele of the shareholders if their preference is dividend or capital appreciation.