Dividend 101: The 3 W’s (Why, Where, Who) of Dividends and Why Dividends Build Wealth
Many companies pay a portion of their earnings to shareholders through dividends. In this article, you will learn the basics of dividends, Dividends 101. The article will discuss why companies pay dividends, when companies pay dividends and what types of companies pay dividends. You will also gain insight into why dividends matter in preserving and building long-term, lasting wealth.
Why Do Companies Pay Dividends?
When publicly listed companies are profitable, what can they do with the excess cash?
- Reinvest profits internally to fund company growth;
- Repurchase their shares through the stock market with a normal course issuer bid; or
- Distribute some, or all, of the profits to shareholders in the form of dividends.
Paying dividends is often the optimal choice, providing the company can afford to do so.
- Paying dividends to shareholders thanks them for their ongoing support and provides them incentive to remain shareholders.
- Consistent dividend payments provide evidence of a company’s strength and of positive future expectations for earnings growth.
- Paying dividends makes the company more attractive to investors which can help to drive the stock price higher.
- Dividends often provide shareholders with a more stable part of their total return on a company’s stock.
When Do Companies Pay Dividends?
Dividend payments are typically aligned with the realization of company profits—most often on a quarterly or monthly basis but sometimes semi-annually or annually.
Companies can pay, increase, decrease, or eliminate dividends at any time.
There can be additional one-time, special-event dividend payments owing to excess cash resulting from a subsidiary sale, unusually high revenues, etc.
Alternatively, a company may pause its regular dividend if it is raising cash for a planned acquisition or a major capital expense.
Once a company begins paying dividends, continuing to pay regularly and even increasing the dividend amount is an indication of that company’s sustainability.
If a company decreases or ceases its regular dividend payment it sends a negative signal to investors, unless the company is able to provide a positive reason for doing so.
What Types of Companies Pay Dividends?
Many may think that only large, established blue-chip companies such as utilities or large consumer staples pay dividends.
This is not the case. Dividend-paying stocks can be found across most industries and through the entire market capitalization spectrum.
Looking at a typical client portfolio here at Bloom Investment Counsel, Inc. you would see dividend-paying holdings across 9 of the 11 TSX industry sectors and allocations to large, mid, and small capitalization companies, identified through our in-house, bottom-up analysis and a disciplined decision-making process built on nearly four decades of investment management experience centered on investing in dividend-paying stocks.
Why Should Dividends Matter to You?
Dividend-paying stocks have two components to their total return:
- The regular dividend payment; and
- The price appreciation of the underlying stock.
Even if the share price of the stock decreases, you still collect the dividend.
Investing in dividend-paying stocks is like getting paid to wait for the underlying stock to grow and increase in value, giving you, short-term (income) and long-term (capital gain) reward.
A Common Dividend Misconception
Simply because a company pays dividends rather than reinvesting in their own growth does not mean they are not growing. What it often means, is that the company is large enough or profitable enough that they can pay a portion of their earnings to shareholders while still investing in their own growth.
Accordingly, dividend-paying companies most often inspire investor confidence owing to their healthy free cash flow, revenues, and profits.
It is Always, the Right Time, to Invest in Dividend-Paying Companies
Investing in a dividend-paying portfolio is a proven strategy to protect and preserve your wealth through turbulent markets and inflation. A dividend-paying portfolio is simultaneously positioned to provide a cushion against price declines while remaining fully invested to benefit from market rebounds and recovery. It is always the right time for dividend investing.
Bloom Investment Counsel, Inc. specializes in providing Canadian and U.S. dividend-paying portfolios for wealthy individuals, family offices, foundations, corporations, institutions and trusts.
With our customized dividend-paying portfolios, our clients’ portfolios earn income, in addition to participating in potential capital gains from an increase in value of the underlying stocks themselves. Throughout history, dividend-paying stocks have proven to be an attractive investment during all market cycles including an inflationary environment, providing investors with the possibility of growing dividends in line with or exceeding the inflation rate and a support level in a volatile market. Get in touch with Bloom today to learn more about your customized dividend-paying portfolios.
This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.