Spotting dividends indicators
Dividends… a big buzzword amongst EasyVSTRs. But what are dividends? These are rewards paid to investors from profits made by the company. They can take the form of cash or additional shares.
For investors, just like an indicator of profitability, earnings per share (EPS) may also be used as an indicator of future dividend payouts. This is because if the EPS is higher, there are more opportunities for paying out some of the earnings in the short to long term.
Read more about companies that have rewarded investors based on high earnings here or below.
Using earnings and dividends paid per share, investors can calculate their dividend payout on a per-share basis. The higher the payout, the more possibilities there are for a regular payout (for example, monthly instalments) – this is also dependent on the performance of the company – while a lower payout may mean more earnings are retained (reserved for future use) that may be distributed in the near future.
Dividend yield vs dividend payout
Unlike the dividend payout ratio which looks at how much is paid out from profits made, the dividend yield calculates how much investors can expect to receive in dividends as a percentage of the company's share price. Given that dividend yield is calculated using the current price, if a company is trading at R3 and the payout is maybe R0.10 per share, the dividend yield at the given time will be 3%.
An example of this would be STAG Industrial Inc. Trading at around $38 (at the time of writing this), with an annual dividend of $1.46. In this case, the dividend yield is 3.8%. Similarly, Main Street Capital Corp, currently trading at around $41, has an annual dividend of $2.58. The company, therefore, has a dividend yield of 6.2%, as of writing.
Read more on companies that pay monthly dividends here or below
Read companies with pricing power here or below
While all companies may not pay out all their profits, some of this money is held as retained earnings. These earnings, which can also be viewed as reserved profits, are used to expand the business or pay future dividends, say in the case where the company pays dividends multiple times.
Retained earnings refer to the percentage of the profits retained. This ratio is called the retention ratio. It is calculated by subtracting the annualised dividends from the net income, dividing the result by the net income and multiplying by 100. This helps investors to work out how much of the company’s revenue is reserved. These reserves may be distributed as dividends in the future.
Debt to Equity ratio
Debt may be considered risky. However, depending on how it's managed and contributes to the overall business, it can be used to position a company for long-term gains. Debt to Equity ratio helps investors understand how a company is managing its debt: a low Debt to Equity ratio indicates that a company has taken on fewer liabilities in financing its operations compared to a higher D/E ratio.
With mining companies, one of the common indicators of dividend payouts is commodity prices. As commodity prices rise, with demand remaining relatively high, mining companies often choose to pay out a chunk of their earnings through share buyback programmes and dividend payouts – dependent on the size of operations.
Read more on how companies reward investors here or below
A listed company will always keep shareholders updated on its dividends policy, either when the policy is reviewed or when dividends are expected within the short to long term. Reasons behind each decision are furnished in all communications.
Read more on how to identify business start-ups here or below
View monthly dividends updates in the EasyEquities blog