After my Post of Oct 10th I have had several emails that wanted more info on Dividends. So here goes.
Where do Dividends come from? Dividends come from the Profit a company makes. That money can be directed in one of 3 ways. They are: Research and Development, Reinvested in the Company (new machinery, more employees, etc) or Paid Out as Dividends to the share holders.
Why do Companies Pay a Dividend? Here are the most common reasons:
• Reward Shareholders: Dividends are a direct way to share profits with investors, reinforcing loyalty and trust.
• Signal Financial Health: Regular dividends suggest stable earnings and management confidence in future performance.
• Attract Long-Term Investors: Dividend-paying stocks appeal to income-focused investors, reducing volatility and encouraging stability.
• Utilize Excess Cash: Mature companies with limited reinvestment needs often return surplus cash to shareholders rather than letting it sit idle.
• Support Stock Valuation: Dividends can help maintain or boost share prices by offering tangible returns, especially during market downturns.
• Reinforce Brand and Reputation: Consistent dividend payments build credibility with analysts, institutions, and retail investors.
There are three things conventional wisdom says you need to research before deciding which companies to invest in. Number 1 is YEILD. Dividend yield is the percentage of a company’s stock price that it pays out to shareholders each year in dividends. You will usually find this information on any site where you research the company. If you need to figure it out, the Formula is simple. Take the Annual Dividend per Share and divide that by the Price of the stock. That will give you a decimal number. Multiply that number by 100 and you have the % yield.
📌 Example: If a stock pays $2 per year in dividends and its current price is $40, the dividend yield is: 2 dollars, divided by 40 dollars equals .05. Multiply .05 by 100 equals 5. So the yield is 5%. Why is Yield important?? The higher the Yield, the more money you make per each dollar you invest. A high yield may attract investors, but could also signal financial stress if it is too high. If the Yield is High it is worth while to investigate if the dividend is sustainable. That means, can the company keep paying that rate of Yield?
Number 2 is: Payout Ratio. This is the relation between how much the company earns per share Vs how much is paid out as Dividends. For example, if a company earns $5 per share and pays $2 in dividends, the payout ratio is: 2 divided by 5 equals .4 times 100 gives you 40%.
What It Tells You
• Low payout ratio (0–35%): The company is likely reinvesting profits for growth. Common in tech and early-stage firms.
• Moderate payout ratio (35–60%): Indicates a balanced approach—rewarding shareholders while retaining earnings.
• High payout ratio (60–100%): Often seen in mature industries like utilities or telecom. May signal limited reinvestment needs.
• Over 100%: Unsustainable—company is paying more in dividends than it earns, possibly using debt or reserves.
The third is: Tax Efficiency. The Canadian government encourages investment in Canadian companies by offering tax advantages (discounted rates) for Canadian corporate Dividends.
Other strategies a company can use besides Dividends is SHARE BUYBACKS and CANCELATIONS, and Reinvestment. Some firms prefer repurchasing shares to boost earnings per share and offer tax-efficient returns. It can also increase the value of a share. In Cancelations, the intrinsic value of the company is the same, but now is divided over fewer shares, so each share is worth more. Companies can also Reinvest the earnings to boost production or fund new projects or acquisitions.
Some questions you might ask if you’re looking at investing in a Dividend Paying Stock.
Is the company’s dividend sustainable based on its payout ratio?
Does the company have a history of increasing dividends?
Is the dividend yield attractive compared to industry peers?
Is the company growing, stable, or declining?
If you’re looking for a place to start, check out the Top 20 Dividend stock spreadsheets under Tools In the “Courses and Tools section.