Key Points
- A dividend is a portion of a company’s earnings paid directly in the form of cash to eligible shareholders.
- These payments can be monthly, quarterly, or annually and all decisions in regards to dividends are controlled by the board of directors for a publicly traded company.
- Dividends are an important metric for investors as it is a sign of the profitability and financial wherewithal of a company and are an input in the investment decision process.
Reliable Income and a Sign Of a Healthy Company
You will actually need to purchase individual shares of a company that pays a dividend in order to receive these cash payments making you a common stockholder.
Dividend payments share a similar structure to fixed interest payments made to bondholders. Investing in a company that pays a dividend can provide an investor with a reliable stream of passive income while still having the possibility of benefiting from an increase in the common stock price.
One of the great aspects of valuing a company by their dividend is that dividend payments cannot be miscalculated solely on the basis of the fact that they are simply paid or not paid to shareholders.
Dividends Tell Investors A LOT
Some investors will place heavy focus on valuing a company by their historic dividend payments and whether or not they will be able to sustainably grow their dividend.
What Dividends Tell Investors at times is if the market could potentially be undervaluing a company since analyzing a company by their dividend helps with understanding the intrinsic value of a company.
The Dividend Discount Model(DDM) is a popular Discounted Cash Flow Model helping investors with their decisions for their portfolio.
