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What is a dividend yield

what is a dividend yield

High payout ratios – things you need to know

If you want to invest you money in dividend paying companies, there is one important question: should you place your money in companies that offer high payout ratios or, on the contrary, in companies that limit the amount of dividends they pay to the shareholders?

Well, your first instinct would be to pick the companies that offer you high dividend payment ratios thinking company are sharing most of their profit with the shareholders (read YOU!).

However, that’s not always or not necessarily the best choice. When it comes to investing money, there are a lot of factors you need to take into account. If you invest in a company that usually pays dividends at high payout ratios, you need to wander for how long that company will be able to continue the payments?

A company that has a 100% payout ratio probably won’t succeed to remain competitive. Distributing all the money to the shareholders, as dividends, means that there is no money left for investments, for development, for bringing in new technologies and for keeping the business competitive. So, a very high dividends payout ratio is virtually impossible to be maintained on the long-term. Sooner of later, that company will either go out of business or will have to stop paying dividends all together for a while.

What is the Perfect Dividend Payout Ratio?

The best strategy to invest your money is to select companies that offer you a decent dividend payout ratio, but still keep a part of the money for future growth. Dividend payout ratios between 30 % and 60 % tell you that you are dealing with responsible companies, which are interested in providing good, stable returns to the shareholders and in the same time

to maintain a healthy, solid business running. When you look at the best dividend stocks . most companies able to maintain a solid dividend payout throughout several years will rarely exceed 60% in term of dividend payout ratio.

What low payout ratios mean and when to invest in such companies

When a company decides to pay only a small fraction of the earnings to the shareholders, as dividends, it means that the company concentrates on growing. Generally, that’s the case of smaller companies. Buying shares to such companies might be a good idea.

Even if you don’t make cash on the short term, there are great perspectives for the future. There is a direct connection between the dividend payout ratio or a company and the price of the shares. Companies with low dividend payout ratio tend to have cheaper shares, while companies with high dividend payout ratio also have pretty expensive shares.

If you buy cheap shares to a growing company, which doesn’t pay high dividends yet, over time you will enjoy great returns. So, if you are interested in capital gain and long-term investments, don’t ignore dynamic companies, only because they offer you low dividend payout ratios. The best way to build a solid, profitable investments portfolio is to place your money both in well-established, big companies and in small, emergent ones. This way, you’ll enjoy nice dividends from companies with high payout ratios and, in the same time, you have the opportunity of high returns on the long run, with emergent companies.

This entry was posted on Thursday, March 31st, 2011 at 9:25 am and is filed under What is Dividend. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response. or trackback from your own site.

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