This is the companyís dividend expressed as a percentage of the
If a share of stock is selling for $30 and the company pays $2 a
year in dividends, its yield is 6.7%.
In addition to generating income for shareholders, dividends are
a good indicator of the strength of a company compared with its
A long history of rising dividends is evidence of a strong
company that manages to maintain payouts in good times and bad. Even
better is a company with a history of rising dividends and rising
earnings per share to match.
A stockís current dividend payout and yield are included in the
daily stock listings in the newspaper. For historical information,
the S&P Stock Guide and Value Line are excellent sources, as are
the stock databases of the online services.
Analystsí dividend forecasts play an important role in creating
expectations for a stockís future performance. If analysts expected
the $30 stock mentioned above to raise its quarterly dividend to 55
cents, its price might creep upward in anticipation of the increase.
Then, if the companyís profits rose only enough to permit it to pay
52 cents per share, disappointed investors might sell, thus causing
the stockís price to fall even though profits and dividends
Sometimes the opposite can happen. Shortly after the death of its
elderly founder, Armand Hammer, Occidental Petroleum announced a
dividend cut and its price quickly rose. Analysts deemed the move
(which was part of a larger plan to close down some unprofitable
operations and write off debts) a smart step toward a stronger
company in the future. Thus, a dividend cut isnít always a sign of
weakness in a company. Itís important to know whatís behind it.
Although occasionally dividends are paid in the form of
additional shares of stock, they are usually paid in cash; you get
the checks in the mail and spend the money as you please. Many
companies encourage you to reinvest your dividends automatically in
additional shares of the companyís stock and have set up programs
that make it easy to do. Such arrangements, called dividend
reinvestment plans, or DRIPs, are described later in this chapter.