Wednesday, April 18

The Dividend Project - more reading

Here is a fantastic story from the Globe that tells about how rising dividends tend to boost the underlying stock price. It has a lot of detail, including some important exceptions and a chart of Canadian dividend stocks.

This correlation makes a lot of sense. If a company keeps raising its dividend, then the yield will go up. When the yield goes up, it becomes more attractive and people will buy at a higher price. This will return the yield to its usual range until the dividend is raised again and the cycle repeats.

As I have mentioned before, I find it hard to stomach buying dividend stocks for income purposes when their yields are so small, but if you get an increasing dividend and the stock price comes with it then there is potential for great gains.

Happy reading!


mOOm said...

Companies don't like to cut dividends and, therefore, a dividend is a signal that the company is confident of maintaining or increasing their earnings. But in the end it is earnings (or free cash flow) rather than dividends per se that drives stock prices. If a compnay maintains a consistent payout ratio from earnings the two will go up at the same rate. In the US in non-retirement accounts even with the lower qualified dividend tax rate we now have, it is more tax efficient for companies to buy back shares. Ths is because the investor doesn't have to pay CGT until the shares are sold. While they have to pay tax right away on a dividend. This calculation is very different in Australia and companies pay out higher dividends. I don't knwo the Canadian situation. But anyway it is all more subtle than that article suggests.

the money diva said...

Good point! I forgot to mention the payout ratio in my previous list. I will have to add that...

The tax effect is so important and I can't really tell you the Canadian rules yet. I know that for personal tax, dividends are taxed favourably but beyond that I can't say much. I will be getting to this later on.

For me, this is a project with so much learning to do. Thanks for your insights!
MD said...

Hey MCM,

Hey Diva,

There is a "obsessive thoughts" post going around the blog world, and I tagged you! :) It's up to you if you want to particpate. Here is a link to my post in case you want more info:

Best Regards,