Dividend Growth

Dividend growth reflects a strong historic corporate performance and the anticipation of future prosperity in the years ahead. In order for a company to issue a dividend it must have sufficient earnings and cash flow to sustain such a policy over the long term. Because investors do not respond well to dividend cuts, a corporation is unlikely to either issue or raise its dividend if a subsequent cut is probable. Therefore, growing dividends reflect a firm's commitment to continuous growth.

While corporations will frequently provide optimistic guidance of future activity, there are two fundamental measures to assess their true beliefs about growth prospects. Firstly, investors can look at the ratio of inventory to sales. As inventory levels increase proportionally, firms are anticipating a spike in demand. Unfortunately, this indicator is somewhat ambiguous because rising inventory levels can also indicate that a company's products are obsolete. On the other hand, the second measure, a growing dividend payout, is less subject to interpretation.

Source: Investopedia

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