Dividend Payouts Are A Strong Indicator Of A Solid Company

Interest rates have been absurdly low for years and look like they’ll stay that way for some time to come. Bank deposits typically pay peanuts and a higher-rate taxpayer gets the princely return of 1% from buying a ten-year gilt. So it’s only natural for investors to look at equities as a way of generating income. That often means buying blue chips in sectors like utilities, oil, tobacco and telecoms. Stocks like Shell, Vodafone, British American Tobacco and National Grid are all worthy businesses and pay out generous dividends. That’s because they are mature long-established companies, which generate surplus cash flow. I won’t knock them for being big and slow-growing. They can play an important role in many investors’ portfolios.

Even if the dividend payout is a relatively small portion of a company’s earnings, it’s still a valuable thing. And not just because of the little it adds to shareholder returns. I think the main benefit of small growth stocks paying a dividend is that it acts as a signal of their quality. Company accounts can be misleading. Many companies go bust despite reporting profits. They just run out of cash! Profits don’t necessarily equal cash. So a company that pays a dividend is making a powerful statement. It’s saying that the profits being reported have enough cash behind them to enable a payout to shareholders. Investors also hate dividend cuts; so a company will make sure it pays out an amount that is sustainable and capable of growing.

Source: MoneyWeek

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