Dividend Policy One of the

Dividend Policy One of the important policy decisions by George Bush sometime back was to cut out the tax on dividends and one of the effects that it was expected to have been to increase the price of securities. The main issue that was being tackled then was to totally abolish the dividend tax which harms the investors in the market. This tax has no basis and is probably a technique that has been developed by groups with a socialist tendency to further impoverish the investors in equity shares.

The reason for the great opposition to dividend tax is that it ends up taxing an income stream twice. This sort of taxation is not justified in a society which treats all its citizens as having equal rights. Dividends are a form of payment that is made by business to its owners who have shares of the equity capital of the organization.

The corporations who have to pay dividends have to earn the money through their work in the market, and that in itself is very difficult considering all elements of competition that they have to encounter. (Dividend Valuation Waves) When the corporation makes profits in the business then they have to pay taxes on the profits that they earn. Then these profits are distributed as dividends, and there was a second tax at the time of distribution.

The general tax that corporations have to pay on their profits from business is about one third of the income. The corporation is compelled to pay the taxes on this directly, and then only after that the dividends can be thought of. As a shareholder of a corporation, the dividends that are earned definitely belong to the shareholder as the person is an owner of the organization.

When the income of the company is taxed for a second time, at the time of distribution as dividends, then it certainly hurts the shareholder as he is being subject to taxation twice that his money has earned. (Dividend Valuation Waves) This was the first problem with dividends and now that has been removed, and made the possibilities of earnings from dividends a little brighter. The companies which can pay high dividends are associated with stable and high earnings that have been going on for some time.

Only those can afford to pay a high dividend regularly. At the same time, it could be a trick by a company which is not performing well to make its share price look to deserve higher ratings based on the dividend that it is paying. We are assuming that the company under question is not a company of this type.

To judge the capacity of a company to be able to pay dividends, one has to look at the cover ratio between the earnings of the company and the amount that it is paying out as dividend to the shareholders. A high ratio generally indicates a safe share. The calculation can also be made on the basis of a 'per share' calculation where both the earnings and the dividends are taken on a 'per share' basis.

When this ratio is at a level below 1, then it shows that the company is not likely to be able to continue paying the dividends in future years. (Dividends: (www.whatinvestment.co.uk) In some earlier years, from 1995 to 2000 it looked that dividends were becoming very rare and many companies were not paying dividends. Then many individuals thought that paying dividends was not needed.

Companies which were growing fast then invested their surplus funds into the company, and this caused more growth to the company, which was also a form of reward to the shareholders. This led to increases in share prices by as much as 20% a year and this was the reward that shareholders got. Even small investors then did not run after dividends as they got their returns from the growth in price of the shares.

Today, the situation has changed and short-term interest rates have come down, and this makes payment of dividend difficult and even a 2% dividend seems to be high. This has also brought some changes to the shareholders and they now think that a dividend from a good company is something that one can consider as a sure return. Taking a look at some stocks, Philip Morris Co. is paying a dividend of 5% for the year, and the price of the share has gone up by about 4%.

The total return is thus 9% and this is a good return in the present conditions. (Dividends: Some Races Are Not to the Swift) Other companies like Proctor and Gamble are paying a dividend of only 2% and the increase in prices is by another 2%. The total return is 4%. When one looks at the total market, the index, S&P 500 has lost 15% in terms of prices of shares and the dividend yield was only 1.3%. This can be taken as a general view of the market.

In the present period of low dividends, only banks like Bank of America, JP Morgan Chase and Wells Fargo are organizations giving good dividends. This is also available in shares of oil companies and food and tobacco companies. RJ Reynolds Tobacco has given a high dividend of 5.6%, though in that company there are not much expectations of price appreciation as the growth in earnings are expected to be only 10%. Yet the total returns are likely to be over 10%.

At the same time, payment of dividend is not permanent and many companies become high yielding stocks before they are compelled to reduce dividends. The increase in dividends in some companies take place as the companies have internal problems and this may lead to a rapid drop in their prices. Even anticipation of a cut in dividends may cause drops in market price. (Dividends: Some Races Are Not to the Swift) Let us look at the process of finding out dividend yield for a publicly traded company.

The factors that one needs to know are the cash dividends that the shareholders get and the price of the share as on date. Then the dividend amount, per share, has to be divided by the stock price to get the dividend yield. Let us say for example that the market price of a share was $50 and the dividend paid, per share was $1. Then the dividend yield is 2%.

In the stock market, there are also 'long valuation waves' and this calculates the general yield through dividends on equity stock over a long period. For the last century this has been calculated to be around 4.6%. Then this figure of 4.6% is taken as the fair market value. The ratio of price to earnings also determines over valuation of shares or their undervaluation.

(Dividend Valuation Waves) When the stocks have high dividend yield, the stock market says that they are undervalued, as they are paying out a comparatively high proportion of their value to shareholders every year. The price to yields of shares can be put on a graph and the figure of 4.6% can be taken as the mean for deciding shares for over-valuation or under valuation. Taking an arbitrary benchmark of say 6%, one can then see which shares are over this limit or near it.

These shares can then be considered to be undervalued. On the other side, let us take an arbitrary figure of 3%. There are some shares at that level, and it can be said that these shares are over valued, as they are paying a lower proportion of their share value to the shareholders and are still being able to retain there price levels.

The results of shares in terms of future trading can also be determined from these graphs as all the positions of the stocks during certain periods tend to get corrected by the stock market at later dates. At the same time, the shares have a certain image, and that also has them trading sideways for long periods, and this happens due to the high expectations from these stocks.

Dividend yield is a very important factor for the investor to note and they can let an investor decide what is likely to be the future movement of the stock. There was the mega mania bubble in the stock market during 2000, and at that time, the dividend yield fell to very low levels in the U.S. market, and it reached a level of 1%.

This sort of levels has not been reached earlier in the history of the stock market in any country in the past and is also not likely to be reached in the future. (Dividend Valuation Waves) Let us now look at what is happening in the U.S. stock market now, as the trends in the market keep changing with time.

Dividends were not a favorite with the corporate authorities for quite some time, but this seems to have changed, and this could be seen in the announcement by Microsoft of a special one time dividend of $3 per share and this payment was made in December 2004. Even their regular dividends were increased from 8 cents per share per quarter to 16 cents. This is quite a high rate of increase. This sort of announcements was also made by banks like Wachovia and Mellon, and consumer staples like Altria and Kraft.

The attitude of the investors can be seen from the fact that the companies which have traditionally paid dividends have performed better in terms of share price than shares which do not pay good dividends, and this change has started from the beginning of 2004. Part of the change in attitudes of the companies may have come because of the reduction in taxation, which has been discussed already.

(Dividends Are Back!) Even in Europe, companies like Carrefour have increased their dividends, and this has led to improvements in market values of their stock. We are all aware that ordinary stocks do not guarantee the payment of any dividend, and the payment of dividend depends on profitability and available cash. There are differences between different dividends as they have to be paid at different times, and also there are fluctuations of dividends in ratios. There are also situations when a company is unable to pay any dividend at all.

At the same time, it is because of these factors, the dividends become a key determinant of the price of a share. The share price is determined by some experts on dividends rate, dividends' growth rate and discount rate. The discount rate is otherwise called the required income rate, and is dependent on the risk level in the business that the company is involved in. Since there are risks in the concerned business, the assets of the company also have to be discounted according to the calculated risks.

Discussing the matter of investors using dividends as guides for the valuation of securities, one can use the following indices. The first is the dividend yield and this can be described as the dividend per share paid by the company divided by the purchase price paid for the stock. This shows the yield rate for the investor in relation to the investment made by him. The second part is the dividend payout ratio, and this is the ratio that dividends form of the total earnings of the company.

This is also looked at as the retention ratio which is one minus the dividend payout ratio. The third is the growth rate of dividends paid by the company. The three indices together give a total model for the security like the dividend discount and APT. When the dividend yield is low, it means that the share has been purchased at to high a price, or that the financial position of the company has declined after the shares were purchased.

When the company has not taken the serious step to stop paying dividends even after this, it just means that the company management is not taking required disciplinary measures. (Dividends Are Back!) If on the other side, there is growth, then it means that there has been a value strategy in the investment.

The question also comes as to whether the company should pay out its earnings in dividends or retain them for growth of the company? This view leads to some experts suggesting that some companies retain capital for the target of achieving growth. This is also reflected in the fact that 'mature' companies that have already passed their performance peaks in growth rate are the ones that pay out a high rate of dividend.

This is not always true as some studies have shown a direct relationship between high dividend payment in the present situation and a high rate of growth also now. The other points of long-term discount model are a technique for the use of financial experts for an attempt at the direct evaluation of the value within the company, and thus get a correct price for the securities concerned with the company.

This is also a route to price capital assets, and that forms one of the basic points in the theory of corporate finance. All this leads to the belief that a high payment of dividend will continue in future and this will thus continue to be an important factor for studying the expected returns from companies. (Dividends Are Back!) It is also important for the companies to pay dividends even for just saying that the dividend check is in the mail.

This payment forms a strong direct message from the company to the shareholders about its being in strong financial shape. This also promises good performances in future. The fundamental financial strength of the company is indicated to the shareholders through dividends and regular increases in dividends. Earlier, prior to 1930s, there was no requirement on companies to send financial statements to shareholders, and then the payment of dividends was the major indication to shareholders about the strengths of the company.

The situation has changed somewhat after the Securities and Exchange Act in 1934, and it has certainly made the information about companies more available to shareholders, yet dividends are still important as an indicator. (the Importance of Dividends) In general it can be seen that developed companies still insist on paying dividends. At the same time, it would be wrong to say that companies not paying dividends are not making profits.

One reason for not paying dividends can be that the company is finding better opportunities for investment, and that is the reason why it is withholding money from shareholders and investing the money in that opportunity. This is leading now to a situation where the companies which are called 'growth companies' do not pay dividends.

At the same time, companies which are mature and pay dividends also retain funds in their own accounts for the financing of their own increase of business activity and look after any contingency that may come up. This leads many investors to keep a watch on dividend yield and that is the last annual dividend paid by the company divided by the current market price. (the Importance of Dividends) The dividend yield directly measures the income in proportion to the investment.

There are occasions when this can be seen to be low for a company as compared to its competitors in the same industry. This can talk well about the company or not so well about the company. It may be doing very well and the price is sustained by the future prospects of the company, and not earnings by shareholders. The second problem may be inability to pay dividends.

At the same time, a high dividend does not indicate a company with excellent future - it may just be a sick company with a low market price. To judge this the important ratio of dividend coverage, which is the ratio of the company's net earnings to dividends, can be used. This will determine whether the earnings are well covered for dividend obligations. The ratio as already discussed is earnings per share divided by dividend per share.

(the Importance of Dividends) When this ratio is getting low and that is generally indicated in ratios below 1.5, then there is a good chance that the dividend in future will be curtailed. The investors should feel happy when the ratio is at 2 or 3. If the dividend is reduced, it is clear that the valuation of the share will also be lowered. For some companies the ratio has been seen to fall below 1 and that meant that the company was paying dividends from its earnings in earlier years.

When the ratio is very high and that means that the ratio is above 5, then the investors should start finding out as to what is being done with the money. When the dividends are raised regularly it gives an indication to shareholders that the business is likely to be stable in future. Let us talk about some companies who have done it in the past.

Kimberley Clark raised the dividend by 13% during the first quarter of 2003, and that was an indication that it was not being troubled by the price war that it was going through then with Proctor & Gamble. (the Importance of Dividends) at the same time, quoted companies with dividends of 5% or more look very attractive, but one has to decide whether these dividends can be continued in future. This can be judged by dividend cover that the company has.

Capital growth in invested shares is always liked, and has to be considered during a check on fundamentals. Some shares even turn around after being in trouble continuously for quite some time. (UK - Three stocks with secure dividends) Getting back to Kimberly Clark, they said that they also wanted to increase dividends regularly over the next five years.

This clearly indicates that if a company suddenly reduces its dividend, it is a clear sign that trouble is likely to be face by the company, or at least the investors should think on those lines. Taking the example of Texas Utilities, this was a company known for its regular dividend payments and was known to give one of the highest dividends in the country. Suddenly the company cut the quarterly dividend that it paid, and the price fell by a third in one day.

When the company has a tradition of paying dividends, there is a discipline to the investment decision making of the company. On the other hand, if the company retains a lot of cash, it may lead to high payments to executives, poor management and poor use of assets. The more cash a company keeps, the more likely it is to pay high figures for acquisitions and that will cause looses to possible earnings of shareholders.

Among companies the ones paying dividends are generally more efficient in their use of capital as compared to those which do not pay dividends. Another factor is of cooking the books and the chances of that happening is lessened through the payment of dividends. When dividends have to be paid, it is more difficult to be hiding the money.

(the Importance of Dividends) When one looks at history one can se that an investor should definitely have bought shares in 1920s when dividends paid were higher than 6% and this made it clear that equity were undervalued. When an investor wants to invest for a long-term, he has to look at the dividend payments. Again, by simply looking at dividends an investor should have sold out in 1929 when the dividend yield fell to about 3% and this showed that equities were then at a very high price level.

A low dividend position is generally a signal for the investors to get out of the market, and the objective then is to make sure that their money does not get trapped in a fit of madness by investors. As such dividends are data for valuation of the stock by the market. High yield of dividends in a large section of the market are an indication for an investor to go in for long-term investments in the market.

At the same time, when the yields from dividends fall it is an indication for the shareholders to get out of the investments they have made and instead convert their investments to gold or commodities so that they can face the downwards movement of stock that is likely. In recent years, the yield in the 1960s were around 3% and the investors who converted investments got out of the bear market that came in the 1970s.

On top of this, if they invested in gold or commodities during the 1970s, then also they would have registered profits instead of having their capital locked up in low return stocks for 20 years or so. Looking at the Dow, it took about 17 years for it to cross 1000 though it had approached that figure 17 years earlier. (Dividend Valuation Waves) Stocks which pay high dividends work out very attractive for investors, when the investors are looking at investments to finance their retired life.

In general these provide good income and are not very volatile. Even if the price of these shares fall a little, it still gives them income from dividends to take care of their expenses. In general, it can be said that stocks which pay out sizeable dividends, do not have the high growth that other shares not paying dividends have. Yet, if the objective is to build up a portfolio then the earned dividends can be reinvested in the same stock.

This is a method to increase the value of capital invested in a stock, though the stock itself does not have much of capital appreciation. There are some other advantages of these stocks and they can provide a good defense for keeping the volatility of the share down when the investor has a portfolio of diversified shares. These shares do not move up and down in price very fast as they are likely to move much less than shares which are more volatile.

This has been seen earlier also that mature dividend paying shares have moved much less downwards than small growth company shares when the market is falling. Thus when the market is not doing well, they are a popular choice. (Dividends Dissected) The period from 1995 has seen some twists and turns, and it seemed in that year the bull market that had been running for 13 years was coming to an end. Yet, the market rose, and this was probably due to the unprecedented inflation that was initiated right from the top.

Getting money became very easy and the stock markets rose, but the dividends fell. This situation continued till the end of the century. This is an anomaly that does not happen usually in the stock market, and the results will come later in the form of serious problems for the investors. The situation now is that the general payment of dividend is around 1% and this makes ownership of stocks meaningless, as the stock investor will not get much return.

Tax cuts have been implemented, but they do not increase the earnings of the companies, or.