THOUGHT OF THE WEEK
The Importance of Dividends to Investors
Dividends are cash distributions that companies pay out from their earnings to shareholders. Payment of dividend sends positive signal about the financial health of the company to investors. A company’s ability to consistently pay dividends and increase the payment amount over time provides good clues about the company’s fundamental strength and sustainability. Payment of dividends by companies is one of the ways a company can communicate its financial wellbeing to investors and other stakeholders.

The proportion of earning companies pay out to investors as dividends depends on the stage of the business in the business life cycle. In most instances, mature, profitable companies pay dividends. Younger companies tend to reinvest all or most of its profits into the business to ensure the sustainability. Companies do not typically pay out their entire earnings as dividend, they retain some portion of their profits in cash to fund their business activities.

Dividend yield is the annual dividend income per share as a proportion of the current share price. This is a measure of the amount of income received in proportion to the share price. The dividend yield is used to analyze companies within the same sector. If a company has a low dividend yield compared to other companies in its sector, it could be interpreted in two ways; the share price is high because of market expectation of growth prospect or the company cannot afford to pay reasonable dividends. A company with high dividend yield may also be a sign of depressed share prices.

Dividend can give investors a sense of what the company is worth. The dividend discount model is a formula which explains the underlying value of a company. According to the dividend discount model, a share is worth the sum of all its prospective dividend payments discounted to the present value. This is because dividend is viewed as a form of cash flow to the investor. Stocks which pays divided generally receive positive outlook from investors than stocks which do not.

Disclaimer
This weekly report is the copyright of NIMED Capital Ltd. (NIMED), an investment banking company licensed and regulated by the Securities and Exchange Commission (S.E.C.) of Ghana as Investment Advisers as well as the National Pensions Regulatory Authority (N.P.R.A.) as an approved Pension Fund Manager. Information and opinions herein have been compiled or arrived at based on information obtained from sources considered reliable; we therefore do not hold ourselves responsible for its completeness or accuracy. All statements of opinion, projections, forecasts, or those relating to expectations regarding future events or performance of investments represent NIMED’s own assessment and interpretation of information currently available to NIMED, which are subject to change.