Proof of Profitability

The following four paragraphs come from Kelly Wright and I could not have said it better myself:

"From our perspective and experience, the cash dividend is the more attractive profit path when investing in the stock market. In the first instance the cash dividend is just that, cash in hand; a tangible return on investment. Unless a company is committing outright fraud, a practice that will typically be short-lived, the cash dividend is evidence that the company is indeed generating profits; a company cannot pay that which they do not have.

When a company has competent management, which means they have a sound business model, they understand who their customers are and the products and/or services they offer are desirable and necessary, the trend of cash dividend payments should consistently increase along with the company’s profitability.

When a company demonstrates consistently increasing profits through a consistently increasing dividend trend, the consistently increasing value of the company to its shareholders must be demonstrated by the only measuring stick that is of consequence; a consistently increasing stock price.

The above, in a nutshell, is the value of the cash dividend: Proof of profitability; an insight into future profitability; and, a predictor of future share price appreciation."

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Source: Page 10, Investment Quality Trends, Mid-February 2011