Want Proof of Profitability?
Before you invest your hard earned money, do you want proof that the company you are investing in is profitable? Of course you do! Do you want to keep your money safe, and avoid investing is risky companies? Then focus on what matters most - profitability.
Rising Stock Price
A profitable company is a financially healthy company, in the long run a profitable company will continue to pay you dividends, and ensure it's stock price continues to rise. After all as an investor you want to be able to collect dividends, and see the value of your shares rise.
What's a Dividend?
But first, what is a dividend? A dividend is a cash payment paid to shareholders monthly, quarterly, or annually. The company decides when and how much to pay shareholders. As a shareholder you are part owner of the company, essentially the company is sharing its profits with you the owner.
Earning for Life
For example, if company XYZ has an annual dividend of $1 per share, and you own 1000 shares you will receive $1000 cash each year for as long as you own those shares, and as long as the company continues to payout the $1/share dividend. You will continue to receive $1000 cash per year regardless of the share price, the stock price can drop or increase but the dividend will remain, as long as the company maintains its dividend.
Dividends Are Not Guaranteed
Companies are under no obligation to pay dividends. Companies can reduce or eliminate the dividend at any time. However any reduction in the dividend usually results in a drop in the share price, so responsibly run companies think long and hard (and crunch all the numbers) before they announce a dividend or dividend increase. Financially healthy companies want to be sure that they can continue to pay the dividend for years to come. Therefore a dividend increase and a history of dividend payments are both good indicators of the financial health of a company.
Where's the Proof?
Consistent dividend increases are proof of profitability. Here's some companies and their consecutive years of dividend increases:
- Dover Corporation: 62 years
- 3M: 59 years
- Johnson & Johnson: 55 years
- Coca-Cola: 54 years
- Lowe's: 54 years
- McDonald's: 40 years
- Clorox: 39 years
Should You Buy These Shares?
Just because a company is in the list above does not mean you should go out and buy shares in these companies right away. The key to successful investing is to buy quality dividend-paying companies when they are undervalued.
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."
Look to the Past to see the Future
Dividends are not guaranteed and, no one can tell the future, no analyst or expert can predict if a company will continue to pay dividends in the future. However looking at the companies listed above one can have a high degree of confidence that they will continue to payout dividends next year, the year after that, and in the years to come. Dividends give you insight into the profitability of a company.
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