Is a good share one that pays out its earnings in dividends?
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In my opinion, the important part which decides whether a company is better off paying out its dividends or reinvesting in itself would be the return on equity. If it is able to maintain or even grow a high return on equity (double-digit?) which is higher than my expected return on investment, I would be happy to let it keep its money for reinvestment in the business instead of paying it out in dividends. Likewise, a company that pays out a satisfactory dividend is also good.
There are stocks now that offer good dividend yields, look at Jardine Cycle & Carriage, which presents a good dividend yield for a company that is at the low end of their cycle (Read: Jardine C&C: Possible Opportunity for Dividends). These companies are good for people looking for a source of income which they can reinvest or use for their own expenses.
But there are also stocks that offer good value while paying almost no dividends. One of the stocks in this category that I'm watching is Ezion. Though is pays like 0.1 cent of dividend on a one cent share, it has a P/E ratio in the mid-single digits. While it is in the oil and gas sector which has declined considerably since its heyday, the fundamentals of the business still seem sound and even if it takes a hit to its profits, its currently low P/E ratio should be able to absorb it. I like it to not pay dividends for one key reason: It earns a high Return on Equity. around 20%. I would be hard-pressed to find another company that can return the same amount, or even if it decreased to say 10%, it's still better than the market return and the money that the company earns and reinvests in the business can also hopefully earn such a high return which would make the lack of dividends worthwhile.
Needless to say, good dividend yields and consistent payouts are good, but I don't think that we shouldn't only be looking out for shares with the highest dividend yields (these usually don't last very long anyway). We have to look at the underlying profits of the business and see if the dividends that it pays are sustainable or if the company is able to generate a satisfactory return on its equity, which can justify the retention of earnings. But I do not think that there should be a preference for a dividend-yielding stock unless maybe you're retired and looking for a passive income flow, but even then, good opportunities for capital appreciation should not be avoided.
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