Unlike earnings, dividends are real cash outlays. Earnings can be manipulated or massaged to meet or beat expectations, but dividend payouts cannot be manipulated. A company has to pay out a dividend from its cash coffers. More so, dividends can serve as a barometer by which to measure the health of some companies.
TUTORIAL: Investing Concepts
Sending a Signal
When a company pays a dividend, that is typically a good reflection that operations are doing well. Remember financial stocks a few years ago? Many that were paying solid dividends had to suspend or eliminate them as a result of huge losses due to asset charge-offs. When business operations are performing poorly, dividends are usually the first to go and that can send a strong signal to investors.
Conversely, companies that are increasing their dividend payouts may be sending a signal that operations are finally starting to show signs of improvement. Several months ago, financial titans like JP Morgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) increased their dividends as soon as they were cleared by regulators to do so. Months prior to that, many analysts suspected as much given the fact that JPM and WFC were considered two of stronger and better capitalized financials. On the other hand, Bank of America (NYSE:BAC) which is still facing a myriad of problems with regards to its loans, is still not paying a dividend. (For more, see Why Dividends Matter.)
Good Times Ahead?
Last week, Sallie Mae (NYSE:SLM), the largest facilitator of student loans, reinstated its common dividend to 10 cents a share. The company's CEO said the dividend payout reflected the "strength of our capital, liquidity and cash flow." Sallie's dividend announcement coincided with a strong quarterly performance which saw EPS climb to 48 cents from 40 cents. It's no coincidence that SLM shares climbed to $17, a new 52-week high.
With gold trading at record highs today, gold miners are reaping profits. Those profits are being returned to shareholders from Newmont Mining (NYSE:NEM), the second largest miner of gold. Newmont investors were treated to a 33% increase in the dividend payout to 20 cents from 15 cents, respectively. Newmont now yields 1.3%. Barrick Gold (NYSE:ABX), the largest gold miner, currently yields less than 1%. The company reports earnings later this week and a strong result could lead it to increase its payout.
The Bottom Line
Don't' discount the value of dividends. They are real and can't be manipulated via accounting gimmicks. And over the long run, dividends deliver tremendous value. (For more, see Dividend Facts You May Not Know.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!