A:

There are two primary causes for increases in a company’s dividend per share payout. The first is simply an increase in the company's net profits out of which dividends are paid. The second is a shift in the company’s growth strategy that leads the company to decide to expend less of its earnings in seeking growth and expansion, thus leaving a larger share of profits available to be returned to equity investors in the form of dividends.

There are a number of reasons why a company might decide to reinvest a smaller portion of its profits into growth and expansion projects. Depending on the size of the company, production capabilities and other similar factors, the extent to which a company can grow may be at least temporarily limited. The company might be concerned about its ability to increase production sufficiently to meet increasing demand if it pushes too far, too quickly in expanding its market. Unfavorable financing rates may lead the company to postpone major capital expenditures. A rapidly growing company may wish to consolidate its gains and reassess its market position before committing further funds to expansion. There is also the possibility a company may decide to increase its dividend payout to attract further equity investment by offering more attractive dividend returns to investors.

The two main dividend-related equity valuation metrics investors use to evaluate a company's overall investment potential and specific income investing potential are dividend yield and the dividend payout ratio. While dividend yield is perhaps a more commonly viewed figure by retail investors, the dividend payout ratio is a metric more favored by capital investors. The dividend payout ratio shows the percentage of a company’s earnings being paid to shareholders in the form of dividends.

A stable dividend payout ratio over time is considered a favorable sign for investors, as it indicates a financially sound company with earnings adequate to support continued positive dividend yields for investors. Analysts prefer the payout ratio to dividend yield, as a company's current yield may be a figure unsustainable over the long term.

RELATED FAQS
  1. What is the difference between the dividend yield and the dividend payout ratio?

    Learn the differences between a stock's dividend yield and its dividend payout ratio, and learn why the latter might be a ... Read Answer >>
  2. How do I calculate the dividend payout ratio from an income statement?

    Understand the dividend payout ratio, how it differs from the dividend yield and how it can be calculated from a company's ... Read Answer >>
  3. Do I receive the posted dividend yield every quarter?

    Learn how companies with stock that pays dividends will typically distribute the dividend each quarter. Find out how much ... Read Answer >>
  4. What is the difference between yield and dividend?

    Learn how to differentiate between dividend yield and dividend return, and see why dividend yield is the more popular rate ... Read Answer >>
Related Articles
  1. Investing

    Is Dividend Investing a Good Strategy?

    Understanding dividends and how they generate steady income for shareholders will help you become a more informed and successful investor.
  2. Investing

    Why Dividends Matter To Investors

    There is much evidence as to why dividends matter for investors, profitability in the form of a dividend check can help investors sleep easily. Learn more.
  3. Investing

    Dividend Yield For The Downturn

    High-dividend stocks make excellent bear market investments, but the payouts aren't a sure thing.
  4. Investing

    WMT: Wal-Mart Dividend Analysis

    Wal-Mart raised its dividend for the 43rd consecutive year, despite losing over 25% of its market value in 2015, and its dividend remains healthy in 2016.
  5. Investing

    Dividend Ratios: Payout And Retention

    The dividend payout ratio and retention ratio measure how much profit a company gives back to shareholders as dividends. When a business earns money, it must decide whether to use all of its ...
  6. Investing

    The Top 5 Dividend-Paying Financials Stocks for 2016 (WFC, JPM)

    Discover analyses of the top five dividend-paying financial stocks for 2016, and learn why their stock prices and dividends are poised to rise.
  7. Insights

    Do Interest Rate Changes Affect Dividend Payers?

    Interest rate changes have an effect on prices of dividend-rich stocks in interest rate sensitive sectors like utilities, pipelines, telecommunications and REITs.
  8. Investing

    5 Dividend Growth Stocks Posed For Higher Dividends (V, NKE)

    Learn about five companies that have a strong history of consistently growing their dividend payments and have the potential to continue doing so in the future.
RELATED TERMS
  1. Target Payout Ratio

    Target payout ratio is a goal companies set for the proportion ...
  2. Payout Ratio

    Payout ratio is the proportion of earnings paid out as dividends ...
  3. Dividend Rate

    The dividend rate is the total expected dividend payment from ...
  4. Dividend Policy

    Dividend policy structures the dividend payout a company distributes ...
  5. Payout

    Payout refers to the expected financial return or monetary disbursement ...
  6. Special Dividend

    A special dividend is a non-recurring distribution of company ...
Trading Center