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.