The Implications of Low Dividend Yield for Investors
When a stock pays a dividend, investors calculate that dividend as a percentage of the stock's share price. This is the dividend yield. For example, a stock that pays an annual dividend of 25 cents and has a share price of $25 has a 1-percent dividend. While it seems intuitive that all investors want the highest dividends possible, many are attracted to companies that pay low dividends.
Investors prefer that small companies and start-ups keep their dividends low. The reason for this is that their low dividends are easier to pay. This allows a company to keep some of its profit to reinvest in growth rather than paying it out to shareholders. This conservative approach to dividends indicates sound decision making on the part of management.
As a company increases its profits, it can increase the percentage it pays in dividends. A growing dividend is a sign of health in a company, and dividend investors search for companies that have a history of increasing dividends. Investing in low-dividend stocks is a long-term strategy calculated to reward investors who have a knack for picking companies that can increase their pay-outs to investors in the long run.
Since low dividends allow a company to reinvest and grow profits, the share price can rise. Investors will be willing to pay more for the stock as they see the company increasing in value. This gives a low-dividend investor two sources of revenue: dividend payouts and increased stock prices. This kind of stock is often called a dividend growth stock.
The reason behind a company paying a low dividend is important. If the current yield is low because the company has had to cut its dividend due to declining sales or profits, then a low dividend is a sign of poor company health. Current low yields should always be evaluated in the context of previous yields. If dividends are dropping, the company may be in trouble.
You can use online stock screeners such as the ones at Yahoo Finance and Google Finance to search for stocks with low dividend yields. The average dividend yield for stocks historically has been around 4 percent. You can find information about a company's profit growth and cash flow by clicking on the company symbol in the list and reading the financial report.
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.