Ever had a dividend wink at you? Ever seen one flirtatiously arch an eyebrow in your direction? Gently lay its hand on your knee while it laughs a little too hard at a lame joke you just nervously blurted out? Well, that dividend may be signaling something.
But that's not really what we're talking about here.
In this case, dividend signaling relates to how investors should interpret a company's decision to raise its dividend. It's a stock-picking signal.
Some stocks come with a dividend. It's an amount of cash the company pays out per share-basically, a little monetary "thank you" for the people holding its equity.
The dividend signaling theory states that raising a dividend indicates a positive outlook for a company. After all, a company must have cash in order to pay out the divided. Managers must think the company will continue to do well, otherwise they wouldn't have the confidence to raise the dividend.
It can also indicate that the company can't think of anything better to do with its money. But, by and large, market watchers treat increased dividends as a sign of confidence on the part of managers.
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Finance: What is a Dividend?1777 Views
Finance a la shmoop what is a dividend? well let's start with how [Bird flying with a bag]
dividends came to be well dividends are the result of a great and awesome quote
problem unquote.. what happened to corporations is they grew and became
dominant in their respective industries they retained so much cash profit even [man as a giant corporation crushing city buildings]
after building factories digging mines and smelting whatever they smelted well
that they couldn't figure out what to do with the cash so under a lot of [man with an open briefcase full of cash]
shareholder pressure and that is the common shareholders would threaten to
fire the Board of Directors, the fat and cash happy corporations just to begin to [common shareholders hitting the board of directors]
give it back to shareholders their owners who were in turn made happy by
that event and in many cases on the announcement of an increased dividend [share prices increasing and man shouts into a speaker]
policy share prices went up because of that whole investor happiness thing
there's a good structural reason for dividends to exist however they force [men bricklaying]
companies to be disciplined in their spending that is if companies aren't
disciplined, they don't have the money to pay the dividend and well when that
happens to a company basically everyone gets fired in most public companies [Donald Trump firing an employee]
dividends are viewed as a long-term commitment not as like a one-time thing
in fact during the Great Depression AT&T famously continued paying its dividend
without fail and many families relied on that dividend to make ends meet in the [family together eating dinner]
modern era companies in financial stress have even borrowed money just to make
sure they can pay their dividends to investors why well they believe that
when they get through the tough times they'll return to that massive [man running down a road sign posted under tough times]
profitability and they'll have a track record of continuing to pay dividends [oil machine working as cash piles up]
and that love is worth taking out a loan to pay a dividend the other big thing to
consider is that dividends are a very meaningful part of investment returns [dividends arrow pointing to investment returns]
which lousy financial journalists so often seem to forget many will decry the
era of the 70s as a lost decade looks like the stock market went nowhere from [man fumbling through a skip]
1968 to about 1980 right? well no it didn't go up but during that
period company's continued to pay their dividends and for the decade the [money going into a shareholders window]
dividend rate of the average S&P 500 company was about six percent so if
you've done nothing other than collect your six percent a year in dividends [Man collecting a 6% dividends]
well you would have been just fine you would have almost doubled your
investment money this way ignoring taxes from about nineteen sixty eight to [Man doubling his investment money from 1968-1980]
nineteen eighty and that's not bad for a lost decade
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