Dividend payments can be an important part of an investment strategy and might influence which companies you hold in your investment portfolio. For many investors, dividends heavily influence how they choose which companies to buy.
A dividend is a portion of a company’s profit that it may decide to pay out to its shareholders. It is a reward to shareholders for the risk they take for investing in the company.
Dividends are calculated and paid on a per share basis.
No company is obliged to pay a dividend. Even if a company has paid dividends in the past, it may pay a higher or lower dividend in future or it may stop at any time.
Older, blue-chip companies with steady profits are more likely to pay dividends. Some blue-chip firms do not pay dividends but re-invest the profits back into the business to increase the share price.
Younger companies that are rapidly expanding are less likely to pay dividends because they need all the money they can get to fund their growth. Startups will not pay dividends as they haven’t yet managed to make a profit. When you buy shares in these kinds of companies, you’re hoping for an increase in share price until they can afford to pay a dividend.
The amount of dividends paid will affect share prices.
During a recession or other times of hardship, or because of changes such as increased taxation on companies, dividend-paying shares can quickly decrease in value. This is because there is a risk that the company will reduce dividend payments in the future. If a company says that it’s cutting its dividend, the share price will generally fall right away. As the market improves, the share price might rise again, as investors hope that the company will increase its dividend once more. But if the economy gets worse, the share price might fall even further because investors worry the company will reduce or stop paying dividends.
When investing in dividend-paying shares, you’ll want to learn what the dividend yield is, how it relates to the share price, and what pitfalls to avoid.
A share’s dividend yield tells you how much dividend income you receive, compared to the current price of the share.
The formula for finding a dividend yield is simple: Divide the yearly dividend payments by the share price. For example, assume you buy a share for 12 kina. The company pays a half year dividend of 0.39 kina per share and a full year dividend of 1.34 kina per share, which means for every share you own, you will receive 1.73 kina per year. Using the formula above, divide 1.73 kina by 12 kina, giving you 0.144. The result is a 14.4% dividend yield. You can see that investing in this company can produce a higher income than a bank deposit.
Buying stocks with a high dividend yield can provide a good source of income, but there are other factors to consider.
You need to exercise caution when considering dividend yields as they rely upon historical information. Dividend yield is calculated using the most recent dividends. If the company reduces its next dividends to 1.50 kina per year, and if the market believes a 14.4% dividend yield is required for the risk of investing in that company, the share price will fall to about 10.40 kina.
A company will generally announce a dividend when announcing its half year and full year results. It will also announce an “ex-dividend” date meaning the day the shares begin to trade on PNGX without the entitlement to the dividend. You would need to buy shares on PNGX before this date to receive the dividend payment. Trading for the days before the “ex-dividend” date is called “cum-dividend”.
A company’s share price will sometimes rise as investors buy shares ahead of the ex-dividend date. The price will often fall by the amount of the dividend on the “ex-dividend” date.
The company will also announce the payment date which is the date the company pays the dividend to shareholders, often between 4 and 8 weeks after the ex-dividend date.
The information in this article is general in nature and you should take care to inform yourself about the specific characteristics of a particular investment before making a decision to invest in it. PNGX recommends discussing your investment objectives and needs with a stockbroker or qualified financial adviser. In PNG, you can either contact JMP Securities Limited or Kina Securities Limited.
By following these articles and reading more information available on the PNGX website (www.pngx.com.pg) you can build your wealth and invest in PNG.
