Sometimes we are so consumed by the movements in share prices that we forget about the other benefit of shareholding, namely dividends. Not all companies pay a dividend but sometimes it is worth your while to invest in those that do.
What we like about dividend-paying companies is the fact that even when their share price is down owing to negative sentiment, companies with a strong cash flow and dividend policy will continue paying the dividend. This gives their shareholders the security of knowing that even though the value of their investment has gone down on paper, they will still receive an income they can use for whatever they need in the short term, giving the share price time to recover.
When evaluating the dividend, you have to look at two things: the dividend yield (dividend as a % of the share price) and the dividend growth. The dividend yield should be compared to the return you could get on cash, i.e. interest; and the dividend growth should be compared to the inflation rate. If you can get a dividend yield of close to the bank interest rate and the dividend growth beats the rate of inflation (currently around 4,6%), you get the future growth in share price as a bonus.
If we look at a specific example we will see that Standard Bank has just published their 2017 year-end results indicating that they will pay a dividend of R9,10 per share (17% better than last year). The current share price is R226,24 in other words the dividend yield is 4%. So, not only do you get a dividend that is close to the interest you will earn on a good fixed deposit, but you’ve also seen a dividend growth of almost 4 times the inflation rate.
