Dividends Play a Vital Role for Investors
29 May 2014
Posted by: Author: Marriot
Author: Marriot (The Income Specialists)
The ability of a company to pay out steady or growing dividends is
often a sign of a healthy business and a good long-term investment. These
dividend payments can play an important role for investors.
A dividend is a payment made by a company to its shareholders and
typically represents a portion of a company’s earnings that the directors of a
business have decided to pay out and not reinvest back into the company.
The benefits of dividends are outlined below:
source of income
Dividends provide investors with cash flows that
can be used to fund a lifestyle or they can be reinvested. It is interesting to
note that in first world markets at present, dividend yields of multinational
blue chip companies are higher than cash and bond yields, making them an
excellent source of current income.
Companies that pay dividends provide investors
with an effective inflation hedge. Take, for example, an investment made in Mr
Price. In 1994 a R100 000 would have bought the investor 66 000 shares in the
company. Those shares would have paid the investor approximately R2 100 worth
of dividends in the first year. In 2013 that same investor would have received
approximately R263 000 worth of dividends from the same number of shares. This
increase in dividend income equates to an average annual income growth rate of
28.5% per annum for the past 20 years. This growth exceeded average inflation
over the corresponding period by 22.1% per annum.
It is also important to note that the value of a
company increases at the rate at which its profit grows. In the same way, the
value of an investment grows over time at the rate at which its income grows.
Mr Price’s average annual capital growth over the last 20 years has been 26.4%
which corresponds with the company’s 28.5% average annual growth in dividend
over the same period.
that reliably grow their dividend tend to outperform others over time
Many investors think of reliable dividend payers
as stodgy, uninteresting companies that will produce mediocre returns. This is
far from being the case. Studies have shown that companies that pay and grow
their dividends outperform the market over the long term.
In South Africa, dividends are taxable in the
hands of the investor at flat rate of 15%. This is an advantage for high net
worth Individuals in higher tax brackets.
Investing in companies that pay reliable
dividends helps to reduce volatility: when company share prices have declined,
investors will still receive dividend payments.