Allocating part of your investment portfolio to company shares is always something to consider. Determining how much and which companies to invest in can get complicated as there are many factors to investigate. Many think, for example, that a company that pays regular dividends is a sure thing.
“Companies pay dividends for any number of reasons,” explains Richard Cayne of Meyer International. “They are attractive to investors as they see an ‘instant’ reward rather than having to sell their shares to make a profit. But that shouldn’t be the only thing to affect investing.”
What are dividends?
When a company has significant earnings, it may choose to share these profits with their shareholders through dividends. Typically, these are paid in cash, but they can also be in stocks, assets, or combinations of the three. Many consider it a sign of a company’s prosperity that it can afford to share its wealth, which in turn may make the company seem like an attractive investment.
However, there are plenty of reasons for companies not to pay dividends. Some companies may choose to re-invest their earnings to continue their development, thereby strengthening their growth potential and profits. Others may choose not to so that their investors don’t get exposed to potential capital gains tax issues, as many jurisdictions consider dividend payments as taxable income.
Dividends: a sure thing?
Just because a company typically pays dividends, this does not mean that it will continue to do so. Even if the company performs well, the board of directors may decide, for any number of reasons, to not pay a dividend. And if it chooses not to pay a dividend, it does not necessarily mean that there’s a problem.
“Although getting a dividend payment is a tangible sign of your investment paying out,” said Richard, “it shouldn’t be the only indicator you use when determining where to put your money.”
Learning more about a company’s structure and potential requires evaluating many factors. Discussing the pros and cons of any investment with a trusted consultant can go a long way to helping you create a beneficial portfolio.