There are two primary types of investments -- stocks and bonds. Stocks represent company ownership and bonds represent company debt. Stockholders can be compensated for their investment through either share price appreciation or dividends. Not all companies pay a dividend, however. There are several factors that affect the amount paid out to stockholders in the form of dividend payments.
The most obvious factor affecting dividend payout is earnings. While companies hate to skip or even lower a dividend payment, they will have to if earnings are consistently unstable. Due to the negative signal a decline in dividend payout sends to the market, most companies opt to borrow on a line of credit or take out a loan to pay dividends; however, this is not a smart use of borrowed funds and is not sustainable over a long period of time.
Growth vs. Mature
The age of the company can also influence the dividend payout. Most new or start-up companies are desperate for capital. As such, they usually do not pay a dividend until they become more stable. As the company matures it can use retained earnings to pay dividends. Most investors in growth or start-up companies expect this and prefer share price appreciation over dividends.
In a tight credit environment, companies are likely to continue to pay dividends; however, they are unlikely to raise the dividend even with an increase in net income. This is because the access to funds is limited and may also cost more to borrow. Likewise, when credit is loose and funds are easy to obtain, companies are more apt to increase the dividend payout percentage.
Dividend Payout History
Dividend history plays an important role in the dividend payout. Many investors purchase stock specifically for the stability of dividend payments over time. Dividend payments represent a form of income. These are usually companies that experience a low rate of share price growth, such as those in the banking or utility industry. As a result, the shareholders of these companies will complain if the dividend is cut, and the board of directors will be less likely to vote in favor of a cut even if the company is in dire straights.
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- Internal and External Factors Affecting Share Price