Many times you'll see a quoted dividend yield along with a share price. It indicates the initial return on dividend income you can get based on the current share price. A big number may look attractive, like a high bank account interest rate.
What's a good yield really? Is it simply the larger percentage the better? That value is frozen in time like a snapshot, yet an investor will want something dynamic, growing. It's growing dividends that we desire.
Since dividend amounts are usually a proportion of earnings per share, it's not set in stone. Many stable companies try to increase dividends every year, but during down times when earnings suffer, so do dividends usually. Real estate investment trusts and other investment fund style companies can possibly have a dividend value set independent of earnings (at least for a short while). The majority of publicly traded companies are not of that sort.
So getting past the initial delight of a high dividend yield, your next questions should be whether the company has a history of rising dividends and if there were any times when dividends were dramatically cut or not paid at all.
Yes, in some cases if the company decides it can't afford to pay a dividend, they just don't pay it. The share price will suffer for it, but it is done.
I searched out some stocks that do have good dividend histories and, more importantly, raised dividends yearly to the delight of shareholders.
M2 Group Ltd (ASX: MTU), the ISP and telephony company that operates Dodo, iPrimus and Commander, has a 4.2% dividend yield and since 2008 dividends have quadrupled from 4.8 cents per share to 20 cps. In the past year, full year dividends were up 11.1%.
Specialty retailer Super Retail Group Ltd (ASX: SUL) offers a 3.6% dividend yield, but in the last five years dividends per share tripled. The operator of such businesses as Supercheap Auto, Rebel Sports, BCF and Amart Sports raised its full year dividend 18.8% in FY2013.
JB Hi-Fi Limited (ASX: JBH), well-known for electronics goods retailing, could give you a 3.6% dividend yield now, but it gave shareholders a 10.8% higher full year dividend in 2013. Dividends per share rose from 26 cps in 2008 to 72 cps in 2013.
Foolish takeaway
Dividends mostly grow along with the earnings, so finding quality companies with rising profits is still the goal.