In tough times the best public companies respond by maintaining their dividend payments. Many are able to increase them.
That’s why dividends are a good indication of investment quality. They point to financial stability and a strong business. The odds are good that if a company pays a dividend, it will increase over time and a history of dividends indicates a company has a plan that is creating revenues and profits.
While a high dividend yield is a good sign, it isn’t the only reason to buy a company’s stock. (Dividend yield is calculated by dividing a company’s annual dividend payment by its share price.) A high yield can sometimes be giving you a warning rather than showing you an investment bargain. It may be high because a company’s share price has fallen, which pushes the yield up. The decline may be due to business conditions and be a sign that investors believe the dividend will be cut.
But in general, dividends are a positive indicator showing management’s faith in the business if only because they make the decision to set aside the payment at the beginning of the year. This decision is made before the company has earned the money to make the payment.
It may be no surprise that Canada’s dividend leaders are the banks. The Big 5 and their predecessors have been paying dividends for more than 150 years. Bank of Montreal (TSX: BMO) began paying dividends in 1829. The Bank of Nova Scotia (TSX: BNS) followed in 1832. TD (TSX: TD) has paid dividends since 1857, the CIBC (TSX: CM) since 1868 and Royal Bank (TSX: RY) since 1870.