“Are companies that pay dividends better than those that don’t?” » – Chantal Allen
The short answer is “not necessarily,” but you need to know what “better” means and why a company does or doesn’t pay a dividend.
Generally speaking, companies that pay dividends to their shareholders have reached a certain stage of maturity or are in a sector where growth is more difficult to generate.
We can think of banks in the financial sector, for example, where barriers to entry are high. We can also think of oil companies in the energy sector. The telecommunications sector is another example.
BCE is a large company in the Canadian telecommunications sector with attractive distribution. BCE’s dividend yield today stands at 8.5%. It’s very high. If the company fails to lower its payout ratio within a range representing a certain percentage of its cash flow, it risks having to reduce its dividend, which could cause its stock value to decline.
It should be remembered that several companies have eliminated, over the years, the dividend paid to their shareholders. In Quebec, we only have to think of Pages Jaunes and Colabor, for example, or more recently of Innergex.
That doesn’t mean that these companies aren’t good, it just means that just because a company pays dividends doesn’t mean it’s “better” than one that doesn’t.
Suspending a dividend or cutting it is a difficult decision for managers to make. It takes a dose of courage, but above all it demonstrates financial discipline. Shareholders want return in the form of a dividend, but above all they want responsible managers when the business context requires difficult decision-making.
RBC Dominion Securities notes that companies that pay dividends to their shareholders are generally financially strong and that dividend payments can help make their shares less vulnerable to large price swings.
Companies that can afford to pay dividends generally have strong liquidity and generate more profits than they can reasonably reinvest internally, RBC adds in a recent client document. “This shows investors that these companies are stable and have a strong financial base,” he said.
Paying a dividend is certainly interesting for an investor given the periodic income it provides. This makes it possible to retain shareholders in the adventure when growth prospects become less significant.
In the technology sector, for example, companies pay a dividend more rarely, especially when they are growing strongly, because companies need their cash to reinvest and expand operations.
Meta (Facebook) and Alphabet (Google) have dominated the technology sector for several years, but only decided this year to pay a dividend to their shareholders.
Ultimately, it is more the investor’s profile that will determine whether a company is good or worse for their portfolio than whether or not it pays a dividend.
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