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Can a company
afford the dividends
it promises?
By comparing a company’s profit with
the amount it pays in dividends over
several years, investors can judge if
that company is a good long-term bet
for providing a future income stream.
Older, larger, and more established
companies with steady earnings
tend to pay healthy dividends,
although their share value may
not rise by much.PROFIT RELATIVE TO DIVIDEND2010 2 011 2012 2013 2014EARNINGS VS DIVIDENDS PER
SHARE, FTSE 100 COMPANIESYEARDividend❯❯Preference share
Share that entitles
the holder to a fixed
dividend that is
prioritized over ordinary
share dividends.❯❯Dividend cover
How many times over
the dividend could be
paid out of the
company’s profit.NEED TO KNOW
Company B
❯❯Much-hyped float on
the stock exchange.
❯❯Offers high dividends
but value soon falls.££££ £Poor dividends likely
£ ££ £ ££ £ £❯❯The company reduces the
dividend – a signal of rocky
financial times ahead.❯❯There is a fall in profits and the
company must borrow in order
to cover its dividend payouts.❯❯The share value falls, meaning
the initially high yield offered on
dividends is short-lived.PERSONAL FINANCE
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