Make Highest Dividend Yields Work for You

2008-02-11 15:35:56

( Legal )



Dividends are cash distributions that companies pay out to their shareholders from their earnings. Dividends are an investor’s share of the company’s profits. Withholding these can be both embarrassing to the management and damaging to its share prices.

As an investor, seeing your stocks earning dividends is the best way of knowing when your stocks are in stable condition. It helps encourage investors to keep their shares. While the company’s willingness and ability to pay dividends show financial stability, it also creates transparency between the company and its shareholders. The importance of the dividend payout is that it brings more discipline to the management’s decision making. Holding onto excessive profits might lead to mismanagement of cash. Studies have shown that companies that pay dividends tend to be more efficient in cash management. For some investors, however, the dividend yield is of little importance because companies need to retain enough cash to fund its business activities and reinvestments.

Before investing in the highest dividend yields in the stock market, try to learn what they are and how you can make them work for you. If investors are used to being paid dividends, a sudden stop by the management may create fear, thus, ruining their financial credibility. Most investors expect that stocks with the highest dividend yields also earn high returns. Dividend yields are similar to bond yields and money market yields due to the fact that they provide regular income to investors.

There are three dividend paying methods, one is residual policy; this kind of payment method is unstable for the investor. It fluctuates from time to time because a company using this strategy is internally financing its own expenses and dividend distribution is only met after the management of the company decides if there is enough cash leftover for a dividend payout. Though some may view this method as a high risk investment, others see it as a possibility of earning the highest dividend yields. The second method is stability policy; the dividends are paid out at a fixed earning, regardless of the company’s expenses. The third method is hybrid policy; it is a combination of residual and stability policy. Companies and shareholders alike view this method as a long term investment.


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