March 2, 2008
Two cents'worth: Why dividends may speak much louder than earnings
By Josh Peters, AUTHOR
THE stock market never seems to get the respect it deserves. It either gets too much credit - partying like it is 1999, so to speak - or too little, the bear market of 2001-2002.
As far as I can tell, this chronic problem stems not from the stocks themselves but from the way people choose to obtain their returns - and the way corporations have adapted to provide them.
Wall Street is obsessed with quarterly earnings reports. A firm that announces earnings exceeding expectations can see its stock price rise 5 to 10 per cent in minutes. A firm that fails to measure up can get clobbered by even larger proportions.
These reports get much more attention than dividend announcements, which are also made at roughly three- month intervals.
Earnings releases are long and chock-full of interesting details and figures. Dividend announcements may contain no more than a paragraph focusing on how large the dividend is and when it will be paid. They also tend to be fairly routine.
But even if earnings releases make much more interesting reading, dividends speak louder than earnings.
A firm's pattern of dividend payments can offer valuable clues to underlying performance, clues just as valuable as those provided by earnings reports, and definitely more useful than the conclusions one might draw from looking at a three-month stock chart.
Dividends are more than mere information - they provide insight that any investor can use to make successful investments.
What exactly is a dividend? Basically, it is a transfer of assets, almost always cash, from a corporation to its shareholders.
Not all corporations are willing to pay dividends, but many do. Some pay out a little, while others pay out a lot, thereby setting the investor free from fickle market prices and unreliable capital gains.
Extracted from The Ultimate Dividend Playbook by Josh Peters, published by John Wiley & Sons
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