Learning about shares: Windfalls that flutter i

Olympic champion BARBARA KENDALL gets help from Dan Dividend

Q. Barbara asks: Can you explain what the dividend columns in the newspaper sharemarket table mean? Are there any underlying messages hidden in dividends?

A. Dan Dividend responds: That's an interesting question - there's more to dividends than meets the eye. Like you, Barbara, if readers started buying shares in the summer when we began this column, they might have already received a dividend - depending on which companies they chose to invest in.

A dividend is often a nice little windfall that arrives in your mailbox or bank account. If you invest in dividend-paying companies, they're an important part of the total returns you get from your shares.

So what exactly is a dividend?

A dividend is a payment a company makes to its shareholders. It's usually paid from profits, but can also be paid for other reasons, such as when a company has extra cash over and above that needed to finance growth or expansion.

You might like to think of a dividend as a reward or perk you get in return for your ownership stake in a company.

Let's move on to the dividend information in the sharemarket table.

CPS (cents per share) The amount of money a company has paid out as dividends over the past year. Many companies pay two dividends during the year: an "interim" dividend, declared when the company publishes its half-year operating results, and a "final" dividend at the end of the company's financial year.

Some companies also occasionally pay a one-off "supplementary" dividend. The CPS figure adds them all together.

T/C (times covered) The number of times a company could have paid the dividend from its after-tax annual profits. Let's throw a dart at the sharemarket table and look at Waste Management (WAM). Its t/c is 1.74, which means the dividend could have been paid 1.74 times from the company's profit. Yield % The return investors have received from dividends in the past year. The figure is re-calculated daily based on the latest share price. If the share price is $1 and the dividends paid over the past 12 months total 7c a share, the dividend yield is 7 per cent.

This week I've asked our guest NZX adviser, Jonathan Westoby from Macquarie Equities, to explain how to use the dividend columns to look at shares.

Jonathan says: Like all ratios, multiples, calculations and other indicators, the dividend columns tell only part of the story about shares. The dividend columns are often more interesting for the questions they raise than the answers they provide.

What does it mean when a company pays only a small dividend, or no dividend at all? The higher the T/C figure, the lower the proportion of profit a company pays in dividends. Companies that pay modest dividends, or none at all, could be reinvesting most or all of their profits to expand the business. This is a good thing, and is typical of rapidly growing companies that need all their money for continued growth.

In some cases, companies that don't pay dividends may be reinvesting profits just to maintain their income level, possibly because of onerous asset maintenance requirements. This is not such a good thing.

Use dividends as an indicator of cash flow strength. The dividend columns can be a broad indicator of a company's confidence in its ability to sustain its cash flow levels. Regular dividends often come from companies that have predictable cash flows based on an established position in a mature industry.

Companies don't like reducing dividends. The basic assumption is that companies don't like reducing their dividends because of the negative message it sends to the market. With this in mind, it's fair to say companies that pay out high percentages of their profits as dividends are confident of their ability to maintain or grow their income. Running your eye down the T/C column allows you to compare the different percentages of profit that companies pay as dividends.

* Email Jonathan Westoby