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As your parents might have told you once, when a company loves its shareholders very much, it sometimes offers a periodic dividend to show it. Then, if its financial affairs continue to go well, the company will occasionally boost its payout amount. A few big name companies have recently lifted their dividends by a considerable amount. Here's one that's doing everything right and another that looks a little dubious.
A fizzy payout
Ah, the joy of Coca Cola (NYSE: KO ) . Few companies could survive a disaster as big in scale as New Coke, but somehow this company did it, and over 25 years later, Coke is still a dominant player on Wall Street. Seeing as it produces the most widely consumed non-alcoholic beverage in the world, this makes perfect sense.
It may not be surprising, but one of the most high-profile companies in the world is also one of the stock market's longest-serving Dividend Aristocrats. Coke announced on Feb. 21 that it would raise its quarterly dividend by 10%, extending a streak that has run for half a century. Even as society looks on the dark side of sugary drinks, Coke continues to bring in enormous annual revenues and retain solid profit margins.
Coke might be dependable, but some other companies are offering bigger dividends that might be more volatile. Texas Instruments (NASDAQ: TXN ) recently announced a sizable payout increase of 33%. Additionally, the company will be expanding its share buybacks. These are two moves that investors generally love to see from companies, but in the case of Texas Instruments, is it that great of a strategy?
Generally, a buyback and dividend of this magnitude happen when a company is thriving. A boosted dividend indicates that financials are on enough of an upswing that the business will not only stay afloat but grow even further after it issues the changes. Meanwhile, share buybacks solidify morale among investors: The stock increases in value if there are fewer shares available for purchase.
Based on Texas Instruments' recent performance, though, returning more capital to shareholders doesn't entirely make sense. Quarterly revenues have decreased 4% since Dec. 2012, and its annual revenue has dropped 8% since 2009. One potential reason for the dividend is that Texas Instruments has spare change left over after letting go of more than 500 workers and is trying to get investors excited about the company again. It might seem tempting to jump on this train after the news of the dividend, but it's wiser for your bank account to wait and see how the company fares following these new changes.
Divi-do's and don'ts
When a company raises its dividend by a large percentage, it may be too tempting to buy. The truly Foolish investor, however, knows how to identify a strong financial structure from a weak one. Coca-Cola is an easy example of a Dividend Aristocrat guaranteed to pay off, but Texas Instruments proves that even if the payout is big, the company might still have some issues to resolve.
Ultimately, if you like a stock but have an apprehension (or several), just wait it out for a while and see how it changes. Mr. Market may fall into a tizzy over moment-to-moment stock twists and turns, but that doesn't mean investors should.
There is absolutely no question that Coca-Cola has been great to long-term shareholders, but the company faces some new threats to its continued market dominance. We've recently compiled a premium research report containing everything you need to know about Coca-Cola. If you own or are considering owning shares in the company, you’ll want to click here now and get started!