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Dividend Basics for Value Investors

Motley Fool Staff
September 30, 2008

Historical records show that more than 50% of the long-term return from stock investing has come from dividends. As you contemplate growth rates, future cash flows, pending patents, FDA approval, or international expansion at the companies you follow, remember that there are only two ways to get paid from the stock market: the "buying low, selling high" method, and dividends.

Not only do dividends give you cash in hand or more shares in your account, they're a powerful indicator of the company's cash-raising abilities and management confidence. Indeed, most of the businesses we look for in Motley Fool Inside Value sport healthy dividends.

A refresher
 A dividend is a taxable payment declared by a company's board of directors. Dividends are typically paid quarterly, in cash, although they can be stock or other property (think Anheuser-Busch paying out with a six-pack or two). If your broker holds your shares, they will be paid directly to the broker, who will then credit your account.

A dividend yield is simply the annual dividend divided by the share price expressed as a percentage. For example, consider the recent yields for the following companies:


Annual Dividend

Recent Share Price

Dividend Yield

General Electric (NYSE: GE  )



5.4 %

DuPont (NYSE: DD  )




Merck (NYSE: MRK  )




Hershey (NYSE: HSY  )




Intel (Nasdaq: INTC  )




Deere (NYSE: DE  )




Source: Yahoo Finance.

Eligibility requirements
A dividend is not a right. In fact, fewer companies pay out dividends today than 50 years ago. It is up to the company's board of directors to both declare the dividend and the amount to be paid to shareholders. In practice, companies are loath to reduce dividends, because shareholders take a very dim view of such action. Companies that have a long history of raising dividends are usually a good investment -- they have demonstrated an ability to increase cash flow to enable their dividend payments. After all, a company can't easily fake its cash flow! It must generate enough cash to consistently pay dividends.

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