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Dividends per share (DPS)

Normally, only a proportion of the profit available to the shareholders is paid out to them in cash, the remainder being retained to allow the business to grow. The proportion paid out will depend on many factors, but a reasonable proportion for a successful business which has growth potential would be 30-50 per cent of the available profits. As dividend amounts and dividend growth are seen as of great importance by analysts and shareholders, companies will want to pay sufficient dividends to satisfy them. Listed companies dislike having to reduce dividends because this may drive away investors, with possibly serious effects on the share price. A company in a difficult year will often decide that it must pay a dividend in excess of the current year's available profit rather than cut the dividend. This is done by paying dividends out of past years' retained profits.

Executives will adopt dividend policies to suit their business needs. This is true, but with the proviso that they have to get their shareholders' and the market's consent.

There are many and often competing drivers as to what percentage of profits should be paid out as dividend and there will be a rationale behind each level of payout. Here are some suggestions:

1 Low profits - low dividend. However, you can pay out dividends from previous years' retained profits, with the proviso that you have cash with which to pay a dividend.

2 High profits, especially 'windfall' profits - high dividends. This may not be the case where executives make a strong case for investing funds.

3 Rapidly expanding (young) company - no dividend. As long as there are investments in organic growth that give good returns, funds should be retained for such investment.

4 Mature company (cash cow) - high dividend. This assumes that the company has no obvious path for growth and any higher-return investments that might follow.

5 Unimaginative, non-entrepreneurial executives - high dividend. Often CEOs and boards are applauded for returning money to shareholders. Indeed, it is better that they do not throw the money into poor investment. But as some commentators rightly say, why do we employ such executives? Surely one of their tasks is to grow, expand, invest - if they cannot see opportunities, get in people who can.

6 Apparently improving company - medium level of dividend. Where executives claim that the present poor performance will definitely get better, they can demonstrate their faith with your (the shareholders') money by declaring a reasonable dividend, even if it means that shareholders' funds are reduced by eating into past retained profits.

In percentage terms, the following may help you understand dividend levels:

- zero - a probably young, but certainly growing company;

- 33 per cent - a reasonable level for a stable company which also has growth prospects;

- 50 per cent - a level demanded from a profitable mature business or a business with risks: investors want to ensure they have some return;

- 80 per cent plus - a very mature and probably long-term declining business.

The above is a simplified overview. There are market and political pressures too. Dividend amounts in relation to share price and in turn in relation to bond prices are interactive. The majority or influential minority shareholders may demand a dividend as a way of putting pressure on executives to improve operational performance.

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