What you need to know about dividends
Here’s what to look for when choosing investments that offer dividends
Updated 
2 min. read
There are lots of things that a company can do with cash flow generated through operations: they can add to their cash reserves, invest in growth, or pay down debt, for example. Lutz Zeitler, Managing Director and Head of Canadian Fundamental Equities at BMO Global Asset Management Canada, explains one of the other things a company can do – pay out dividends to shareholders.
What is a dividend?
A dividend is an amount paid to the shareholders of a publicly-listed company. Think of it like a reward for investors for being a part owner of a company – the company is paying back the capital it acquired from shareholders. The dividends might be paid out as cash or, more rarely, as additional stock or other property.
What should you look for in a company paying dividends?
First things first, any investor would want to see that the company can pay out dividends without creating risk, to the company or the dividend itself. Next, look at dividend growth. Growth indicates that a company is strong in its industry and is reinvesting in itself to provide value for shareholders.
Just because a company doesn’t pay dividends doesn’t mean they aren’t performing, however. Growth companies, for example, take the cash flows that they generate and reinvest it into the company in order to fuel their growth.
What are some of the risks of dividends?
Dividends that are too high aren’t sustainable and will damage the business without cuts. In instances like this, where dividends have been cut in order to salvage a company, we often see a severe cut to that company’s stock price.
When BMO invests in a dividend paying company, we’re paying close attention to the fundamentals – how strong is the management team and what is their track record? How strong are their operations? We’re looking for high quality companies that can deliver value and become stronger over time.
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The opinions and views expressed in this presentation are those of the presenter and not necessarily BMO InvestorLine Inc. This presentation is prepared as a general source of information and is not intended to provide legal, investment, accounting or tax advice, and should not be relied upon in that regard. If legal or investment advice or other professional assistance is needed, the services of a competent professional should be obtained. Any information contained in this presentation does not constitute and shall not be deemed to constitute advice, an offer to sell/ purchase or as an invitation or solicitation to do so for any entity. The content of this presentation is based on sources believed to be reliable, but its accuracy cannot be guaranteed. BMO InvestorLine Inc. and its affiliates, sponsors and employees do not accept responsibility for the content and makes no representation as to the accuracy, completeness or reliability of the content and hereby disclaims any liability with regards to the same.