Dividends

What is a dividend?

It's the share of the profits paid to the shareholders. The amount is usually expressed as cents per share. Like earnings, the history of dividend payments can be a guide to the efficiency of a company.

What do I need to know about dividends?

That depends on what you are looking for. If your aim is capital gain, then dividends are less important. If you are investing for retirement and want an income stream, then dividends are very important indeed.

How do dividends help me to evaluate a company?

Through the dividend yield. You take the total dividend - there may be more than one payment a year - and divide it by the share price. That gives you the yield in percentage terms. Once again, you have a tool for comparison.

Don't be fooled by an apparently very high dividend yield if you are looking for income. This could be due to the slump in share price since the last year's dividends.

If you look at the average dividend yields and P/E ratios for the whole market, and then track them back, you will have a good guide to how high or low the market currently is in historical terms.

How about book value?

This represents the total amount of a company's assets minus liabilities and, if issued, preferred stock. Once again, you can build a comparison tool by dividing the book value by the share price, giving the book-to-price value.

A good company selling below the book value might be a bargain, but it isn't that simple. Prospects of bleak earnings in the future may be one reason why the price is so low.

...Is that all?

Far from it, these are just the very basic building blocks of fundamental analysis. To get a better understanding of the financial healthiness of a company, take a look at the key figures contained in the profit and loss account, balance sheet and consolidated cash flow statement as well as the auditors' report.

Apart from these numeric tools, you also need to evaluate the qualitative factors, such as corporate governance, management quality, industry outlook, market share, competitive edge and business plans.