Friday, April 02, 2010

For Dividend Investors, It Is All About The Cash

As important as the stock yield percentage might be for investors, looking at dividend growth investments is more than simply looking at the yield on a particular stock. Certainly, history shows that a large part of the market's total return is attributable to the dividend return. Since 1926 the dividend component of the S&P 500 has accounted for one-third of the index's total return. An important aspect of focusing on dividends is it provides an investor insight into a company's cash flow.

One of the most important financial statements an investor can review when evaluating a company is the cash flow statement. A recent article reacquaints investors with the importance of this statement. One thing a company can't manipulate is cash. Cash is cash and cash is king as they often say.

As the article, Show Me the Money: Tracing a Firm's Cash Flow, shows, the cash flow statement provides investors with a wealth of information. Under the "financing section" of the statement, investors should pay particular attention to the activity surrounding the stock account. Many companies are once again announcing stock buybacks, but are the buybacks actually reducing the shares that are outstanding? Maybe the buybacks are simply offsetting potential dilution from option exercises.

The Show Me The Money article is timely for investors as many companies are once again focusing on dividends and buybacks as company fortunes seem to have stabilized.

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