Are Dividends Leading or Lagging Indicators?

With income more important than ever, Intertape Polymer Group (TSX:ITP) helps us answer some questions.

| More on:
The Motley Fool

When investors purchase a stock, it’s often like deciding whether to pick a red or green door. As a dividend-growth investor, I want to avoid the red doors — the companies which have stagnant dividend growth. The green door is where we find the companies increasing their dividends. To find the best dividend growers, we need to understand dividends from all angles. The question we want to answer is fairly simple: Are dividends leading or lagging indicators of positive returns to come?

As most investors are aware, dividends are paid out of a company’s profits, representing a share of the profits passed on the investors. Obviously, dividends are confirmation of profit and can be viewed as a lagging indicator in this respect.

Increasing dividends, however, are a different story.

When companies make a profit, there is an opportunity to either retain the cash or distribute the profit back to investors. Assuming the company does something productive with the capital retained, not paying a dividend can be a very profitable choice.

The transition of the capital from the company to the investor can happen in one of two ways. The first is through the payment of dividends, while the second is through share repurchases. Although there is a more immediate result for investors when a dividend is increased, the share repurchases offer investors long-term benefits through higher profits per share and the potential to increase the dividend per share while not increasing the total payout for the company.

The major difference between a share buyback and a dividend program is, the share buyback can stop at any time, and no investor is going to log in to their investment account and ask, “Where is the money owed to me?” This question would only be pondered if a dividend failed to arrive. The dividend is an unwritten obligation the company makes to appease shareholders. The assumption is, the quarterly dividend will be paid on a continuous basis.

Using Intertape Polymer Group (TSX:ITP) as an example, the dividend has increased since 2012. Long-term investors have had a fantastic run by holding shares assuming they didn’t sell their shares. In 2014, the company announced the increase of the quarterly dividend from $0.08 per share to $0.12 per share, creating an obligation to pay the dividend on an ongoing basis every quarter afterwards.

Clearly, management felt the most appropriate use of capital was the payment of the dividend to shareholders. Additionally, there have been approximately two million shares repurchased in the past few years.

With fewer shares outstanding, the company has increased the dividend in 2016, creating a higher payment to shareholders. The obligations taken on by the company have increased.

The increase in the dividend payments has created higher expectations for the shareholders. With dividends coming out of net profits, they are the result of a profitable operation — a lagging indicator.

The increase in dividends is another story. Rising dividends are both a leading and lagging indicator. They increase expectations going forward, and investors are being offered the opportunity to go behind the green door and join a winning team before the game is over.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Goldsman has no position in any stocks mentioned.

More on Dividend Stocks

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »

sale discount best price
Dividend Stocks

1 Dividend Stock Down 11 Percent to Buy Right Now

Do you want a great dividend stock down 11% that can provide years of growth potential? Here's one heavily discounted…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Are you looking for dividend stocks to buy right now? Here are two top picks!

Read more »

edit Taxes CRA
Dividend Stocks

Tax Time: How to Keep More of Your Money

Nearly everyone hates paying taxes, although Canadians can lessen the financial pain with the right tax strategies.

Read more »