-- Jackie Mason, Comedian.
I do not have, nor did I ever want, an accounting degree. I have a general understanding of accounting principles and I can read Income Statements, Balance Sheets, and Cash Flow Statements but I get a headache when I look at them for very long. What I’m really interested in is Total Revenue, Net Profit/Loss, and Amount of Dividend Payment. If revenue is increasing, profits are increasing, and dividends are increasing at least annually, then I’ve found a stock I’m interested in. And that's all the accounting I need to know.
The importance of increasing dividends to me is simply to increase my annual income year after year. Increasing the dividend is important to companies because if done for a number of years it puts the company on certain lists. These lists are the Dividend Challengers, Dividend Contenders, Dividend Champions, Dividend Aristocrats and even the Dividend Kings. It is these lists that attract investors who will buy, support and even increase the stock price and market value of the entire company. Stay on a list and investors will notice you. Fall off a list and you’ll be ignored.
But dividends aren’t everything. Revenue and Profit are also important. If a company is not increasing their revenue and profit then eventually their dividends will have to be cut. Revenue and profits won’t necessarily increase quarter over quarter but they should be increasing year over year. And an occasional set back won’t hurt the company if there’s an explainable and unusual reason, but it should be relatively rare. I like stocks that are steady and consistent.
Sometimes companies will continue to increase their dividends annually even though their earnings and profits are starting to slip because they want to maintain their status on one of the lists above. That may not make sense initially. If you understand that management is usually invested in the company through granted stock options, then you understand that if the company falls off one of the lists above, the stock may fall and that’s not good for management’s financial health.
If earnings and profits begin to fall significantly, management will eventually have to make the decision on whether to pay themselves their hefty salaries or pay the dividend to their stockholders. Guess who’s going to lose on that decision? Initially management will simply continue the dividend at its current rate to hide the fact that the business is deteriorating but if revenue and profits continue to fall you can expect the dividend to be cut next. You can also expect that the last thing that management will cut is management’s salary!
This is why I check quarterly earnings reports for all my stocks. I want to know that their earnings and profits are increasing, and if not, why not? I want to know if they’ve increased their dividend sometime in the last 4 quarters, and if not, why not?
If I can’t figure out why, I sell the stock. Immediately. I may not be the first one to know that things aren’t going well with the company but I don’t want to be the last to know. That would be a disaster to my financial worth. I then take the money from that sale and invest it in another stock that’s performing as it should. Which for me means going back to the lists and my first stop is the list of Dividend Aristocrats.