Why are dividends so important to equity investors?
Income fund managers constantly bang on about dividends. Maybe it’s in our genetic makeup but actually dividends should be important for all equity investors. In my mind there are five key reasons for this:
Dividends are very important to investors but only if they are sustainable and can grow into the future. Focusing on a well-diversified portfolio of companies that pay a good and growing dividend should help drive outperformance over the long term.
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Price to earnings ratio: A popular ratio used to value a company’s shares. It is calculated by dividing the current share price by its earnings per share. In general, a high P/E ratio indicates that investors expect strong earnings growth in the future, although a (temporary) collapse in earnings can also lead to a high P/E ratio.
Discount: When the market price of a security is thought to be less than its underlying value, it is said to be ‘trading at a discount’. Within investment trusts, this is the amount by which the price per share of an investment trust is lower than the value of its underlying net asset value. The opposite of trading at a premium.
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