GlaxoSmithKline: An Atypical Dividend Investment

Investing in companies that pay above average dividends has historically been a good investment strategy. Of course investors, specifically those looking for income, want more than just a current high dividend yield; they also want the company to continue to pay out that high dividend and hopefully increase it as well. A recent study by Tweedy Browne (the dividend studies begin on page 30) sheds some light on what investors might want to look for in addition to just a high yield. The historical study shows that investors can increase their returns by narrowing the list of stocks with high dividend yields to those that also have low dividend payout ratios. This makes sense, as a low payout ratio implies a few key things. First, most importantly, and obviously, it means the company is actually making enough money to support its dividend. A low payout ratio can also imply that the company is finding productive uses for the portion of earnings that it is not paying out and using those earnings to grow the business and increase the dividend in the future. If they have a high payout ratio it could mean the company can’t find profitable ways to reinvest its own earnings. A low payout ratio also means the dividend payment is isolated to some degree from falling earnings. If the payout ratio is only 40% and net income drops 25%, there is still enough cushion to maintain the dividend payment. A low payout ratio also means there is room for the company to increase the payout ratio and grow the dividend.... Read more

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