Why investors shouldn’t get too excited over record-high dividends

Many investors would get their dividend exposure from Canadian banks, White notes. The largest Big Six bank by market capitalization, RBC, recently increased its dividend by 0.89%, bringing its current yield to 4.04%. BMO, the oldest of Canada’s big banks, boosted its dividend by 1.92% in February, bringing its yield to 4.54%.

“It’s pretty great when you can get 4% to 4.5% on an asset that’s dropped in value,” he says. “Assuming you can get back to the same historic level of share price accumulation, you can expect to get 6.5% to 7% per year on that bank stock eventually.”

In its April commentary, Dixon Mitchell noted that faced with the right investment options, a company with healthy cash flow would often want to use part of its generated capital to either fund organic growth or boost acquisition activity. But management teams should also be able to recognize when the investment landscape is less attractive and potential projects are not likely to generate enough returns to justify their cost of capital.

“When this is the case, it’s often preferable to return some or all of the excess cash to shareholders, either directly through dividends or by repurchasing and retiring outstanding shares,” it said.

Of course, that pendulum can swing too far. If it seems like a company’s management is fixated on dividends and distributions, rather than reinvesting their free cash in the business, White says it’s time to ask some important questions.