Philip A. Fisher part 10 about dividends

 Different dividend payout weights can confuse investors. Retaining profits in the company may make sense if they are used to launch new products, build factories, or purchase more cost-effective equipment, etc. Not all companies have the same need to invest in more efficient production. The investor's task is to assess how much capital the company needs to increase efficiency. The capital left in the company should maximize the returns received by the owners. Investors have different dividend needs.

Investors do not always get the full benefit of leaving capital in the company instead of paying dividends. The worst reason for this is that the company's management is of poor quality and does not get a return on the capital left in the company, but uses the capital to expand inefficient operations instead of making them more efficient. Top management may expand operations to justify increasing their salaries, which is directly out of the hands of the owners. Such companies do not meet Fisher's fifteen points. Companies that meet the conditions, on the other hand, find a use for the extra money in developing the company.

Management may also raise too much cash to increase their sense of security. This may happen unconsciously. Sometimes capital needs to be raised because customers or regulators want investments that do not have a positive impact on cash flow but will reduce it if not made. Such things include air conditioning and government-mandated investments such as ship scrubbers.

An investor should evaluate a company’s dividend policy at regular intervals because capital investment needs can change. This does not have to be done every year. Needs rarely change suddenly. The policy should be evaluated with long-term returns in mind, because that is the most useful. The most important thing for an investor in a dividend policy is its predictability. A rational investor plans ahead, so predictability is important. A company should tell investors its dividend policy and keep its word. According to Fisher, a company should tell investors what percentage of its annual profit it will pay out as dividends to its investors. The dividend rate can vary. Fisher used 25-40% of earnings as an example.

A percentage is most appropriate when it does not jeopardize long-term earnings growth but rather seeks to maximize it. Opportunities for earnings growth are rarely maximized by leaving all earnings in the company's capital. For Fisher, companies that offer high dividend yields do the investor a disservice in the long run because they rarely maximize earnings growth. By increasing earnings, dividends increase while the dividend yield remains the same, which increases the investor's income. Despite this, Fisher allowed a company to increase its dividend only when the company has enough income to grow the business, its profits, and has the ability to pay a higher dividend in the future. For Fisher, it was vital that a company not lower its dividend except in dire straits, because it affects the stock's valuation.