IN Jamaica today, we are neither experiencing the best of times nor the worst of times. And those of us for whom Charles Dickens’ A tale of two cities was required reading for a high school or later English course, may recall that Dickens, in commenting upon the extremes, also referred to a season between a spring of hope and a winter of despair.

I believe that the Jamaican economy and our financial markets are gradually passing from a winter of despair to a spring of hope.

Dividend yield

Dividend yield is just one component of that spring of hope from a listed company’s and an investor’s perspective. Dividend yield is a company’s annual dividend per share divided by the company’s current price per share. It is a financial ratio that shows how much investors get back from what they paid for each company share they purchased or, put another way, how much cash flow they are getting for each dollar invested. It is the return on investment in a stock that is particularly appropriate for a long-term view of the market.

The formula: Annual dividend per share/ Price per share

Dividend yield as an investment strategy has been employed in world markets from at least the early 1920s to assist in determining the value of a stock and the likely future performance of the company. The approach fell into disuse somewhat beginning in the 1990s as investors began to focus increasingly on share price appreciation or capital gain, which is considered more suitable for fast moving or volatile markets. To benefit from dividend yield, the investor reinvests the dividend and holds the asset while its value increases whereas capital gains are taken frequentlty during the year, on a short-term basis, when the asset is sold.

Here is another way to show how dividend yield works. Company A and Company B both paid out annual dividends of $1.00 per share. Company A’s stock traded at $10.00 per share on the final day of trading during that year, resulting in a dividend yield of ten per cent ($1.00 divided by $10.00). Company B’s stock traded at $20.00 per share for a dividend yield of five per cent ($1.00 divided by $20.00). Company A, with a higher dividend yield would become sought after by investors, eventually pushing up its market price.

As interest rates on money market investments such as government paper subside, investors should turn increasingly to the equities market and more specifically to high dividend yield equities.

Dividend yields on the Jamaica Stock Exchange

Twenty-five (65.8 per cent) of the thirty-eight companies regularly traded on the main index of the Jamaica Stock Exchange paid out dividends during the calendar year 2009. This is an impressively high percentage of dividend payers when one considers that the vast majority of the 2,700 stocks listed on the New York Stock Exchange do not declare dividends.

Furthermore, the top five companies, Carreras, D&G, Supreme Ventures, NCBJ and Sagicor delivered between 8.12 percent and 25.70 per cent in dividend yield, which beats the current BOJ 30-day CD and commercial bank deposit rates. Both NCB and BNS had higher dividend yields than the interest they pay their customers on time or savings deposits. The dividend yields are even higher when one takes into account that they do not attract withholding tax. The table following ranks the JSE companies by dividend yield.

Applying dividend yield

Eleven (44.0) per cent) of the 25 dividend paying companies on the Jamaica Stock Exchange in 2009 have already paid out larger dividends in 2010 and it is anticipated that other companies will join the dividend paying ranks going forward. Investors should take note of this trend and monitor the dividend payers in order to take advantage of opportunities to incorporate them into their portfolios.

However, investors should look beyond the fact that the companies pay dividends. Neither should non-dividend payers be ignored. Microsoft, for example, which was established in 1975, did not pay any dividends until 2002, when the company was the world’s second largest in market capitalisation. Not all high dividend stocks may be good investments now and in the future.

Among the additional factors that an astute investor should want to know about a dividend payer are: whether the company’s operating profit margin is reasonably higher than the dividend yield; whether the company has sufficient free cash flow to cushion the dividend payout; and the extent to which the dividend yield may signal that the market is either under or overvalued. The lesson here is straight forward: Buy if the market is undervalued and sell if it is overvalued. The dividend payers can lead the way.

Gary Peart is the chief executive officer of Mayberry Investments Ltd. You can email him at gary.peart@mayberryinv.com