The Importance of the Company Dividend Policy

As the name of my blog suggests a company's dividend policy is the backbone to a lot of my investments (there are others which have no bearing on the dividend policy at all and some where the dividend policy is only a minor consideration).

As the well known saying goes "Actions speak louder than words." I mean anyone can say we're going to increase this by this amount and so on (should they not however then the shareholders wouldn't be impressed but it is possible that they could have such a short term outlook to keep the share price buoyant).

I find the best way identify to a company's intentions with regard to their dividend policy is to look at their dividend history and what dividends they have paid over the years. Now you can go back as far as you like but I find 6 years is plenty and gives a sufficient guide as to what they intend to pay in the future with regards dividends. It is worth noting here that the actual share price has no bearing on this exercise I'm just looking at the average dividend growth.

One of the powerhouses of dividend growth shares is British American Tobacco so I shall use this as an example.


            Dividend    Dividend Increase
2006       55.9p             
2007       66.2p              18.43%
2008       83.7p              26.44%
2009       99.5p              18.88%
2010       114.2p            14.77%
2011       126.5p            10.77%
2012       134.9p             6.64%

Clearly when identifying the dividend policy of a company the continued annual dividend increase is vital, any decrease in dividend over the 6 year period must be looked at and lead to the likely discarding of the share.

Above however you can see that British American Tobacco's dividend history shows that British American Tobacco's dividend policy is firmly one of dividend growth and strong dividend growth at that. Whilst there is a fluctuation over the years the average comes out at a strong 15.99%.

So following this calculation the higher this 6 year dividend growth average figure the better obviously but a single annual decrease in the dividend should be looked at closely as this demonstrates the company doesn't have such a strong dividend policy.