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Investors should not only pay attention to dividends!

Many investors pay attention primarily to the dividend. However, professionals recommend to pay attention to another value that is easy to understand for laymen. (By Sandra Ketterer, dpa)

Investors should not just focus on the dividend.

Investors should not just focus on the dividend.

Beginners among private investors are often faced with the key figures of a company. It is not always obvious to them which value is meaningful and how it has to be interpreted. Well known is the dividend, the profit sharing, which is distributed to many shareholders. Experts rate the cash flow higher. Only why?

Financial experts control a whole range of numbers before investing in a business. “The so-called price-earnings ratio is placed in the foreground, so the question of how many annual profits of the company reflects the share price,” says Good Credit of Independent Capital Management. Many buyers are satisfied with this indicator along with the dividend yield.

Of course, paying attention to the dividend makes sense. “The dividend is important for the private investor because he understands it,” explains Franz-Josef Leven, Deputy Managing Director of the German Stock Institute in Frankfurt am Main. The definition is very simple: “The dividend is the profit share per share, which is distributed to the shareholders,” explains Good Credit.

High dividend a deceptive sign?

High dividend a deceptive sign?

The shortcoming: whether the profit could be achieved sustainably, does not matter. “Basically, of course, the shareholders are happy about high dividend payments,”. “However, this could actually be a sign of a lack of investment.” Professional investors controlled more, says Good Credit. These include, for example, the level of debt, the market position of the company in the respective industry, the sustainable earning power, dividend continuity, investments in the future business and also the quality of the management.

An important indicator in the valuation of a company is its cash flow. “Put simply, cash flow is the amount of cash that a company has more to pay at the end of the year than at the beginning of the year,” explains Leven. However, the cash flow is not identical to the profit, because even payments would have to be taken into account, which not only relate to the one financial year, for example the purchase of machinery.

“The cash flow answers the question of how much funds the company actually generated,” says, managing director of the German Property Association. The advantage: this indicator eliminates “all political accounting cosmetics” and give a better view of the actual financial position of the company. “The cash flow statement also shows how creditworthy a company is, because it can be seen whether a company has the power to actually pay back the debt,” adds 

Cash flow is not the same as cash flow

Cash flow is not the same as cash flow

But also on the subject of cash flow, it is important to inform thoroughly. Basically, of course, a positive cash flow is good, says Lender. “Nevertheless, it should not be forgotten that a company that has just invested a lot in order to remain competitive in the future, usually due to the high payments can have a negative cash flow.” Investors would have to distinguish between operating and investment cash flow. It’s important to know if the money has been invested to grow in the future, or just to maintain the current level.

Investment-happy companies often had a high cash flow. While investments may pay off in the future, they would not necessarily translate into high dividends immediately. Here, the investor must decide whether he has enough patience and confidence to wait for the return.

 

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