Question 1

Is a higher dividend yield always better for an investor?

Accepted Answer

Not necessarily. While a high yield provides good income, it can also be a red flag. It might result from a falling share price (indicating poor performance) or an unsustainable payout policy. Investors seeking capital growth may prefer a company with a lower yield that reinvests more profit for future expansion, which could lead to a higher share price.

Question 2

What does it mean if a company has a negative or undefined P/E ratio?

Accepted Answer

A P/E ratio is calculated using 'Earnings per share'. If a company is making a loss, its earnings are negative. In this case, the P/E ratio is not a meaningful metric and is usually stated as 'N/A' (not applicable). Investors would then need to use other metrics to value the company, such as its assets or future sales potential.

Question 3

Why would shareholders in the same company have different views on its dividend policy?

Accepted Answer

Shareholders have different investment objectives. An institutional investor like a pension fund or a retiree may prioritise a reliable, high dividend for income. They would favour a high dividend yield with strong dividend cover. In contrast, a younger investor might prefer the company to pay low or no dividends and reinvest the profits to fuel growth, aiming for long-term capital gains through a rising share price.

Investment ratios

What you need to know

Investment ratios