Why Do Companies Pay Dividends? And Are High Yield Dividend Stocks Actually Good?

The word "dividend" gets thrown around a ton, but what does it actually mean, and why do companies pay dividends? In this video, we break down the different ways companies decide to allocate capital, why companies pay dividends, and how dividend reinvesment plans (DRIP) work We also dig into some core metrics investors need to watch with dividend stocks -- dividend yield and payout ratio. Dividend yield is the annual dividend payments divided by the price for one share of the company's stock -- it gives you a sense of the return you'll earn even if the company's share price stays flat. Payout ratio is a measure of how able a company is to continue paying its dividend. It is calculated by dividing a company's annual dividend payments by its net income. Investors interested in good dividend stocks might want to start their search with the dividend aristocrats. These are stocks that have consistently raised their dividend every year for at least the past 25 years. They have been able to do that because they have strong businesses that are able to shift with trends and weather economic downturns -- and really those are some of the most important attributes of a good dividend payer.

Factors affecting production

What is meant by production?
Production is the provision of a product to satisfy wants and needs. The process involves businessesadding value to their products. E.g. The production process of matches involve cutting wood into matchsticks, putting phosaphorus ends on them and packaging them to sell.


Productivity
Productivity is the outputs measured against the inputs used to create it. This is measured by:

Output (over a given period of time)/Number of employees

If a worker makes more products in the same amount of time, his productivity increases. Firms aim to be productively efficient to be able to make more profits and compete against their competitors.

Methods of production
Job production

• Goods are made individually, by one person.
  
• Goods are usually specialized, no two goods are the same.
  
• Usually made to order.
  

Pros

• The product meets exact requirements of the customer.
• The workers have more varied jobs.
• More job satisfaction for workers.

Cons

• Skilled labour is needed.
  
• Slower and more expensive than other methods of production.
  
• Usually labour intensive.
  

Batch production

• Products are made in batches according to order.
  

Pros

• It is flexible. You can easily change from making one product to another.
• Still gives some variety to workers jobs.
• Production is not too affected by machinery breakdown.

Cons

• Expensive to move products around the workplace.
• Storage space will be needed to store raw materials. Expensive.

Flow production

• Large quantities of a product are produced in a continuous process.
  
• Uses specialization.
  
• Benefits from economies of scale.
  
• Is capital intensive.
  

Pros

• Low costs. Low prices. High sales.
• Increased efficiency.
• Little training is needed.
• Goods are produced quickly and cheaply.
• Goods do not need to be moved around like batch production. Saves time.
• Quality is high and standardized (courtesy to Muhammad Hassaan Ayyub)

Cons

• Boring for the workers. Little job satisfaction.
• Needs a lot of capital to set up.
• If one machine breaks down then the whole production process stops.

Which type of production should be used?
The type of production that should be used varies with how the product is demanded:

• Job production: Unique and individual service is required.
• Batch production: Demand is higher but products will not be sold in large quantities. Batches are made to orders.
• Flow production: Demand for the product is high and steady.

Stock control
Stock control is important so that a business will not
run
out of stock and be unable to satisfy demands. When stock levels get to a certain point, more goods need to be reordered for the stock level to reach its maximum again. If more goods are not reordered, stocks could run out because of an unexpected
surge in demand. However, keeping a lot of stock costs money, so the level of stock in a company should always be balanced. The following graph demonstrates how stock can be controlled:

Lean production

• Focuses on cutting down waste, increasing efficiency.
• It tries to reduce the time taken to produce a product and transport it the selling point.
• Includes the following methods:
  • Kaizen.
  • JIT production.
  • Cell production.
  • Kanban.

Kaizen

• Continuous improvement through the elimination of waste.
  
  • Ideas of workers.
    
  • Regular meetings of workers to discuss how to increase efficiency.
    
• The advantages of Kaizen:
  
  • Increased productivity.
    
  • Reduced amount of space needed for the production process.
    
  • Work-in-progress is reduced.
    
  • Improved layout of the factory floor may combine jobs of some employees, freeing others to do other things.
    

Just in time production

• Eliminating the need to hold stocks.
• Goods are delivered to the selling point just when they are needed.
• JIT production needs:
  • Reliable suppliers.
  • Efficient system of ordering raw materials.

Cell production

• Production line is divided into cells.
• Each cell makes an identifiable part of the finished product.
• Boosts morale.

Kanban

• A system of ordering used with JIT production.
  
• Operates with two component bins.
  
• When one is emptied, production begins to fill it.
  
• The other one is then left to be emptied.
  
• The first one is filled up when the second one is emptied.

Improvements in technology
Here are some things that technology does in the production process:

• Automation: Equipment in the production process is controlled by a computer. 
• Mechanisation: Tasks are done by machines operated by people.
• CAD (computer aided design): Used for designing 3-D objects.
• CAM (computer aided manufacture): Computers control machines in the production process.
• CIM (computer integrated manufacture): CAD and CAM are used together. The computer that uses CAD is directly linked with the one that controls the production process.

Here are some things that technology does in shops:

• EPOS (electronic point of sale): When products' bar codes are scanned and the information is printed out on a receipt. Data is also sent to a computer to keep track of stocks.
• EFTPOS (electronic fund transfer at point of sale): When the cash register is connected to the retailer's main computer and banks. The customer's credit/debit card is swiped and the money is debited from the customer's bank account. A receipt is printed out to confirm the transaction.

The advantages of new technology 

• Increased productivity.
• Boring jobs done by machines. Boosts motivation.
• Training is needed to operate new machines. Workers become more skilled.
• Better quality.
• Better stock control.
• Quicker communication and reduced paperwork.
• Info is available faster, resulting in faster decision making (for managers).

The disadvantages of new technology

• Unemployment
• Expensive
  • To invest in new technology.
    
  • To replace outdated technology.
    
• Employees are unhappy with changes in the workplace.
  

Quality control 
There are three ways to control quality:
Quality control

• Involves checking and removing faulty products at the end of the production process.
  
• Wastes a lot of money.
  

Quality assurance

• Involves inspecting during and at the end of production.
  
• Aim to
  
  • Stop faults from happening.
    
  • Set a quality standard that all products have to achieve.
    
• Need teamworking and responsibility.
  

Total quality management

• Encourages everyone to concentrate on quality.
  
• Quality is the main aim for all staff.
  
• Products need to satisfy all customer needs.

Winning Big, Winning Often

David Gardner’s Proven Formula for Consistently Profitable Growth Investing

Forget what you’ve heard. Consistent, reliable, repeated success as a growth investor is possible. With a proven formula, picking winning growth stocks can be a predictable – and very profitable – investing strategy.

David Gardner is walking proof.

Check this out: As of January 18, 2016, of the 204 active buy recommendations David has made since 2002, a shocking 66.2% are winners! And the gains of those FAR exceed any loses. And that’s though some of the most turbulent times in stock market history!

It’s remarkable. There is probably not another investor on Earth who can claim to outperform the market with the same kind of “Old Faithful” consistency.

If you’ve been scared of making growth investments because you’ve been told they’re “too risky”… “too volatile”… or you simply just don’t know what to look for, this special report is what you’ve been waiting for.

Why This System Works

When we talk about growth, we’re essentially talking about a company selling more goods and services this year than it did last year — and expecting to sell even more the following year.

Yet you shouldn’t just search out hot companies or high growth rates in isolation.

David’s investing style is about identifying companies that are he thinks are likely to turn a high growth rate — or an anticipated high growth rate — into a sustainable force that drive cash flow for a very long time to come.

With the right principles and a little discipline, you can be a successful growth-stock investor too — and the payoff can be huge.

Rapid growth can lead you to some of the biggest returns you’ll ever find as an investor. Yet at the same time, chasing growth by itself is a ticket to mediocre performance … or worse. So how can you find the companies that will lead to superior returns and avoid the mistakes that will drag down your performance?

Here’s a deeper look at six criteria David uses to help identify a winning growth stock. Not every great growth investment has all these traits, but the companies that exhibit all these characteristics deserve special attention. He’s found they’re most likely to be the ones that sustain extraordinary growth over a long period of time.

1. Top Dog and First Mover in an Important, Emerging Industry

A top dog holds the dominant market share in its industry; usually it’s the largest by market capitalization. The first mover is the innovator that first exploits a niche — essentially creating its market. And finally, that niche must actually be worth dominating.

Who has put all of this together? Think of Microsoft in software, Starbucks in coffee, Whole Foods in natural and organic groceries. Starbucks didn’t invent the coffee shop, and Whole Foods wasn’t the first natural food store. But these companies were the first to conceive of these businesses on a national and ultimately international scale, when others didn’t see growth opportunities.

Winners aren’t hidden; they’re right there before our eyes, bringing disruptive technology, clever and effective marketing, or a brand-new business model.

2. Sustainable Advantage Gained Through Business Momentum, Patent Protection, Visionary Leadership, or Inept Competitors

Successful businesses attract competition. The critical question is how well a company can fend off that competition.

In some businesses, like the pharmaceutical industry, patents can enforce a lasting competitive advantage. On the other hand, patent protection can be problematic in the software industry, where protected inventions can often be worked around.

Luckily, there are other ways of protecting a competitive advantage. Companies have trade secrets (the formula for Coke isn’t patented; it’s a well-guarded secret known to only a few employees), and they can build expertise that others find hard to duplicate. Some businesses require daunting levels of capital investment to establish, while others invest in their reputations and brand names. Sometimes a company’s leaders are just smarter than the competition — and sometimes competitors find they just can’t adapt to a changing world.

The key is to find what we call a company’s moat — its bulwark against inevitable competitors — and figure out how many alligators are in it.

3. Strong Past Price Appreciation

Consider an investor’s take on Newton’s law of inertia: A stock on the rise tends to remain on the rise unless an outside force disrupts its path.

The best growth stocks continue rising, because their advantages allow them to sustain remarkable earnings and cash flow growth and to continuously win new converts among the ranks of both customers and investors. Don’t count on momentum to save your bacon in the absence of other strong fundamentals. But a strong company firing on all cylinders can sustain a remarkably extended run.

4. Good Management and Smart Backing

Good management trumps almost all other concerns. Think of a company like Target: At its core, it’s just another discount retailer with few structural advantages over its rivals. Yet by dint of good management, it’s been very successful and returned a lot of value to shareholders. Better a mediocre business with great management than a great business with mediocre management. Over time, those latter guys will screw up a free lunch.

Now imagine adding great management to a great company — it’s a powerful force.

Judging the quality of a management team is a bit subjective, but that’s because it’s human beings who head these companies. Luckily, we’re human beings, too, and most of us are equipped with skills to assess the more subjective aspects. Listen to conference calls and investor presentations. Even if you can’t talk to management directly, the Internet makes it easy to hear how the top brass thinks and how they interact with investors. Are they smart? Visionary? Inspiring? The heads of the best growth companies are often career entrepreneurs with a track record of business formation you can look to. Even if you can’t put a number on it, you can certainly get some idea of whom you’re dealing with.

5. Strong Consumer Appeal

It’s almost impossible to overstate the power of a strong brand. If a business has mass consumer appeal, sustaining extraordinary growth is that much easier. A brand eventually reinforces itself — that’s why a company like Starbucks has never really had to advertise. A brand also becomes associated with an experience. We’re creatures of habit, and when we have to think less, it makes our lives seem easier. The habit that comes from a strong brand — knowing where your next cup of coffee is coming from — immeasurably strengthens a company against its competitors. It also gives a company pricing power over rivals — you expect to pay more for a brand name, right?

Of course, some great companies work in specialty businesses that simply don’t have mass consumer appeal. That’s OK, but we want to know that the company’s product, name, and reputation constitute a brand among the people who matter. If you’re looking at an esoteric software business, ask yourself this question: Could this company price its product 5% or 10% higher than its competitors and still maintain market share because of its reputation and loyal customers?

6. Grossly Overvalued According to the Financial Media

This might sound like an odd factor. Who wants to buy a stock that those wise financial commentators say is too expensive and poised for a tumble?

In fact, being derided as overvalued is a trait shared by many of David’s most famous stock recommendations that supposedly smart investors avoid … stocks that go on to double, triple, quintuple, and more over the years. The “too expensive” label comes from underestimating how a long-term winner can disrupt its industry, displace competitors, and grow over a relatively short time. Investors’ fears leave many on the sidelines, only to come in later and drive the stock up further as the writing on the wall becomes more apparent.

These six criteria aren’t guaranteed to weed out every dog or to point you to every winner. But they offer a framework for evaluating fast-growing companies. David thinks they can focus your attention on the characteristics most likely to be shared by companies that turn growth into extraordinary performance over a long period.