Communication infrastructure technology giant Broadcom (NASDAQ: AVGO) is about to pay its investors a sizeable $4.10 USD dividend for every share of its stock that they own. If you own its shares before September 21, 2022 -- the day it goes ex-dividend -- and hold them at least until that date, you will get paid that much for each of your shares.
Getting cash handed to you is always nice, right? And getting that cash for doing nothing more than simply holding on to a company’s shares is even nicer, since you don’t actually have to do any additional work to receive that payment. So that raises a key question -- should you buy Broadcom’s stock to receive that dividend payment?
It’s not free money
As awesome as dividends can be, it’s important to remember that they don’t represent free money. To sustainably pay a dividend, companies have to earn enough from their operations to cover that payment. Not only that, but cash that a company pays in dividends is no longer available to it to invest in maintaining or expanding its operations or for research towards its next great innovation.
In addition, dividends payments are typically well-known and published in advance of any ex-dividend dates, so the market has plenty of time to react to a dividend. As a result, stock prices usually drop by around the amount of the dividend as the stock goes ex-dividend. That means you can’t make a guaranteed profit by buying Broadcom’s stock just before its ex-dividend date, holding until that date, and then selling for the same price, while also collecting the dividend.
Dividends do tell a story
Despite the fact that a company’s dividend is not free money, they can be useful when it comes to understanding what its leadership really thinks about its prospects. Since dividends take money out of a company’s hands and puts it in its investors’, a company’s leadership will typically want to be sure it can sustain its dividend before it starts paying one. Similarly, it will want to make sure any increased dividend can also be maintained before it starts boosting that payment.
With that in mind, Broadcom’s $4.10 dividend is nearly 14% higher than what it paid in the same quarter last year. In fact, it has increased its regular dividend every year for the past 11, which tells you that its leadership is fairly confident in its ability to build its business while still rewarding its shareholders.
Of course, with a payout ratio currently sitting at around 76% of its trailing earnings , Broadcom may not be able to continue increasing its dividend in the future as aggressively as it has in the past. Still, its dividend is covered, and since it is not paying out all of its earnings to its shareholders, it does have some money organically available to it to reinvest in its future. Plus, if history is any guide, if it chooses to increase its dividend again, it will likely do so with its December payment.
More than just the one-time payment
Because of the trade-offs involved -- with the company, with investors, and with the stock itself -- it doesn’t make sense to buy a stock just to receive a one-time dividend from owning its shares. Instead, if you look at the dividend in terms of the story it tells about the business behind the stock, it can be a useful tool in evaluating what its leadership thinks of its ability to continue generating cash.
Plus, if you recognize a dividend as a direct reward for the risks you take -- and part of the total return you can hope to get for being a shareholder -- then it can be a benefit of being a long-term owner. After all, a cash dividend lets you spend part of your return, without having to give up any of your ownership along the way.
Net -- as tempting as Broadcom’s $4.10 dividend looks, don’t buy the stock just to get that payment one time. Instead, consider it as part of your total risk vs. potential reward tradeoff when deciding for yourself whether the company deserves a spot in your portfolio.
At the time of publication, Chuck Saletta owned shares of Broadcom stock as well as Broadcom bonds scheduled to mature in January 2027.
