Investing Guide · Chapter 7
Understanding Dividends and Growth Rates
Learn how dividends factor into investment analysis.
CEOs must choose between distributing surplus cash to shareholders or reinvesting it. Paying dividends doesn't inherently indicate slow or fast growth—it reflects strategy, not performance quality.
Good vs. Bad Dividends
- Good Dividends: Acknowledge that retaining excess cash would reduce return on invested capital
- Bad Dividends: Distribute funds needed for business growth (a warning sign of poor capital allocation)
Tax Implications
Double taxation on dividends reduces shareholder returns, as companies pay taxes before distributing earnings to shareholders.
The Rule of 72
A simplified calculation method: divide 72 by the doubling time to estimate growth rates without complex calculations. Useful for quick investment assessments.
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