How do analysts’ recommendations affect dividend yields?
Earnings season is one of the most volatile, and exciting, times in the stock market. For dividend-paying stocks, analysts will look through their balance sheet, listen in to their quarterly earnings call, and interview key executives at the company to make an assessment of the stock's future performance including the likelihood of increasing their dividend and the amount, if any, of that increase. One of the challenges for companies and investors is that analysts and companies sometimes do not agree on the forecast for earnings per share (EPS) and revenue.
Let’s look at an example, if Company C projects an increase of $0.50 to their annual dividend yield, it would mean their new projected dividend yield would be 5.5%. However, analysts are more optimistic and forecast a $0.75 dividend increase. If the company's profits rise, but only enough to allow them to increase their dividend yield by $0.50, their dividend yield would be lower than the analysts projected, however, it would have met the company's expectations. An investor may see this as a negative sign even though the company is showing higher revenue and profits.
On the other hand, a dividend cut does not always have to be negative. If after reviewing a company’s fundamentals, analysts foresee a dividend cut being a temporary measure to help the company build a stronger balance sheet that will improve their future performance, they may very well be rewarded by analysts and see their stock price increase.