Listen to a rather ordinary casual comment. “The company is paying a great dividend, around 5%. I’m seriously considering buying some of their shares.”Not so fast. Think about what was just said. Is that all you should consider, a complete focus on the dividend yield of a company’s stock? Shouldn’t you be considering what other comparable companies are paying?How the revenue is generated to fund these dividends?Where the cash (in the company) is coming from to pay you out?What kind of performance is this stock exhibiting?Is the daily, weekly value of the shares all over the place, or is there a steady slow capital appreciation?What are financial analysts saying, as in buy, hold, or sell those shares?These are only some of the questions and research that you should undertake.Why? Because the ability of a company to return part of the profits to you, the shareholder, is only as good as the underlying financial fundamentals.There is no mystery to this statement.You can just as easily compare a company to your own family financial picture.Finances in good shape, extra cash in the bank? You can afford to dividend out something to yourself.On the other hand, if your personal financial situation in underwater with high credit card and other debt, the expenses of running your household are increasing, economy is shrinking, and your job position is very uncertain, you aren’t going to be paying out any extra money at all, including investing in capital markets.This tightening of the money belt is evident across the spectrum in the Bermuda economy. Even small splurges such as nail styling and thrift shop purchases are down.What are dividends?They are not interested earned on fixed deposit vehicles or bond structures; they are not guaranteed to be paid every year or even during a year.Investopedia www.investopedia.com defines dividends as,1. A distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.2. Dividends may be in the form of cash, stock or property. Most secure and stable companies offer dividends to their stockholders. Their share prices might not move much, but the dividend attempts to make up for this.High-growth companies rarely offer dividends because all of their profits are reinvested to help sustain higher-than-average growth.The dividend payout ratioThere are three ways to look at dividends.1. “It is a terrific high dividend, but the company seems to be on the skids!”2. “ The dividend is just average, the company seems to be doing well, why aren’t they paying more?”3. “I’m lucky if I get a 1.5% yield on my shares, yet the shares have really increased in value.”There is a strong (but not total) correlation between the performance of the stock (the company), company financial statement (profits) and the amount (percentage) of earnings that may be returned to investors.A very conservative board may recommend only 30% of the annual profits be returned to shareholders, leaving the remainder for contingencies, capital growth and expansion. I remember well, years ago when one of the large US auto companies was struggling, yet was paying out more than 100% of the profits in dividends.Company financials are so important. Balance sheet (statement of net worth), Income Statement, and the most important statement of all, the Statement of cash flows, are audited and reflect the company’s true financial position.Free Capital markets rule the perceived value of the stock, sometimes contrary to the underlying core company financials.Those numbers may not be so hot, but perception, for whatever the reason, can be reality. The company Board of Directors may decide to continue a good dividend based upon a future projection that the public is not privy to.The share value of a company and its related company financials is a hard concept to grasp.Once the company issues shares to the public and sells them on the open market - which could have been many years ago, the company (unless they own some of their own shares) no longer receives any cash at all from the share performance or trades, yet the company must fund the payment of dividends.Every financial action that a company initiates, however, may affect those share values.If company management borrows money from banks, investors and the like, the amount loaned and repayment contracts are based on the underlying value of the company shares and other assets and its credit quality.If the company net revenues reflect a fabulous year, the share value escalates; conversely, the share value will head south at a whisper of uncertainty, such as mounting bad debt, and poor profit/loss figures.In an excellent article this week, by Marina Mello, “Lost Dividends Cut off Income Stream in Bermuda Economy”, the issue of local Bermuda companies issuing lower dividends, freezing dividends, and no dividends at all was discussed by various financial firm’s spokespersons.Disclosure: the author was asked to comment for the article and the firm received some free publicity.The pure reality is this. Bermuda companies, that are publicly traded (some companies are held privately no information is known) on the local stock exchange, have heavily invested in businesses in the Bermuda economic market as well as in the international investment environment.And, you all know what is currently happening in both places. Dividending out profits will return, when successful earnings return in a stable secure economic environment.Increase your financial literacyYou, and only you, make the ultimate decision to spend your hard earned cash.The primary goal should always be - if I make this investment, what are my chances of getting my original cash back plus the expected interest or dividends or capital appreciation.No point in receiving a very high dividend (or interest) payment, if you end up with half your original capital investment at the outcome.Focus on what is in it for you that will persuade you to part with your hard earned money!Readmore at: http://www.investopedia.com/terms/d/dividend.asp#ixzz1YmTgxBnv.Martha Myron, JP CPA CFP(US) TEP is an international Certified Financial Planner™ practitioner in private wealth management.She specializes in independent fee-only cross border investment, tax, estate, and strategic retirement planning services for Bermuda residents with United States and multi-national connections, and US citizens living and working abroad.She is a Masters in Law candidate in International Tax and Financial Services and the Bermuda member of the American Citizens Abroad Professional Tax Advisory Council. www.americansabroad.orgFor more information contact mmyron[AT]patterson-partners.com or 296 3528 at Patterson Partners Ltd.