Dividend Signaling

Ever had a dividend wink at you? Ever seen one flirtatiously arch an eyebrow in your direction? Gently lay its hand on your knee while it laughs a little too hard at a lame joke you just nervously blurted out? Well, that dividend may be signaling something.

But that's not really what we're talking about here.

In this case, dividend signaling relates to how investors should interpret a company's decision to raise its dividend. It's a stock-picking signal.

Some stocks come with a dividend. It's an amount of cash the company pays out per share-basically, a little monetary "thank you" for the people holding its equity.

The dividend signaling theory states that raising a dividend indicates a positive outlook for a company. After all, a company must have cash in order to pay out the divided. Managers must think the company will continue to do well, otherwise they wouldn't have the confidence to raise the dividend.

It can also indicate that the company can't think of anything better to do with its money. But, by and large, market watchers treat increased dividends as a sign of confidence on the part of managers.