Ask the Fool
Dividend Payouts
Q: How do companies decide how much to pay out in dividends?

- T.W., Greeley, Colo.

A: It depends on how management thinks it can best use the firm's profits. The money might be used, for example, to pay down debt, to buy another company, to build more factories, hire more workers or buy more advertising. Such uses can reward shareholders by making the company (and its stock) more valuable. Companies often opt to pay out a portion of their earnings in dividends, especially when there aren't more compelling alternative uses for the money.

Dividend amounts tend to stay put for months or years. Healthy, growing companies will usually hike their dividends periodically. Wells Fargo, for example, has hiked its dividend by an annual average of 14 percent over the past decade. Young or rapidly growing companies, though, often don't offer dividends, preferring instead to plow any extra cash into fueling growth.

If you're looking for promising dividend paying investments, take advantage of a free 30-day trial of our Motley Fool Income Investor newsletter (www. incomeinvestor.fool.com), and you'll be able to see our long list of recommendations.

Q: What's the "efficient market theory"?

- T.S., Escondido, Calif.

A: It suggests that all available information about a stock is known and factored into its price. Thus, an investor shouldn't be able to find undervalued or overvalued stocks. There are strong and weak forms of the theory, and it's not embraced by all. We Fools tend to think that the market is generally efficient, but there are still occasional pockets of inefficiency that an alert investor can take advantage of. A well-regarded book addressing this topic is Burton Malkiel's "A Random Walk Down Wall Street" (W.W. Norton, $19).

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