Definition:

Common dividends refer to the portion of a company's earnings that is distributed to shareholders of common stock. These dividends are typically paid out in cash and represent a share of the profits that the company has decided to return to its equity investors.

Formula:

Common Dividends = Total Dividends Paid - Preferred Dividends

How to use the metric:

Investors use common dividends to assess the income-generating potential of a stock. A consistent or growing dividend payout can indicate a company's financial health and its commitment to returning value to shareholders. It is often used in conjunction with other metrics like dividend yield and payout ratio to evaluate investment opportunities.

Limitations:

Common dividends do not provide a complete picture of a company's financial health. A high dividend payout might not be sustainable if it is not supported by strong earnings. Additionally, companies might choose to reinvest profits back into the business rather than paying dividends, which can be beneficial in the long term but might not appeal to income-focused investors.

Applies to:

Common dividends are most relevant in industries with stable cash flows and mature companies, such as utilities, consumer staples, and telecommunications, where companies are more likely to return profits to shareholders.

Doesn't apply to:

Industries characterized by high growth and reinvestment needs, such as technology and biotechnology, may not prioritize paying common dividends. These companies often reinvest earnings into research and development or expansion, which can lead to higher capital gains for investors rather than immediate income through dividends.

Summary:

Common dividends are a key metric for evaluating the income potential of an investment in a company's common stock. While they provide insight into a company's profitability and shareholder return policies, they should be considered alongside other financial metrics and industry characteristics to make informed investment decisions.