I have taken an interest in stocks that pay a high dividend as I see this as a good way to boost my income. At the same time I will hopefully receive capital growth through the share prices going up. How can you determine what is a good dividend yield and, if a company does not pay a dividend, does that suggest they have made no profit?

A Many companies pay out regularly to shareholders and this sends a clear, powerful message about future prospects and performance. A company's willingness and ability to pay steady dividends over time, and its power to increase them, provides good clues about the firm's fundamentals.

Typically, mature, profitable companies pay dividends. However, companies that do not pay dividends are not necessarily without profits. If a company thinks that its own growth opportunities are better than the investment opportunities available to shareholders elsewhere, the company should keep the profits and instead reinvest them into the business.

The progression of Microsoft through its life-cycle demonstrates the relationship between dividends and growth. When Bill Gate's brainchild was a high-flying growth company, it paid no dividends, but reinvested all earnings to fuel further growth.

Eventually, it could no longer grow at the unprecedented rate it had maintained for so long. So, instead of rewarding shareholders through capital appreciation, the company began to use dividends and share buybacks as a way of keeping investors interested.

The plan was announced last July. The cash distribution plan put nearly $75 billion worth of value into the pockets of investors through a new $0.08 quarterly dividend, a special $3 one-time dividend, and a $30 billion share buyback programme spanning four years.

Many investors like to refer to the dividend yield, which is calculated as the annual dividend income per share divided by the current share price. The dividend yield measures the amount of income received in proportion to the share price.

If a company has a low dividend yield compared to other companies in its sector, it can mean two things: 1) the share price is high because the market believes the company has impressive prospects and isn't overly worried about the company's dividend payments; or 2) the company is in trouble and cannot afford to pay reasonable dividends.

At the same time, however, a high dividend yield can also signal a depressed share price.

Dividend yield is of little importance for growth companies because retained earnings will be reinvested in expansion opportunities, giving shareholders profits in the form of capital gains, such as the example with Microsoft.

If a company with a history of consistently rising dividend payments suddenly cuts its payments, you should treat this as a signal that trouble is looming.

Also, while a history of steady or increasing dividends is certainly reassuring, investors need to be wary of companies that rely on borrowings to finance those payments. Finally, dividends are like public promises. Breaking them is both embarrassing to management and damaging to share prices.

Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 (office hours) or e-mail mh@hollingsworth-int.com.

Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.