Amid record profitability, companies are paying out more and more dividends to shareholders. In 2014, 423 companies in the S&P 500, or 84%, paid dividends. That marks the highest percentage since 1997.

Additionally, a whopping 375 companies increased their dividends last year. And 267 firms have already increased so far in 2015.

Major Commitment

When a company decides to increase its dividend rather than just buy back stock or sit on the cash, it’s a signal to investors that management is confident in the outlook of the business.

The reason for this is that dividends represent more of a long-term commitment because companies can usually decide to simply stop buying back stock at any time without any major repercussions. On the other hand, if a company decides to stop paying its dividend, investors will flee the stock.

NYU finance professor Aswath Damodaran put it this way:

“Dividends are like getting married; stock buybacks are like hooking up.”

Dividend Growth Stocks

For investors with a long-term horizon, it’s important to not only look at a stock’s current dividend yield but also to look at its payout ratio. A payout ratio is simply the percentage of net income a company pays out in dividends.

Even better – go to the company’s statement of cash flows and look at the percentage of dividends paid to its free cash flow, which is just cash from operations less capital expenditures.

Knowing a company’s dividend payout ratio is vital. Typically the higher the payout ratio, the less room a company has to raise its dividend in the future. And if a company becomes distressed, a high payout ratio can signal a significant cut is on the way.

A company with a relatively low ratio of dividends to free cash flow, on the other hand, may just have some big dividend hikes on the horizon. This is typical of a younger, fast-growing company, assuming it even pays a dividend at all. As the company grows and matures, however, it will have less growth opportunities and will usually plow back less cash into the company and more into your wallet.