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at one time rising dividends were looked at as a sign of good financial health ... it was like saying "look at me " we have so much money we don't even need all of it , so here is some of your investment back ."
it was a vote of confidence and dividend payers tended to outperform .
but that has not been true for years .. today stock buy backs , acquisitions , purchasing brand names and new product development in companies have provided the best compounding on share holder money .
I think the conversation going on is entirely different than what people who are trying to understand this are asking. I'm trying to understand why even buy stocks in the first place. Artillery77 gave a very comprehensive answer for people like me.
Because buying broad based stock funds is one of the best ways to compound investor dollars over the long term.. total return is key , how it is arrived at is irrelevant
The bellicose nature of the other posts refers to whether or not a dividend is good. The argument is that if a company you own 5% of has $1000 in assets, but then pays a dividend of $100, you do receive cash of 5% of $100 =$5, but you now own 5% of a company that has $900 in assets. In effect, nothing has happened. Worse, some proponents say, is that you will have to pay taxes on the dividends for the distribution from the company, so you may end up with a net of $3.50 while the total assets in your company have fallen.
Proponents of dividends say that shareholder capital built a business and it is entitled to a share of the profits. Management needs to determine how much capital is needed for the company to operate and grow, but should return the remaining capital to shareholders. Without any return of capital, your money essentially becomes a free loan to management, and if management doesn't have to value your money, they will not. Instead surplus money will fund acquisitions that don't make sense or simply be wasted.
Your second paragraph is absolutely key. If a company knows it has a regular, scheduled dividend investors have an expectation of being paid, my personal belief is it is likely to be more fiscally prudent than one that views retained capital and the 'things' it can buy (potentially overpriced acquisitions, profligate R&D, etc.) as a simple windfall. It's too easy, in an environment of seemingly endless resources, to gold-plate the company's products or services.
If, instead, the company has to balance those 'things' with the dividend that's coming up on the calendar, sure as the sunrise, I submit it is more likely to be cautious and prudent about use of capital. Please note I said regular dividend-not an occasional special dividend or a stock buyback, which are just too easy to not execute.
Financial rules about stock pricing after a dividend, taxes on dividends, and the idea of total return are fantastic concepts to keep in mind, but aren't closely related with organizational behavior and its effect on whether retained earnings in the control of management are going to be used wisely-or not.
Your second paragraph is absolutely key. If a company knows it has a regular, scheduled dividend investors have an expectation of being paid, my personal belief is it is likely to be more fiscally prudent than one that views retained capital and the 'things' it can buy (potentially overpriced acquisitions, profligate R&D, etc.) as a simple windfall. It's too easy, in an environment of seemingly endless resources, to gold-plate the company's products or services.
If, instead, the company has to balance those 'things' with the dividend that's coming up on the calendar, sure as the sunrise, I submit it is more likely to be cautious and prudent about use of capital. Please note I said regular dividend-not an occasional special dividend or a stock buyback, which are just too easy to not execute.
Financial rules about stock pricing after a dividend, taxes on dividends, and the idea of total return are fantastic concepts to keep in mind, but aren't closely related with organizational behavior and its effect on whether retained earnings in the control of management are going to be used wisely-or not.
Bingo. Peter Lynch called it "di-worsification" and while dividend payments alone won't keep it from happening (AT&T is a great example of this)…. at least dividends keep a company on a budget.
I certainly would not ever consider that a criteria anymore ... companies still do all the bad Decision making ..if they didn’t have the money to diworsify they would just adjust the dividend until they do ..not raising it would be a likely way
at one time rising dividends were looked at as a sign of good financial health ... it was like saying "look at me " we have so much money we don't even need all of it , so here is some of your investment back ."
it was a vote of confidence and dividend payers tended to outperform .
but that has not been true for years .. today stock buy backs , acquisitions , purchasing brand names and new product development in companies have provided the best compounding on share holder money .
Perhaps. Stocks always stray from fundamentals...never returning, but always in its orbit. Investors value leveraged stock and company acquisitions today, in an era of the cheapest credit ever available to commerce in history with an amazing plethora of sources.
How long do you really expect that to last? Every cycle has its bubble. Intangible Assets are a lot more squishy than bonds issued to acquire them I'm afraid. Even without debt...spending 5% of company assets to acquire 1% of a company's stock leaves everyone else poorer...but the sampling way of how stock trades of the time are reflective on everyone's shares looks fantastic.
I did a straddle a long time ago on a stock that was thinly traded in options. As expected, the stock moved decisively away from one of the option points. The option was worthless....yet my results kept getting skewed because after every trade some a-hat would buy 1 for an exorbitant price. I kept trying to catch that trade but never could. One day, just to be a jerk, I bought another for .05 after he'd made his trade. By the end of the day, another trade for 1 had been made putting the price back up. It wasn't until the last day that my not real 30% gain finally showed as 100% loss.
The point being...some shareholders are valued by management. Some shares are valued by potential shareholders. I would expect that distinction to start becoming more important again as the fountains of capital start running a bit drier. What happens when Vanguard asks FB for a dividend and Zuckerberg tells them to go pound sand or that he'll let the company buyout his own class of shares?
What actually goes on in companies is less meaningful then performance .. for the most part stocks are trading vehicles .. there are few buffets who actually care about anything except bottom line performance..
Do you really think the trillions in index funds have anyone caring about what individual companies decide to do or who their ceo’s are or what their compensation is ? nope ,there is no interest at all here , just bottom line performance. If a company messes up it is simply booted out of the index or sold .
What actually goes on in companies is less meaningful then performance .. for the most part stocks are trading vehicles .. there are few buffets who actually care about anything except bottom line performance..
Do you really think the trillions in index funds have anyone caring about what individual companies decide to do or who their ceo’s are or what their compensation is ? nope ,there is no interest at all here , just bottom line performance. If a company messes up it is simply booted out of the index or sold .
So you like growth only.
You don’t like “rock steady” stocks with a high dividend. The stock prce barely moves but
you hold it for the nice juicy dividend.
Bottom line you don’t like dividends at all, I get it, some people don’t,
if buying individual stockd that is.
Nope I never said I only like growth .. I have no preference ...if total return is good ,it’s good ...if it pays dividends and total return is poor it’s bad.. I own both..
The stock can never pay out a nice juicy dividend and stay flat without appreciation just by design .. .. the price must appreciate at least the amount of the dividend for the total return to equal the dividend . That would make the share price gain back the reset amount so it appears flat .
So a stock that pays a 7% dividend has the share price reduced by that amount of dollars ... to recover back to where it was takes appreciation of equal amount . Then you see a 7% total return and the stock goes back to the price it was..
If the stock saw no appreciation it’s total return would be zero , you would have a 7% dividend and a share price reduced by equal amount equaling zero return..
A growth stock that goes up 7% and has those dollars drawn out is the same as a dividend stock that appreciates 7% and has the dividend kept
Last edited by mathjak107; 02-18-2019 at 06:30 AM..
The stock can never pay out a nice juicy dividend and stay flat without appreciation just by design .. .. the price must appreciate at least the amount of the dividend for the total return to equal the dividend . That would make the share price gain back the reset amount so it appears flat .
What you just described-appreciation just replacing or slightly surpassing dividend yield-was clearly what BMI meant by 'stay flat'. I seriously doubt anyone looks for a company which is paying dividends into oblivion, rather one whose growth and free cash flow is sufficient to cover the planned dividends plus leave 'enough' to continue growing the company. It's at least part of what I look for, because all other things being equal, some investors prefer to extract total return as both dividend and growth.
Part of my hangup on this is that my time in the government, I saw what happens to yearly budgets and projects when there is no perceived accountability by managers. Lip service is paid to 'conserving money', and almost nobody does it. Instead, they 'fight for their budget' (even if a lower budget is enough), and 'create initiatives' (even if everything is just fine and an initiative only confuses the situation). I think it's likely to be exactly the same in a corporate environment. Dividends put the control on the investors, not on the corporation to intelligently use retained earnings.
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