It is not an apples to apples comparison but it is not entirely without use. Companies are generally punished for not maintaining their dividend. Therefore, a company initiating a recurring dividend or with a history of recurring dividends is signalling to the market that it expects to be able to maintain at least that level of dividend in perpetuity so it at least has some similarties to long term bonds which also fluctuate in market value. By the way, I am amazed that in two pages of posts on the topic nobody even referred to the dividend irrelevance theorem. Was that not part of the curriculum? By the way, I don’t think Modigliani won the nobel prize for proving that dividends don’t matter. I think the point of the theory is that under certain full-information assumptions dividends do not matter. Because in the real world, dividends do matter, it is proven that signalling information is important, etc.
My apologies to DarienHacker who did mention Modigliani-Miller.
Dividend is simply a hedge against stupid management. Like everyone discussed, dividend is nothing but money exchange from the control of management to the control of shareholders. If you have a company that is under earning its WACC yet management keeps most of the cash to do stupid acquisitions (example, RGS and various tech companies), shareholders are better off paying the dividend tax and keeping the cash. If a company that is managed well and can deploy that money at a high rate, by all means keep the retained earnings. The dividend payment is not “sexy.” If a stock rallies after the announce of dividend, that means the market is fed up with the underperforming management and wants the money deployed better, like paying for son’s tuition for a MBA at University of Phoenix.
I don’t want to rehash the whole argument of ‘do dividends matter or not.’ I agree that they do, but in my opinion their significant is often misunderstood and overstated. You may agree or disagree with that. What bothers me is using a pure yield approach to compare an equity to a bond. i.e. choosing MSFT stock because it has a 2% dividend yield over a 1% bond yield based on the those values alone (notwithstanding views on the market) which CNBC appears to purport.
I think for companies with stable recurring dividends, a sufficiently low payout ratio, and a sufficiently low p/e ratio, the dividend yield is a good approximation for the minimum expected return that a reasonable model could generate (Note: minimum expected return and expected minimum return are not the same thing). That is why comparing the dividend yield and the bond yield is instructive in which asset has a higher expected return. While preservation of capital and portfolio diversification may still lead to choosing the bonds over the stocks, CNBC does not tend to focus on these goals.
DarienHacker Wrote: ------------------------------------------------------- > The marginal (professional) > investors generally don’t care. I completely disagree with this. One of the reasons companies issue and maintain dividends is to have access to large pools of institutional money that requires an income component to all the securities they select. Most obviously these include equity-income mutual funds, but also pensions and endowments often have such requirements, at least for a portion of their portfolios. This is exactly why companies like BofA maintains a $.01 dividend. It’s not to help out the individual shareholders. It’s so many of their institutional shareholders don’t have to automatically sell their shares if the dividend is eliminated. This is another reason why dividends are beneficial even if it’s an indirect benefit. Issue and maintain a dividend and more people/institutions will buy your stock (all else equal).
Sweep the Leg Wrote: ------------------------------------------------------- > DarienHacker Wrote: > > The marginal (professional) > > investors generally don’t care. > > I completely disagree with this. http://faculty.fuqua.duke.edu/~charvey/Research/Working_Papers/W71_Payout_policy_in.pdf: “We survey 384 financial executives… Executives believe that institutions are indifferent between dividends and repurchases and that payout policies have little impact on their investor clientele.” > One of the > reasons companies issue and maintain dividends is > to have access to large pools of institutional > money that requires an income component to all the > securities they select. That was true in the 1970s. Since then fund managers have figured out how to synthesize dividends. (Hint: sell a share of the stock.) You probably cannot name a fund today that restricts itself to dividend payers. > This is another reason why dividends are > beneficial even if it’s an indirect benefit. > Issue and maintain a dividend and more > people/institutions will buy your stock (all else > equal). http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.163.4023&rep=rep1&type=pdf: “We study stock holdings and trading behavior of more than 60,000 households… We find that, as a group, retail investors prefer non-dividend paying stocks over dividend paying stocks.” The paper goes on to note that the only group preferring dividends are old, poor retail investors.
DarienHacker Wrote: ------------------------------------------------------- > You probably cannot name a fund today that > restricts itself to dividend payers. I can think of several, including the top selling equity fund at the firm I work for. But, just to throw out an example, Blackrock Equity Dividend is fairly popular these days. American Funds has a couple. There are really quite a few of them. And, selling a share of stock is how retail investors replicate income, not most portfolio managers. If one of our value PMs went into a meeting with an institutional client that was looking for an equity dividend strategy and told him he sells shares to replicate dividends he’d be laughed out of the room. And don’t say derivatives either. Sure it’s possible, but most of the time it’s not practical or allowable by prospectus. You’re completely missing my other points. In my last post I wasn’t debating repurchases vs. dividends, or even dividends on their own. I was just saying some institutional investors do care, and that by itself is a reason to at least pay attention to dividends.
This is the most compelling information regarding dividend investing for me. I believe people do care, and if managed correctly can be a very profitable strategy. This is taken from dividendgrowthinvestor.com One dollar invested in CL in 1989 would have turned out to $16.94 with dividends reinvested. The yield on cost is 27.70%. Johnson & Johnson (JNJ), which recently announced its 47th consecutive annual dividend increase. A dollar invested in JNJ in 1989 would have turned out to $10.84 with dividends reinvested. The yield on cost is 26.4%. Lowe’s Companies (LOW) has increased its dividends for 47 consecutive years. A dollar invested in MAS in 1989 would have turned out to $25.40 with dividends reinvested. The yield on cost is 39%. Procter & Gamble (PG) is one of the original 26 members still present in the index. The company has raised dividends for over 53 consecutive years. A dollar invested in PG in 1989 would have turned out to $9.05 with dividends reinvested. The yield on cost is 20%. Again, some of these guys who have been in the market for decades dont really care if the stock price on some of these blue chips are flat. They are yielding 30% on their money to do nothing. WMT’s yield on cost is over 100% if you had invested during this same period. To say people dont care about dividends is a rediculous thought in my mind.
people care about dividends and big corporations with dividend history definitely care about it. it really depends on the sector. technology companies generally are no compelled to produce dividends, but banks, insurance, utilities, healthcare, consumer staples definitely are.
MoneyMan_CFA Wrote: ------------------------------------------------------- > This is the most compelling information regarding > dividend investing for me. I believe people do > care, and if managed correctly can be a very > profitable strategy. > > This is taken from dividendgrowthinvestor.com > > One dollar invested in CL in 1989 would have > turned out to $16.94 with dividends reinvested. > The yield on cost is 27.70%. Johnson & Johnson > (JNJ), which recently announced its 47th > consecutive annual dividend increase. A dollar > invested in JNJ in 1989 would have turned out to > $10.84 with dividends reinvested. The yield on > cost is 26.4%. Lowe’s Companies (LOW) has > increased its dividends for 47 consecutive years. > A dollar invested in MAS in 1989 would have turned > out to $25.40 with dividends reinvested. The yield > on cost is 39%. Procter & Gamble (PG) is one of > the original 26 members still present in the > index. The company has raised dividends for over > 53 consecutive years. A dollar invested in PG in > 1989 would have turned out to $9.05 with dividends > reinvested. The yield on cost is 20%. > > Again, some of these guys who have been in the > market for decades dont really care if the stock > price on some of these blue chips are flat. They > are yielding 30% on their money to do nothing. > WMT’s yield on cost is over 100% if you had > invested during this same period. > > To say people dont care about dividends is a > rediculous thought in my mind. MoneyMan, I know it’s a long thread but please read the rest of the posts first. I never claimed that dividends don’t matter. I simply was stating that they are often misunderstood and overrated, which your argument has proven. Total return is what matters for investors, and you are focusing on the dividend yield aspect of the total return. Now let’s imagine instead of paying out a dividend the company used the cash to repurchase stock. Now you have the same amount of earnings spread over fewer shares, so EPS increases, and the stock price increases proportionally as long as the PE ratio holds. This represents the capital gain aspect of total return. Obviously there are externalities and inherent assumptions, but a $1 investment becoming $15 measures total return, and in telling me how much the dividend yield contributed to that is just robbing Peter (cg yield) to pay Paul (div yield). I realize dividends have an important role in investing and generally they are a positive indicator, but moreso for reasons such as a that a high dividend payer typically has a stable cash flow and dividends allow access to capital that requires an income component. I don’t buy into the argument that dividends are far superior to a capital gain because it’s money in your pocket as opposed to a gain on paper. Stocks are liquid, so it’s not like the paper gain is Madoff-esque, you can realize it whenever you want by selling. Plus, if the stock goes to 0 I’m not going to do any cartwheels out of joy that at least I retained the 2% dividend, and even that aspect is moot if you reinvest dividends! Basically I don’t see any convincing evidence that dividends are an optimal corporate strategy for increasing total return.
Sundev, I understand your arguement and realize the thread kind of got derailed. I just wanted to respond to some of the other posts which had nothing to do with the original thread, ha.