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Thoughts on dividends -- do you care or not?


Nelson
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Just wondering how much dividends play into everyone's investment decisions.

 

I'd consider myself dividend agnostic, not caring whether a stock paid a dividend or not. As long as the value is there, then who cares, right? Most companies have opportunities to reinvest their earnings, even if the result is overpaying for some acquisition.

 

But at the same time, I find I really like getting dividend payments. I usually get enough each month to add a bit to a position, which I've been doing as the markets continue to fall. On the one hand, I know that whether I get the cash or the company reinvests it, the value of the investment is the same. On the other hand, I find the psychological impact of getting that money each month to be very real.

 

I'm probably at the point where ~75% of the stocks I own pay dividends. Where's everyone else at on the board? Do you guys care about dividends or not?

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Just wondering how much dividends play into everyone's investment decisions.

 

I'd consider myself dividend agnostic, not caring whether a stock paid a dividend or not. As long as the value is there, then who cares, right? Most companies have opportunities to reinvest their earnings, even if the result is overpaying for some acquisition.

 

But at the same time, I find I really like getting dividend payments. I usually get enough each month to add a bit to a position, which I've been doing as the markets continue to fall. On the one hand, I know that whether I get the cash or the company reinvests it, the value of the investment is the same. On the other hand, I find the psychological impact of getting that money each month to be very real.

 

I'm probably at the point where ~75% of the stocks I own pay dividends. Where's everyone else at on the board? Do you guys care about dividends or not?

 

In general, I prefer buybacks/retained earnings to dividends given the tax treatment. That said, most of my dividend paying stocks are in tax-free/tax-deferred accounts so the tax penalty doesn't affect me outside of foreign withholding taxes...so in practice I'm generally agnostic, but do like receiving them as markets are falling as it allows me to reinvest and pick up more shares without having to trust that the management will be making smart investments.

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I prefer dividends as they are an instant catalyst in realizing value from a stock. Buybacks do not do that. Buybacks in theory raise intrinsic value, but I don't care about IV, I want to see the price of the stock go up. My nightmare would be an IBM situation - management burns away ridiculous quantities of cash on buybacks and shareholders are left with a low stock price.

 

What's more is that management is terrible in using buybacks.

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I prefer dividends for most of my investments and strangely (probably not) my best returns have been from big dividend paying stocks mainly MO. I think the double taxation scares many people away as well as the assumption that management really reinvests the money at a higher ROI. I think managements ability to do so is very over estimated by investors and management themselves. Of course there are some outliers like Malone and Buffet but they are few and far between.

 

It amazes me a stock like Altria is not celebrated or discussed more on the board. If its the moral aspect Im glad its not because its a waste of time but its returns with dividends invested rivals many of the great investments of all time.

 

 

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David Dreman in "Contrarian Investment Strategies...." discusses dividend payers at length.  Dividend growers generally do well versus companies that dont pay dividends.  I have seen other articles on this but cant recall right now. 

 

I prefer dividends over buybacks, except in very rare instances -  the two mentioned above.  Dividends keep management focussed.  But then we dont pay extra tax on dividends in Canada (for CDN. stocks).  My holdings are now 90% dividend payers - The board will know how this goes in the coming years.  Brokerage fees are so low that I have no problem reinvesting any dividends myself. 

 

Most managers are business and sales people, skilled at office politics among other things, but not necessarily capital allocation.  They are also pressured to do certain things at the worst times. 

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IMHO, divvie stocks performed really well post 2009 with low bond rates and people attracted to the "safety" and yield of divvie stocks. I thought that we'll get into divvie stock bubble and it's gonna implode at some point. So far, it seems not. But I think the possibility remains. FWIW.

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I will add that should the markets be in long term "slow or no" growth mode companies that pay and increase their dividends above the rate of inflation will see that reflected in their stock valuations, in time.  Everyone is still thinking that returns may come back to the 2009 to 2013 range - I am not so convinced.

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David Dreman in "Contrarian Investment Strategies...." discusses dividend payers at length.  Dividend growers generally do well versus companies that dont pay dividends.  I have seen other articles on this but cant recall right now. 

 

That's a trivial conclusion. Of course that has to be true because dividends ultimately have to be grounded in profits, so as a group of course dividend payers/growers are going to be more healthy than non-payers. The issue is if you can find other markers of good performance besides dividends that may be even better. For example share shrinkage.

 

I think dividend champions and the like are generally way overrated. Huge portions of the market are addressed towards investing in those stocks at the exclusion of every other kind of stock. I absolutely love to identify companies that could be huge dividend payers but for some reason or another aren't. That's a very hated subset of the market and if price offsets it or if there are good reasons, I will bet on them. 

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David Dreman in "Contrarian Investment Strategies...." discusses dividend payers at length.  Dividend growers generally do well versus companies that dont pay dividends. 

 

Not to pick on Uccmal, but do these studies include portfolio changes when dividend grower slashes dividend?

 

It seems self evident that "dividend grower" will perform acceptably while it grows dividends. But what happens when it has a problem and slashes dividend. Won't you lose a lot of previous outperformance by switching to something else at the worst time?

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I used to think dividend stock where good in a foreign retirement account (like Canada) since you'd save the withholding tax which are higher tax rate than capital gains. Then I concluded if the dividend payer was reducing it's growth rate, it would still be better to have no capital gains tax and go for the fully retained earnings. Then I concluded it's probably best to own a stock that does a spin-off (like the Libery family of stocks), which are one heck of a headache for non-US holders to elect it to be tax free. So now I hold stocks in retirement account that are breaking up into pieces.

 

 

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David Dreman in "Contrarian Investment Strategies...." discusses dividend payers at length.  Dividend growers generally do well versus companies that dont pay dividends. 

 

Not to pick on Uccmal, but do these studies include portfolio changes when dividend grower slashes dividend?

 

It seems self evident that "dividend grower" will perform acceptably while it grows dividends. But what happens when it has a problem and slashes dividend. Won't you lose a lot of previous outperformance by switching to something else at the worst time?

 

Alwaysinvert, Jurgis: I cant do Dremans book justice here.  You just have to read it.  Anything I write will be taken out of context.  Its an awesome book, amd he has corrected for most of your concerns. 

 

Alwaysinvert: I am staying out of the buyback argument on this thread.  Been there done that. 

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David Dreman in "Contrarian Investment Strategies...." discusses dividend payers at length.  Dividend growers generally do well versus companies that dont pay dividends. 

 

Not to pick on Uccmal, but do these studies include portfolio changes when dividend grower slashes dividend?

 

It seems self evident that "dividend grower" will perform acceptably while it grows dividends. But what happens when it has a problem and slashes dividend. Won't you lose a lot of previous outperformance by switching to something else at the worst time?

 

Alwaysinvert, Jurgis: I cant do Dremans book justice here.  You just have to read it.  Anything I write will be taken out of context.  Its an awesome book, amd he has corrected for most of your concerns. 

 

Alwaysinvert: I am staying out of the buyback argument on this thread.  Been there done that.

 

I did read it ages ago and from my foggy memory it indeed is a good book, but what you said is not something you even need historical research to prove. It is logically self-evident from the properties of the compared groups (one is self-purging and the other is not). Of course, if it's all corrected for the finding is a completely different thing, I'll have to check the book for that.

 

As for some buyback vs dividend argument, I'm not that interested either. Both tends to be imperfect for different reasons. I was just speaking of cases that I anecdotally have found to be the most ripe for mispricings.

 

I don't hate dividend investing by any means, it's better than many alternatives and may very well even be better than indexing. But my opinion is just that the theme is way overused for value investing (and that's not saying it's of no value whatsoever in value searching).

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Responding to the subject line, I personally don't care in an absolute sense.  Just depends on what I'm looking for.  For example, I've owned NLY for 6 or 7 years.  I bought it for the dividend.  But when I'm looking at stocks generally, I don't really care.  I agree with Buffett; if operating cash can be reinvested at a high rate of return, why pay it out?

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I have come to think I want to invest both in companies with long runways, which can go on growing for a very long time and therefore don’t distribute dividends, and in companies which are more mature and therefore distribute generous dividends.

The balance between these two types of investment depends on the general environment: under certain conditions I am going to hold more of the first kind of companies (basically when general valuations are reasonable or the market is oversold), under other conditions I am going to hold more of the second kind.

 

Cheers,

 

Gio

 

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Responding to the subject line, I personally don't care in an absolute sense.  Just depends on what I'm looking for.  For example, I've owned NLY for 6 or 7 years.  I bought it for the dividend.  But when I'm looking at stocks generally, I don't really care.  I agree with Buffett; if operating cash can be reinvested at a high rate of return, why pay it out?

 

So you mean reinvested at high rates of return like for example VRX has done? Even Berkshire is struggling to get high rates of return on its capital lately. Sounds easier than it is in reality. The ideal business doesn`t need reinvested capital and growths without it. Doesn`t it make sense to pay it out as buyback or dividend?

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IMHO, divvie stocks performed really well post 2009 with low bond rates and people attracted to the "safety" and yield of divvie stocks. I thought that we'll get into divvie stock bubble and it's gonna implode at some point. So far, it seems not. But I think the possibility remains. FWIW.

Interesting. MCD seems to fall in that bucket. Declining earnings, increasing debt, steady dividend, increasing share price.  Will look into that.

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Hey all:

 

If a company has stable earnings, I absolutely think they should pay a dividend.

 

A). It focuses management's attention on capital allocation to some degree.  They know they've got to keep the business going, expand AND pay the dividend OR there will be hell to pay.

 

B). It helps prevent huge losses & blowouts.  A good example of this is AWLCF.  I'm getting killed on the share price, but when you factor back in dividends, my loss is relatively small.  Another example might be GM.  Company was rock solid for years, then ultimately went bankrupt.  If you collected a dividend along the way, it reduced your risk.

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I prefer dividends as they are an instant catalyst in realizing value from a stock. Buybacks do not do that. Buybacks in theory raise intrinsic value, but I don't care about IV, I want to see the price of the stock go up. My nightmare would be an IBM situation - management burns away ridiculous quantities of cash on buybacks and shareholders are left with a low stock price.

 

What's more is that management is terrible in using buybacks.

 

Yeah, it's fun to go back in time and see the correlation between buybacks and market tops. For the most part, management teams have awful timing when it comes to buybacks. Sure, there are plenty of exceptions, but they're not the rule. Not even close.

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I prefer dividends for most of my investments and strangely (probably not) my best returns have been from big dividend paying stocks mainly MO. I think the double taxation scares many people away as well as the assumption that management really reinvests the money at a higher ROI. I think managements ability to do so is very over estimated by investors and management themselves. Of course there are some outliers like Malone and Buffet but they are few and far between.

 

 

What always scares me is when management decides they're going to get into some other business that's barely related. NO! THIS DOESN'T END WELL!

 

I'd say most managers are good operators. Only a select few are good capital allocators too.

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David Dreman in "Contrarian Investment Strategies...." discusses dividend payers at length.  Dividend growers generally do well versus companies that dont pay dividends.  I have seen other articles on this but cant recall right now. 

 

That's a trivial conclusion. Of course that has to be true because dividends ultimately have to be grounded in profits, so as a group of course dividend payers/growers are going to be more healthy than non-payers. The issue is if you can find other markers of good performance besides dividends that may be even better. For example share shrinkage.

 

I think dividend champions and the like are generally way overrated. Huge portions of the market are addressed towards investing in those stocks at the exclusion of every other kind of stock. I absolutely love to identify companies that could be huge dividend payers but for some reason or another aren't. That's a very hated subset of the market and if price offsets it or if there are good reasons, I will bet on them.

 

I'm also not a huge fan of this strategy I've seen (especially on Seeking Alpha) where the history of dividend growth seems to be the most important thing to consider. This stock isn't a dividend aristocrat? Then don't even consider it! Pure bunk.

 

I'd say the better dividend growth strategy would be to identify companies which are relatively small and have a huge potential market ahead of them they can capture while largely self-funding themselves.

 

As for all those dividend studies that say dividend payers outperform non-payers, I find them absolutely hilarious. Dividend paying stocks tend to be profitable. Non-payers tend to not be, or at least less profitable. Therefore, all you're saying is successful companies tend to outperform unsuccessful ones. Well, duh. The issue becomes when dividend investors hold up these studies as gospel, all but saying dividends are the key to outperformance.

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Hey all:

 

If a company has stable earnings, I absolutely think they should pay a dividend.

 

A). It focuses management's attention on capital allocation to some degree.  They know they've got to keep the business going, expand AND pay the dividend OR there will be hell to pay.

 

B). It helps prevent huge losses & blowouts.  A good example of this is AWLCF.  I'm getting killed on the share price, but when you factor back in dividends, my loss is relatively small.  Another example might be GM.  Company was rock solid for years, then ultimately went bankrupt.  If you collected a dividend along the way, it reduced your risk.

 

Yeah, plus collecting dividends during weak markets helps to keep your emotions in check too. A stock might be down 25%, but you're still getting paid to wait. Seeing the dividends flow in help keep me sane at least.

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Guest notorious546

Here's a quote from a Peter Bernstein interview with Jason Zweig

 

Q: Tell us why dividends are important

 

A: In 1995 i said, "Dividends don't matter." I've been eating those words ever since. I assumed that reinvestments [the cash that companies put back into the business instead of paying out as dividends] would earn the same rate of return. I was wrong. Managements are more careful when they're not floating in cash.

 

http://money.cnn.com/2004/10/11/markets/benstein_bonus_0411/index.htm

 

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David Dreman in "Contrarian Investment Strategies...." discusses dividend payers at length.  Dividend growers generally do well versus companies that dont pay dividends.  I have seen other articles on this but cant recall right now. 

 

That's a trivial conclusion. Of course that has to be true because dividends ultimately have to be grounded in profits, so as a group of course dividend payers/growers are going to be more healthy than non-payers. The issue is if you can find other markers of good performance besides dividends that may be even better. For example share shrinkage.

 

I think dividend champions and the like are generally way overrated. Huge portions of the market are addressed towards investing in those stocks at the exclusion of every other kind of stock. I absolutely love to identify companies that could be huge dividend payers but for some reason or another aren't. That's a very hated subset of the market and if price offsets it or if there are good reasons, I will bet on them.

 

I'm also not a huge fan of this strategy I've seen (especially on Seeking Alpha) where the history of dividend growth seems to be the most important thing to consider. This stock isn't a dividend aristocrat? Then don't even consider it! Pure bunk.

 

I'd say the better dividend growth strategy would be to identify companies which are relatively small and have a huge potential market ahead of them they can capture while largely self-funding themselves.

 

As for all those dividend studies that say dividend payers outperform non-payers, I find them absolutely hilarious. Dividend paying stocks tend to be profitable. Non-payers tend to not be, or at least less profitable. Therefore, all you're saying is successful companies tend to outperform unsuccessful ones. Well, duh. The issue becomes when dividend investors hold up these studies as gospel, all but saying dividends are the key to outperformance.

 

Your turning this into a chicken or egg question.  Companies that are successful can pay dividends.  They continue to be successful because they have a good business niche, moat, or necessary product and economy of scale.  They raise the dividends.  It is self perpetuating and part of their culture.  If Cokes management didn't find a way to raise that dividend every year, the whole gang would be out the door, but quick.  Culture has alot to do with it.  There are companies that have raised their dividends every year for generations no matter what the economy is doing.  One could do alot worse than buying a clutch of these. 

 

Your middle paragraph is all but impossible.  Your trying to predict the next Coke, Apple, Macdonalds, Exxon.  All power to you.  So all were left with is hindsight.  Companies that have a culture of increasing their dividends tend to keep doing it.  It keeps existing and future managers focussed.

 

That Peter Bernstein quote sums up my thinking exactly in far fewer words., Board members here seem to think that most companies have managers capable of reasonable capital allocation skills, but that is just not the case.  Big pots of money create their own problems. 

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