When invest in stock market, why are people so hard up over dividends?

Long post..expert investors might want to give this a miss.

Let me share based on my near decade long personal investment perspective:

Dividends are one of the most impt deciding factors in both selecting a stock and holding onto a stock. With it, I am able to use it both, to buy more into the same company and have the option of buying into another company.

To me, dividends form a "strong monetary connection" between the company account and my account. It's the only physical connection we can have with the company. We can read all we can and all we want from the ARs and the research analyst reports and from friends, brokers recommendations etc..the list goes on. But NOTHING will show more than dividends paid out.
To fully quality that, the company in question, must show a consistent trend in paying out dividends. Skipped dividends are a no no, akin to an employee not receiving his pay. Recognising that sometimes businesses are cyclical and markets move up and down, sometimes the raised dividends characteristics might not be obvious. Thus a past decade dividend payout trend is impt. Take note that sometimes the no of shares might not be the same over the past ten years, thus it would be useful to look at the AR to assess the dividend payout amount.

Raised dividends payout would mean that the company is earning more and more, and is willing to pay more and more. Over a decade, this long time, would reduce the likelihood of funny money or colourful auditing. With raised payouts over time, this would also indicate that the company is truly growing, thus able to payout more and more. And with the above point, likely the share price will rise to reflect this.(sometimes it doesn't show over google finance or yahoo finance, do check the share count in the AR)

The dividend yield at entry point should also be decent, imo, anything from 3-6% is fine. Even high 2% with a definite trend yoy raised dividends are fine.

The dividends could be used to buy more shares consistently from the market and over time, one's shareholding will increase. With the overall rise in share price over time, this will lead to a more rapid growth in wealth. Dividends can also be used to be vested in another company with similar characteristics or simple taken out as cash to supplement one's expenses at a later date, especially when one is going on semi-retirement.

Thus to just say looking dividends per se are totally insufficient. The dividend history, raised trend, % yield, absolute dividend payout by company are the more apt parameters to look at when we say look at dividends.


Gautam

(26-12-2013, 12:09 PM)gautam Wrote: Long post..expert investors might want to give this a miss.

Let me share based on my near decade long personal investment perspective:

Dividends are one of the most impt deciding factors in both selecting a stock and holding onto a stock. With it, I am able to use it both, to buy more into the same company and have the option of buying into another company.

To me, dividends form a "strong monetary connection" between the company account and my account. It's the only physical connection we can have with the company. We can read all we can and all we want from the ARs and the research analyst reports and from friends, brokers recommendations etc..the list goes on. But NOTHING will show more than dividends paid out.
To fully quality that, the company in question, must show a consistent trend in paying out dividends. Skipped dividends are a no no, akin to an employee not receiving his pay. Recognising that sometimes businesses are cyclical and markets move up and down, sometimes the raised dividends characteristics might not be obvious. Thus a past decade dividend payout trend is impt. Take note that sometimes the no of shares might not be the same over the past ten years, thus it would be useful to look at the AR to assess the dividend payout amount.

Raised dividends payout would mean that the company is earning more and more, and is willing to pay more and more. Over a decade, this long time, would reduce the likelihood of funny money or colourful auditing. With raised payouts over time, this would also indicate that the company is truly growing, thus able to payout more and more. And with the above point, likely the share price will rise to reflect this.(sometimes it doesn't show over google finance or yahoo finance, do check the share count in the AR)

The dividend yield at entry point should also be decent, imo, anything from 3-6% is fine. Even high 2% with a definite trend yoy raised dividends are fine.

The dividends could be used to buy more shares consistently from the market and over time, one's shareholding will increase. With the overall rise in share price over time, this will lead to a more rapid growth in wealth. Dividends can also be used to be vested in another company with similar characteristics or simple taken out as cash to supplement one's expenses at a later date, especially when one is going on semi-retirement.

Thus to just say looking dividends per se are totally insufficient. The dividend history, raised trend, % yield, absolute dividend payout by company are the more apt parameters to look at when we say look at dividends.


Gautam

i think dividends are a strong signal that the company cares about its shareholders.

however, i think the thread starter's point (maybe I misread it) is that blindly buying a stock because of dividend yield as the most important metric is wrong.

i think it is human nature to want a positive carry, which implies that negative carry trades generally have a better EV relative to price.

For me, my philosophy is to invest into companies with dividends and keep them till the day the dividends growth can cover my living expenses plus the occasional indulgences comfortably. Of course, even better if capital invested grows along the way with increasing earnings yield.

could it be your friends are using dividend payment as a first screen? rather than what you perceive as "only looking at dividend"?
it makes sense to me if they are using it as a screen, meaning that they could be looking at mature companies as a starting criteria?

dividends or not depends on what kinda investor you are and your beliefs in owning a stock

some people own a stock because they wanna buy low and sell higher
some investors own a stock because they treat it as a business that they now own

some people own growth stocks because they like companies with high ROE, example a fast food chain. They think it would be better if the company can reinvest the profits and continue opening more stores.
some investors like dividend stocks because they need a regular stream of cash flow, imagine a 60 years old retiree. He just wanna sit back and collect the cash and use it to cover the daily expenses.

Dividends is never left hand pass right hand, it comes from the company's profits. The company can always choose to hoard the cash, invest it to grow earnings or just simply pass it back to shareholders.

(26-12-2013, 10:32 AM)Drizzt Wrote: - maturing business whose having problems reinvesting to meet cost of capital should pay out to be accretive to shareholders.
- growth business that when reinvest enhances share holders value because if they have consistent high ROIC increasing product mix, encrouching competitors domain brings high value.
- in all cases, if the management is so proven that they are good capital allocators i.e. FF Wong, John Malone, Markel, Berkshire, Transdigm, Colfax, St******, it makes sense to keep money with them, since they have more opportunities to better deploy the money. why take dividends when you have freaking trouble every time you need to reinvest during wealth accumulation
- we take dividend when we are not super confident if management is the kind of capital allocator mentioned in the previous point

- What your friend should be looking for are sustainable EBIT or Free Cash flow NOT dividends.

Well said. I think the above 5 points answer everything what wahkao needs.

For dividend investors, they are most like to put their money in Stalwarts and Slow Growers.

As defined by Peter Lynch in One Up on Wall Street, Slow Growers are usually large companies that are generally older and expected to grow slightly faster than the country’s gross national output. Utilities, like AT&T, the 3 local telcos are common slow growers. The stalwarts are companies that don’t do a lot of shaking during recessions and economic downturns. Most of these are multibillion-dollar giants that are slow to move with new products, but remain strong with recession-proof products. Think of Cola-cola, Proctor & Gamble, 3M.

I follow what Peter Lynch preaches, buy into fast growers - aggressive new enterprises that grow at 20-25% p.a. If you choose wisely, this is the land of the 10-40 baggers and even the 200 baggers. Lynch looks for the ones that have good balance sheets and are making substantial profits. The trick he says is to figure out when these companies will stop growing and how much to pay for their growth.

Therefore, i am usually not really bothered about dividends as fast growers tend not to pay a dividend as the management will want to reinvest their profits back into the business.

However in finance 101, we were taught that dividend has a signalling effect. By paying a dividend, management is signaling to investors that they are confident in the company's ability to generate cash flow and vice versa if dividend is reduced.

(25-12-2013, 08:28 PM)d.o.g. Wrote:

(25-12-2013, 05:44 PM)wahkao Wrote: I was thinking, dividends dont matter. The idea of receiving dividends every year sounds nice, but if you think carefully, its just left pocket right pocket. When you receive dividends, the share price will drop together with the dividend.

In fact, having no dividend is better because you are in control of when you receive your dividend.

Shouldnt other valuation ratios like PE, NAV, debt, gearing,growth be more important?

So really, why are people so hard up over dividends when they invest?

Many people have learnt the hard way that in investing, it is more important to avoid losers than to pick winners. As a result it makes sense to use indicators that suggest that a particular stock is unlikely to be a loser. Dividends have emerged as one of these indicators.

Franco Modigliani and Merton Miller developed a theorem that showed that all things being equal, there was no difference in market value between a firm that paid dividends and one that did not. In layman terms this is the "left pocket right pocket" idea where you can create your own dividend by selling a few shares.

However the theorem makes some important assumptions:

No taxes
No bankruptcy cost
No agency cost
No information asymmetry
Efficient market

All of the above assumptions are untrue to varying degrees in the real world, with the result that there IS a difference in market value between 2 companies that differ only in their dividend rate. Unsurprisingly the dividend payer is usually valued higher. A bird in the hand is worth two in the bush, as it were. In layman terms: "show me the money".

In theory, lousy businesses that generate a low return on their activities should pay out everything. Good businesses should reinvest everything.

In practice, lousy businesses cannot generate free cash and not only consume all the cash they produce but must also borrow more money to expand. Good businesses generate cash in excess of reinvestment opportunities and can afford to pay a dividend.

One might then ask - why do some low-return businesses still pay a dividend when their balance sheet suggests they should pay down debt? Because if they don't, their market value would fall and it would hamper their ability to raise money via a placement.

One might also ask - why don't the high-return businesses use their cash to expand more aggressively? Because if they did, their returns would fall, and they wouldn't be good businesses any more.

Look at Berkshire Hathaway - it has compounded at 20% for decades. But the companies within Berkshire did not compound at that rate. Instead they all generated cash that was sent to Warren Buffett to reinvest. He used that money to buy other businesses which sent him more cash, and so on.

Anyone hoping to emulate Buffett should study what he does - and what he does is buy dividend-paying companies.

As usual, YMMV.

Merry Christmas!

Great post by d.o.g as usual... my humble 2 cents add:

1) Dividend is cash flow. Real money. Earnings is funny money

2) What is the diff between a company that pays you $1 cash so you can subscribe for $2 rights, vs one that just do a $1 rights (excluding the ulterior motive of major shareholder increasing their stake)? You know the former actually got real cashflow to pay $1.

3) Dividends gives you cash to do something while retaining the asset. To get cash from capital gains you need to sell assets. They are not the same thing though theory tells you otherwise. Recycling of capital ie payback period is very important.

Seasoned investors know the importance of cashflows, which is what fundy investing is all about. When cashflows within the company does not translate to cashflows for outside equity or bond holders (continually refinancing the principal or increasing quantum)... it is a red flag.

As d.o.g insinuated rightly: Finance 101 and practice is not the same thing.

The obvious conundrum is that Berkshire prefers dividend but it hardly pays out dividend. The question is actually: Do you believe Berkshire has the cashflow or just another Madoff? For most other companies, our faith is not so secure.

(26-12-2013, 04:34 PM)yawnyawn Wrote:

(26-12-2013, 10:32 AM)Drizzt Wrote: - maturing business whose having problems reinvesting to meet cost of capital should pay out to be accretive to shareholders.
- growth business that when reinvest enhances share holders value because if they have consistent high ROIC increasing product mix, encrouching competitors domain brings high value.
- in all cases, if the management is so proven that they are good capital allocators i.e. FF Wong, John Malone, Markel, Berkshire, Transdigm, Colfax, St******, it makes sense to keep money with them, since they have more opportunities to better deploy the money. why take dividends when you have freaking trouble every time you need to reinvest during wealth accumulation
- we take dividend when we are not super confident if management is the kind of capital allocator mentioned in the previous point

- What your friend should be looking for are sustainable EBIT or Free Cash flow NOT dividends.

Well said. I think the above 5 points answer everything what wahkao needs.

For dividend investors, they are most like to put their money in Stalwarts and Slow Growers.

As defined by Peter Lynch in One Up on Wall Street, Slow Growers are usually large companies that are generally older and expected to grow slightly faster than the country’s gross national output. Utilities, like AT&T, the 3 local telcos are common slow growers. The stalwarts are companies that don’t do a lot of shaking during recessions and economic downturns. Most of these are multibillion-dollar giants that are slow to move with new products, but remain strong with recession-proof products. Think of Cola-cola, Proctor & Gamble, 3M.

I follow what Peter Lynch preaches, buy into fast growers - aggressive new enterprises that grow at 20-25% p.a. If you choose wisely, this is the land of the 10-40 baggers and even the 200 baggers. Lynch looks for the ones that have good balance sheets and are making substantial profits. The trick he says is to figure out when these companies will stop growing and how much to pay for their growth.

Therefore, i am usually not really bothered about dividends as fast growers tend not to pay a dividend as the management will want to reinvest their profits back into the business.

However in finance 101, we were taught that dividend has a signalling effect. By paying a dividend, management is signaling to investors that they are confident in the company's ability to generate cash flow and vice versa if dividend is reduced.

It is rare to find Peter Lynch fan in this forum. Nice to hear from you, fellow Peter Lynch fan.

Mr. d.o.g. sums up quite well on the Mr. Market mentality on dividend. I fully agree with him.

1) wahkao,

Now that you have got quite a lot of interesting answers to your question, it would be interesting to hear your reflection after reading them.

What are your thoughts now?

Don't worry. There are some hybrids here. You are not alone



2) Dear fellow forumers,

I think wahkao had been a good catalyst to bring out some very insightful comments that benefit us all.

Especially those that are new here, or are shy to ask questions.

Time will tell whether a person is sincere in asking questions he/she don't understand; or that person is just being a nuisance.

We have quite a few "detectives" here who are very good at fishing out charlatans and those out to deceive us.

May we hold off being too quick on the "negative rating" thing? (For asking a question?)

It can give the wrong impression and frighten off newer forum members from speaking up with an alternative viewpoint....

It's Christmas after all!

Both dividends and capital growth are important. Growing dividends mean that the company is doing well and as such, it is able to offer more dividends. Market would also increase the price of the stock if it is giving increasing dividends. There are a lot of such examples in the US market. I would not say I am hard up for dividends but I would not choose one which do not even give a cent of dividends if it is doing well.