David Jackson put a post on the Seeking Alpha site called Why dividend-paying stocks are a mistake. A reader asked me to comment on it and funny but true David emailed me the link. I have said it before on this site; Seeking Alpha is a great resource, I read it regularly.
If you haven't already done so go read this article.
I have written a lot about owning dividend paying stocks right now. Very simply, they have been working. I would expect dividend paying stocks to continue to work when the market is up a little or down a little.
I take that article is saying there is a sense of complacency among some managers. No one thing works forever, and anyone that thinks that will have a problem at some point. I am overweight foreign dividend payers. I doubt I will be overweight this type of stock forever. Long time readers will know one thing I focus on is trying to get more big picture themes right than wrong. To this point I wrote about adding some non-tech beta back before the election.
I will always have some weighting in dividend payers, maybe more maybe less but always some. That is diversification.
As for David's article I don't disagree with him on too much. If you look at a name like Pinnacle West (PNW) it has a 4.4% dividend yield. The stock rose about 8% last year, so the total return was 12% or so. I don't own it and since they can't keep my electricity on during a snow storm I won't be buying it but there are tons of stories like this in the market. I doubt the stock will have a radically different year in 2005. In a diversified portfolio this stock gave market beating returns, but not too many people by a stock like PNW to get 30% in a year.
Compare this to Adobe Systems (ADBE), again something I don't own. Adobe pays less than one tenth of one percent in dividends. I don't think to many people buy this one for the yield, it gets bought because people think it can go up 30% in a year, it may not but it has the potential. In 2004 it was up about 51%, factor in that dividend and it was still 51%.
To be clear dividends (as David says) are not, by themselves, a catalyst. At different points in the stock market cycle there will be more demand for dividend payers, and that is the time to overweight them.
David talks about other ways for companies to utilize capital. It probably makes sense for growth companies to reinvest earnings, buy stock back or issue stock options. A company with very little earnings is not really diluting itself by issuing stock in the same way a mature company trading at ten times earnings would.
David throws out some cliche's being used by IMs about dividends. I would urge anyone to be skeptical of an advisor that can't articulate some sort of game plan that acknowledges dividend payers won't be it forever.
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4 comments:
David has essentially expressed an implication of the Modigliani Miller theorem: if the market rate of return equals the rate of return to reinvested capital, then it does not matter what the dividend payout ratio is. Of course, as he points out, buybacks are a more tax efficient way for firms to return cash to shareholders. Moreover, Glenn Hubbard and others have long argued that most firms can generate a much higher rate of return on reinvested capital than the market rate but can not do so due to asymmetric information in credit markets. This suggests that dividends may not only be bad for shareholders, but they may be bad for economic growth as well. Of course, the argument that you site that dividends can be a form of signaling (i.e. like going to university to prove that you are bright, not because university makes you more productive) is entirely valid, and helps explain the current fad for dividend paying stocks (especially in light of Enron and WorldCom).
stockcoach.blogspot.com
Stock buybacks does not always make sense as some people have commented on Seeking Alpha. For an investor in Intel, it is hard to argue that stock buybacks of the past five years have been an efficient allocation of capital (not to mention the billions that Intel invested in a search for new revenue streams). I'd be much happier with dividends in this instance.
http://canadiancapitalist.blogspot.com
Roger, thank you for your comments on my blog. I enjoy your blog, esp. the "big picture" views.
Hey Roger,
I like what you're saying about dividends being inherently a "disadvantage" to shareholders. I think dividend investing (searching for value) is an investment style that some people just prefer. Part of the reason for that is it just feels less risky. Ultimately, the most deserved total return comes from a growth story- history will prove that. However, in a volatile market, an undervalued REIT with a 10% dividend can feel real good.
Russell Bailyn
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