Dividend Irrelevance

That’s the big question, it depends on their options to generate return on capital.

If the company has nothing better to do with the money then yes 100% they should distribute it (via a buyback / dividend) to avoid destroying shareholder value.

If they can invest in a new factory to increase revenue or process efficiencies to reduce cost or acquiring another company to broaden their offering etc… those options could generate much better earnings in future in which case it would be unwise to distribute cash now.

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Yeah, I was looking at one of the linked articles that compared Berkshire reinvesting their income compared to a 50% payout, but it seemed to ignore the fact that the investor may be reinvesting that 50% payout. im not sure its a one or the other scenario though. There’s definitely scenarios where companies are paying out dividends that they clearly probably shouldn’t be.

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Good answer.

In my view you can protect yourself further by finding out why this is. i.e. because of a big moat or they’ve just run out of ideas, in which case you should maybe reconsider whether you should be investing at all. as well as this:

Obviously there are periods of out-performance for high yield stocks in various markets, but the arguments for a consistent premium attached to high yielding stocks doesn’t seem very compelling (at least not compared to other factors).

Page 16 - JP Morgan compares annual returns of different risk factors including yield in the past 15 years
https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/

This takes a longer look back at high yield performance:

Here are some links you may find interesting:

https://www.invesco.com/us-rest/contentdetail?contentId=634ff6163339f410VgnVCM100000c2f1bf0aRCRD&audienceType=investors

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since 1928 dividends plus inflation accounted for 99.7% of the nominal wealth produced, as of 2008, by investing in stocks

The solid top line, corresponding to the performance charted in Figure 1, does not much
change its aspect, continuing to show an ever-rising escalator, albeit now with some backing and
filling toward the end of the period. An investor who bought near the top of the 1920s bull
market, but re-invested all dividends, grew an initial $10,000 investment into about $9.3 million
dollars of (nominal) final wealth—even when evaluated near the bottom of the 2007-08 bust.
Sounds great—until one realizes that the small shift in time period has cut the estimate of final
wealth accumulated by two-thirds, relative to the period charted in Figure 1.
Conversely, when valued in constant dollars, and with dividends spent along the way—as
a retiree must perforce do—that same $10,000 investment produced a bit more than $33,000 in
real final wealth. The three hundred-fold difference captures the effect of omitting dividends and
adjusting for inflation. Put another way, since 1928 dividends plus inflation accounted for 99.7%
of the nominal wealth produced, as of 2008, by investing in stocks
.

Hope I get to spend 80 years as a retiree :stuck_out_tongue_winking_eye: :rofl:

I’m not sure if this was intended as a counterpoint, but Dividend Irrelevance doesn’t mean that dividends don’t form a significant part of total return, just that they aren’t relevant to an investment decision (i.e. logically and empirically a company’s dividend policy doesn’t inform future returns)

To put it another way, the same total return could have been generated if more of those companies had distributed more excess cash via buyback instead.

I do agree with the paper though, looking at price is pointless - you always need to consider total return.

It was not intended as a counterpoint. I just wanted to share the article. I searched the forum using the"dividends" keyword and found it hard to choose a perfect fit.

If I wanted to argue I would strart by mentioning IBM, their share buyback program and the price depreciation that followed at some point in the recent past.

But I’m not going to do that. Instead I’ll just state I’m agnostic in this debate. At first glance I have the impression we can’t derive definitive, absolute conclusions about the clash between buybacks and devidends.

In theory buybacks have the advantage of saving on tax expenses for the investor. Until when we don’t know. There are rumours some politicians want to impose taxes on that activity.

In practice I have the impression that share buybacks offer a better deal for the investor in some cases like Apple I think. But then there’s also IBM and I doubt IBM is the only one.

If we calculate an average, maybe buybacks have a superior performance. But that doesn’t allow to say it’s always better. I prefer to look at things case by case

I’m not suggesting you said this or that you said something else

Got it, ok yeah I didn’t want to assume anything just checking.

Yeah that’s my position, not that one is better or worse, just indifference.

I’m in a similar boat, agnostic. I strongly disagree with “don’t chase dividends” because I agree with the rationale but disagree with the messaging; it’s intent is in the right place and many great, great investments don’t pay a bean in dividends.

Stocks that offer both good dividend yield and the potential for capital gain down the line are golden gooses; those few that do exist sit either in sectors which will in the foreseeable future enter terminal decline (tobacco, fossil fuels), are back-a-horse types (certain pharmas for instance) or are forms of investment firm in and of themselves (they’re trying to make a higher ROI than you and hope that you are pleased with the skim you get back - often they do very well but by definition if you’re pleased with your ROI then they are riskier than your baseline level of investment.

I hold one or two of the above in the knowledge of the giant asterisk involved. I also hold a few much more safe and sensible dividend-yielding stocks on the basis that I think their long-term share price should be significantly higher post-current-crazyness; dividends will slow that progression but will be picked up along the way contributing to my overall ROI, and when I reach target share price I go from there.