With GE's dividend yield sitting above 11% right now, there was talk of GE cutting the dividend this week. Even in the midst of bankruptcy, a few months ago GM was looking to keep its dividend at $.01 so that its stock would show up on the radar of mutual fund managers that screen for dividend paying stocks. Retirees whose portfolios have been devastated by the market crash are hoping their quarterly dividend check will still be there to pay the bills. Dividends are on the mind of everyone right now as a means to get some sort of return in a time of uncertain and stagnant returns.
What are some reasons for a company to pay dividends? In my mind, the first is a purely aesthetic marketing ploy. Paying a dividend appeases shareholders who are used to it or who will only buy shares in dividend paying companies. Further dividend paying companies appear more stable.
The second is that the company does not have a good way to spend some of its profits to produce a return and rather than sit on the cash, decides to return it to the shareholder. Buffett does not pay a dividend on Berkshire Hathaway because he believes he can produce a greater return for his shareholders with that cash. Further releasing a dividend is not tax-efficient as it subjects the shareholder to a double tax, first on the corporate level via a tax on profits and second on the actual dividend being paid out. If the company is truly run well, the most efficient way to a return is by the company not paying out dividends.
This is not to say dividends don't have a place, depending upon the situation. Stay tuned for more discussion and analysis in this arena.
Agree/disagree/ferociously disagree...share your thoughts below.
Subscribe to:
Post Comments (Atom)
Posts
2 comments:
Buffett's belief that no dividend should be paid out to shareholders is wrapped around the assumption that the management of the company is better equipped to get a return on that money than the shareholder is, as well as the idea that the market and share prices positively progress between a start and end point (typically an undefined "long" range for Buffett). Further, the idea is wrapped around the belief that investors are rational and recognize value. I just don't buy it... as the market has shown lately and throughout history, even some of the largest, most respected companies are run by fools and crooks. At any given time, you can find a stock that is undervalued or overvalued.
Does this mean that a maximum return through divindeds is the answer? Absolutely not. If a company doesn't reinvest in itself, is it really worthy of your investment? That's a question best answered by your investment goals and styles, but as far as value investing is concerned, the answer is no.
What's the right answer? In my opinion, you need a mixture or return and reinvestment. Jim Cramer likes this mixture and puts his dividend yield range in the 4%-8% range. While I don't subscribe to the idea that one range fits all investments, I generally agree with the concept. For example, Cramer would rule out a company like GE that currently has a dividend yield around 11%. That's where a well rounded investment philosophy comes into play. I love GE as a value investment, as a durable competitive advantage company, and the dividend is just the cherry on the top. Buying GE, the dividend (assuming it stayed the same) would pay off your initial investment in 9yrs and anything beyond that point would be profits. That's completely separate from the changes that would likely occur in the per share price in that time span.
Stay tuned for more on the discussion of dividends and how they can be used properly.
Post a Comment