Insist on Dividends

Always insist on dividends. As a shareholder, you are entitled to your pro-rata share of earnings. They are the stock market’s safety belt.

Consider the 90 years through December 2016. According to a study by Hendrik Bessembinder, a professor at Arizona State University, there were almost 26,000 publicly traded U.S. companies during this stretch. They were listed for an average of just seven and a half years. Some of the companies that disappeared would have been bought out—but many others would have been delisted as they struggled financially on their way to extinction. In fact, only 36 stocks were around for the full 90 years.

From Jonathan Clements at Humbledollar.com

Companies come and go……………..frequently. They need to pay you because chances are they are going to disappear anyway. I know, I know, many disappear through acquisitions or other “Non-bankruptcy” means, but those deals often happen under “distressed” situations. I prefer to get my money now.

For example……

Take General Motors, which was delisted from the stock market in 2009 after filing for bankruptcy. The share price when it was delisted was 61 cents, down from $93 less than a decade earlier. (Since late 2010, a new GM stock has been trading, but that was the result of a subsequent initial public offering.)

As Bessembinder notes in his paper, GM paid out more than $64 billion in dividends over the decades prior to its bankruptcy, plus it repurchased its shares on multiple occasions. That means that, even though the stock ended up worthless, its shareholders still made money. “GM common stock was one of the most successful stocks in terms of lifetime wealth creation for shareholders in aggregate, despite its ignoble ending,” Bessembinder writes. In fact, over the 90 years that his study covers, GM ranked eighth among all U.S. corporations when it came to creating wealth for investors.

From Jonathan Clements at Humbledollar.com

As seen above, dividends mitigate risk enormously. Even though GM zeroed out, the shareholders had been given $64 billion dollars. That is significant. When Enron went to zero, what had their shareholders gotten to date? By my memory, nothing. They got nothing. Nothing. Getting nothing for your investment is the worst case scenario. This must be avoided.

Dividends reduce cash available to management. Some people think that is bad. Some people want “the management” to reinvest it for them. I’ll reinvest it myself, thank you. I like the companies I invest in to be beholden to that payment schedule. It makes them frugal. I like them to be focused on core business activities, not developing “the next big thing.” Dividends keep companies lean. To that point……..

Reducing cash on hand reduces the possibility of the management increasing the value of the stock through acquisition. Here’s the game. If a big company trades at a price to earning ratio of 20 to 1, the stock price will be $20 for every $1 in annual earning generated. If that big company can buy a smaller company at 10:1, they’ll do it. The earnings of the acquisition will be added to the P&L of the big company and will boost the stock price by $20. The “management” spends $10 to get a stock price bump of $20. Sounds good huh? No. I’ll buy shares in the smaller company myself. I’ll buy two shares for $20 instead of them spending $20 to net out a $10 increase in share price. In doing so I’ll also be diversifying. The big company needs to execute on creating the primary good or service, not become a mutual fund or holding company. Give me my money.

Dividends are cushion. If you are a retired person and need $60,000 per year to get by chances are you’ll have about $20,000 per year in social security coming in. If the dividends on your $500,000 retirement account are at 2.5% you’ll get another $12,500 per year. You’re over halfway there. You’ll be able to live off the retirement account for 24 years IF the stock doesn’t appreciate at all. If the stock goes up 3% per year you’ll be able to live on it for 63 years.

Haters are saying you could do that if the capital gains are 2.5% + 3% for a total of 5%. They are right. Dividends give us an option they don’t care about. In our scenario we are short $28,500 per year. If you were to have another $55-60,000 of cash in your holdings, the dividends will allow you the luxury of not selling stock for up to two years at a time. Dividends can help us weather the storms. Depending on capital gains is riskier.

By paying out regular DECLARED payments, dividends make it easier for you to plan. (I suspect dividend payouts reduce beta, the measure of volatility in stock prices. I need to research this.) I know i’m going to get around 2.7% of my stock portfolio in cash. The capital value may drop, but I’m still getting that. What do you KNOW you are going to get from your stocks over the next 4 quarters?

Geraldine Weiss, who ran Investment Quality Trends for decades and is a teacher of mine said, ” If a company doesn’t pay a dividend, it’s a speculation.” I don’t have enough money to speculate. I have to invest in companies that yield value. I have to invest in companies that pay dividends.

12 thoughts on “Insist on Dividends”

  1. What are your thoughts on Berkshire Hathaway stock given they don’t pay dividends? Do you make exceptions in cases like this? Even so, this article gave me a good perspective on making the companies pay me vs pure equity growth.

  2. So what do you look for in a good dividend stock? I would assume stability and consistent profits quarter after quarter, but I’d like to hear your opinion.

    -Andrew

  3. I know no one has commented on this in months but I just wanted to add this in case people are looking at this in the future and wanting to ask the same thing Andrew is.

    I would suggest starting with Geraldine Weiss and her books; ‘Dividend Don’t Lie’ and ‘The Dividend Connection’. Kelley Wright; who I believe was Geraldine’s predecessor at Investment Quality Trends also wrote a book ‘Dividends Still Don’t Lie’ which can also be found as an audiobook.

    I am guessing since Scott named Geraldine Weiss as a teacher that these books will give you a good introduction to a dividend investment strategy that he would approve of.

  4. So…thinking through this. Let’s say I have 30 years until retirement wouldn’t I be better off to put money in an index fund and reinvest dividends for compound interest sake. Now let’s say I get to age 60 and want to retire. If I had put my money in a roth ira with average market returns I should have north of 1 million.

    Many people say near retirement to get a lot of bonds in your portfolio I’m not sure I agree with that. Let’s say I have a portfolio with 70% bonds at age 60 and live until 90 then I would have made very little off my portfolio those last 30 years. I like the idea of insisting on dividends at retirement age where you want to know exactly what you’re getting and can stay invested heavily in stocks.

    Enjoy the discussion, fire back with anything I’m missing.

    1. “average market returns.” There’s your problem.

      There will be no such thing for you between now and 60.

      You’ll see.

      Meanwhile it’s an existential threat to chase “market return.” When you capture a dividend, you at least get that.

      We are due for a BIG drop. BIG.

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