Tag: Dividends

  • Dividends are overrated

    A couple of weeks ago an interesting article was posted on Stockopedia:

    'Dividends are more reliable than accounts' 

    This is a pretty bold statement and, having ruminated on it a bit, one I can't help but disagree with. I started typing a comment by way of response on there, but having got a bit long, I figured I'd move it over here with a suitably gauntlet-laying title. My teachers always did say I was prone to exaggeration! Click through and read the article for yourself if you want to get it from the horse's hooves, but I'll attempt to summarise the author's argument here as fairly as I can:

    Active management is bad because it's difficult to spot profit warnings coming, and difficult to discern future profitability. It is better to base investment decisions on a 'fundamental measure, like dividends'.

    On unreliability

    The charge that accounts are unreliable is one that comes up quite often. I note one thing to start with; if you like investing in AIM-listed Chinese companies, or exciting little oil & gas plays, I sympathise with you - you might well find published accounts a decidedly questionable source of information.  (more…)

  • Friday Reading

    The Dividend Dilemma

    If there's a subject that seems to get people talking, it's dividends. Those semi-annual payments seem to be a gift from the heavens for some investors, a tangible reward for holding assets whose returns are otherwise extremely volatile. On the other extreme, in a more textbook academic argument, is the point that dividends are basically a semi-liquidation of a company you put your money into because you believe it can earn greater returns on that capital than you can - and, since dividends are still horribly tax-inefficient, it's simply a lose-lose game to placate (irrational) investors. I'm somewhere in the middle. I'm wary of those who hunt for dividend yields as a primary objective, but I would probably say that, ceteris parabis, I'd prefer a stock yielding 5% to one yielding 2%.

    What got me thinking about the topic, then, is a great article on Stockopedia - and an equally great tree of (as of writing this!) 34 comments. As with much of writing on investment, the article starts with the base premise being that of a sort of efficient market concept - that dividends are fundamentally inefficient, and that in a rational world they shouldn't be paid. It then goes on to list several examples of where dividends may be a sort of rational choice, given a number of explanatory factors. I should state at this point that, if the tax laws work so as to make capital gains more advantageous than dividend payments, I don't think there's any advantage of dividends over share buybacks, barring those fluffy psychological ones - people prefer them, for some reason. If we're talking about share buybacks vs. dividends, then, I'm in the camp of returning money to shareholders the most efficient way. Owning a stock, in my book, implies that you think a share buyback is more efficient than a dividend. You are saying you prefer to have the stock of the company than the equivalent amount of cash. Hence - no matter what the P/B or P/E, you should prefer to increase the percentage of the company you own (through a buyback) than your cash (through a taxed dividend). (more…)