Dividends - The Ultimate Bird in the Hand

The saying 'A Bird in the Hand is Better Than Two in the Bush,' really can be used to describe several life choices, as well as financial decisions. For example you might apply this credo to the following decisions:

• Should I take part in a lottery pool with my co-workers?
• Should I accept a lower amount for a prepayment for my goods or services than I would for a 'net 30 days' or more type of credit arrangement with an unknown credit risk?
• Should I accept a position with company X now, even though company Y might hire me for more pay and benefits at a later date?

Dividends, the Ultimate Bird in the Hand

I've explained in the past some of the reasons why I am so focused on dividends as part of my investing strategy. Dividends have a human side and they're something to fuss over. Another reason I like dividends comes back to the 'Bird in the Hand' concept:

Companies like TD Bank (TD) and IGM Financial (IGIFF.PK) constantly garner fee revenue each day without having to really employ many intensive resources. Inter Pipeline [IPL.UN], Fortis (FRTSF.PK), and CP Rail (CP) generate consistent revenue as well by various means including the distribution of electricity, energy liquids, and goods. These functions are part of every day life for these companies and if they can keep their costs down the result is pure, consistent profit. The challenge for these company's is growth. The easy part is their consistent, stable, fee-type revenue.

When I make an investment in a company I am looking out several years so that someday I will receive 'two in the bush' in the form of a tidy capital gain. In the meantime though, why can't the company pay me for my trouble? They can pay me out of their stable fee-type revenue in, ideally ever increasing amounts, called 'Dividends'. These dividends will be some fraction of the actual capital that the company requires for it's future growth. I rely on the company to grow and provide my two in the bush someday, but for now I'll take my bird in the hand now as payment for the capital that I am providing the firm.

Comments

[cloclo:]

Periodic sales of small portions of one's stock can serve just as well as dividends. The advantages include control of the timing and the amount, and also the tax treatment when capital gains are taxed at a lesser rate than dividends (which have heretofore been generally treated as ordinary income). It takes a bit more effort, and there may be a selling commission ($10 or less) to pay, but controlling one's taxes is an important advantage which most financial advisers seem to overlook.

2008 Dec 07 05:32 PM

[CoverIsBetter:]

With all due respect to your expertise.. TD?

That company has lost over 50% of its value in the past 2 years and yields Under 6%. Could you use a better example?

I don't even want to talk about Rule of 72 or any other reason why 6% yield sucks. Taxes, maybe?

Why not a Tax Free Muni fund like EVN yielding 10%?

2008 Dec 08 12:36 AM

[YoYoMama:]

Taxes, taxes, taxes. IRA and 401(k)...no taxes until funds are withdrawn.

2008 Dec 08 09:39 AM

[secmaven:]

Are dividends paid out of profits or cash flow from depreciation that should be reinvested to maintain the company's capital base? That is a critical question. All dividends are not equal. If paid out of capital the investor will receive nothing but a return of capital and find the price of the stock dropping year by year to reflect economic realities.

2008 Dec 08 01:54 PM