Arnold Landy's  Instablog

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TradingHelpDesk Comments (538)
 
But haven't dividend paying stocks outperformed non-dividend paying stocks over the long term?

Maybe better run companies can consistently make profits and share those profits with shareholders annually?
21 Nov 2009, 09:13 AM Reply Like

Arnold Landy Comments (28)
 
That is an interesting question. I am not aware of studies that have compared dividend-paying stocks with those do not pay dividends. Even if a difference were found, the two groups are so diverse that knowing if one group outperformed the other would not be very useful. After all, among dividend payers there are many fine companies, but many clunkers, too. Companies in decline often keep paying a dividend even as their financial situation worsens. AIG even raised its dividend a few short months before its demise in order to reassure investors. GM paid a dividend thoughout most of its many years of decline. Likewise, among non-dividend payers, there are stocks heading for oblivion, but many young, fast growing companies on their way to becoming tomorrow's dividend-paying blue chips. And don't forget success stories like Warren Buffett's Berkshire-Hathaway, which has never paid a dividend. Just knowing whether or not a company pays a dividend is, by itself, not very useful. Thanks for your comment.


On Nov 21 09:13 AM TradingHelpDesk wrote:

> But haven't dividend paying stocks outperformed non-dividend paying
> stocks over the long term?
>
> Maybe better run companies can consistently make profits and share
> those profits with shareholders annually?
21 Nov 2009, 07:45 PM Reply Like

richjoy403 Comments (6543)
 
I am not a dividend investor, however...

Mr. Landry's view of dividends is interesting, but I'm not yet convinced;I would think there would be many studies comparing dividend paying stocks to those that pay no dividend.

I do believe I have read many times that over a period of years, buying dividend paying stocks (especially those that grow their dividends), and reinvesting those dividends, has produced far greater returns than owning bonds...still, that does not negate Mr. Landry's thesis (which is that investors should not consider a dividend as a positive when evaluating the purchase of a stock) .

If one can equate dividends to "value" stocks, I also understand that over the long run, value stocks have historically outperformed growth stocks...again, this does not directly address Mr. Landry's thesis.
21 Nov 2009, 08:01 PM Reply Like

StockMasterFlash Comments (69)
 
A dividend is a good thing for any company that regularly earns cash above its expenses and any possible expansion/growth expenses if they have a stable business and good balance sheet.
22 Nov 2009, 02:56 AM Reply Like

Low Sweat Investing Comments (563)
 
Your hot dog cart analogy makes a fair point – avoid investing in broken businesses with no revenues or earnings, and that are paying out the last of their cash pile. (For the record, I’d avoid eating their last hot dogs, too.)

But dividend stocks, in particular those with a record of increasing dividends, can be smart investments. As for research, I wrote an article on the consistent outperformance of dividend-growers. The research findings are quite clear: these stocks outperform.

Additionally, with regard to your point about the pain of recent years and dividends not cushioning stock prices: hold the mustard.

The pain was real, but I would propose it was a sector and industry problem, not a dividend stock problem. Check out this weekend’s Wall St. Journal: in 2008 dividend payers’ total return was 6 percentage points ahead of non-payers.

So financials were the disaster, not dividend stocks. And not to belabor this, but I also wrote articles on dividend-growers in healthcare, industrials and technology that outperformed the market, as well as their sector benchmarks, over a number of trailing time-periods. (And other authors on the site have written far more than I have.)

All that said, I enjoyed reading your post. Your points about cash generation and assets are insightful; your headline is a guaranteed traffic-stopper; and your disclosure shows you know how to pick good dividend stocks.

I hope you submitted this post for publication as an article. If so, I think you’ll get plenty more comments; I’ll even re-post this one.

But I’m still going to avoid those hot dogs.
22 Nov 2009, 01:16 PM Reply Like

Michael D. Comments (170)
 
Growing companies, growing cash flows, who grow their dividends at a rate which keeps their payout ratio relatively low (less than 40%) are the dividend investments with value. You should write an article about these companies (INTC, JNJ, etc.)

Your 'hot dog' analogy is of the broken, mature business being raided for its cash (there were a few 'special dividends' announced last month intended to scare off corporate raiders).
22 Nov 2009, 05:50 PM Reply Like

David Jackson Comments (1115)
 
Arnold, thank you for a stimulating article about a topic I'm personally interested in (seekingalpha.com/artic...).

Two additional issues about paying out cash to investors are:

1. Do companies that return profits to shareholders produce larger total returns to investors than companies that reinvest their profits in their businesses? Warren Buffett, for example, *never* returns cash to investors.

2. Even if companies do decide to return cash to shareholders, are dividends superior to share buy backs? Buy backs are usually more tax efficient (they leave it up to the investor whether to realize the gain by selling stock), but they also benefit those who own options as well as those who own stock. In companies where options issuance is problematic, returning cash to shareholders by paying dividends may be better.
5 Feb 2010, 09:01 AM Reply Like

Will Menzies Comments (7)
 
Warren Buffet does, however, invest heavily in dividend growth stocks (KO, PG, JNJ, WMT, etc.)
9 Feb 2010, 05:49 PM Reply Like

David Jackson Comments (1115)
 
Will, you're right about that Buffett likes dividend paying stocks, but this is what ForMyOwnAccount wrote about this in his article Why I Hate Dividends (seekingalpha.com/insta...):

"Note that Berkshire's own love of dividend-paying investments such as Goldman and GE stem from the favorable tax treatment that corporations get from preferred-stock dividends, namely that federal tax law requires corporations to pay tax only on 30% of a preferred stock dividend, while individual investors must pay tax on all 100% of the preferred dividend. This means that fully 70% of the dividend that Goldman and GE pays Berkshire is tax free. Mr. Buffett knows how to use tax laws to his advantage"

I'd add that Warren Buffett is a better capital allocator than the CEOs of the publicly traded stocks he invests in -- so he's happy for them to pay him dividends rather than invest the capital themselves. But that's not true of most individual who receive dividends.
9 Feb 2010, 07:55 PM Reply Like