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Robert Allan Schwartz
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I'm a computer programmer and teacher of computer programming. I am self-employed, and manage my own SEP/IRA and investments for retirement. My personal investing goal is to own a portfolio of dividend growth companies such that: 1) The overall portfolio dividend income is sufficient to pay for... More
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  • The Peacock's Tail And Dividend Growth Companies 27 comments
    Jun 12, 2013 7:37 AM | about stocks: DBD, PG

    One of the most magnificent sights in nature is the peacock's tail:

    Scientists from Charles Darwin onward have wondered, "Why do peacocks have such a tail?"

    The disadvantages are obvious:

    1. A complicated body part like that tail might require lots of DNA to describe.
    2. An average peacock tail has 200 feathers, which are shed and regrown every year. That uses up a lot of calories.
    3. Keeping the tail feathers clean and preened uses up a lot of calories.
    4. The tail is heavy; raising it and lowering it uses up a lot of calories, and makes flying more difficult.
    5. The tail is long, perhaps twice as long as the bird's body itself (see photos below).
    6. The tail makes the peacock slower, and more noticeable to predators.

    Each of those reasons would seem to reduce the peacock's fitness and ability to survive and reproduce.

    So you have to wonder: "How does the peacock survive and reproduce despite such a handicap?"

    Many scientists have tried to answer this question, with varying degrees of success.

    One scientist said, "That is the wrong question to ask."

    Amotz Zahavi wondered, "Maybe the peacock survives and reproduces because of (not despite) such a handicap." This is called Handicap Theory. Handicap Theory says that a male who has such a handicap is signaling females: "Choose me! I am so good at surviving and reproducing that I can do so even with this handicap. I am more fit than other males. Choose me!"

    How does this relate to investing and Seeking Alpha?

    Investors have wondered, "Why do companies pay (and raise) a dividend?"

    The disadvantages are obvious:

    1. Paying a dividend reduces available cash with the company, which could have been used for research and development, acquisitions, etc.
    2. Paying a dividend reduces the company's retained earnings.
    3. Paying a dividend reduces the price of the company's shares.

    Each of those reasons would seem to reduce the company's fitness and ability to survive and grow.

    So you have to wonder: "How does the company survive and grow despite such a handicap?"

    Many investors have tried to answer this question, with varying degrees of success.

    I say, "That is the wrong question to ask."

    I wonder, "Maybe the company survives and grows because of (not despite) such a handicap." Handicap Theory says that a company who has such a handicap is signaling investors: "Choose me! I am so good at surviving and growing that I can do so even with this handicap. I am more fit than other companies. Choose me!"

    Many dividend growth companies have paid (and raised) their dividend for 50 or more years. Diebold (NYSE:DBD) has paid (and raised) their dividend for 60 consecutive years. Procter & Gamble (NYSE:PG) has paid (and raised) their dividend for 57 consecutive years. Others in this elite group include AWR (59 years), PH (57 years), NWN (57 years), GPC (57 years), DOV (57 years), EMR (56 years), MMM (55 years), VVC (53 years), CINF (52 years), LOW (51 years), LANC (51 years), JNJ (51 years), KO (51 years), and CL (50 years). These Peacock Companies have demonstrated their ability to survive and grow over decades, during wars, natural disasters, recessions, etc. They appear to me to be more "fit" than other companies. When they say, "Choose me!", I do!

    Disclosure: I am long JNJ, KO, PG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: DBD, PG
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Comments (27)
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  • maybenot
    , contributor
    Comments (6633) | Send Message
     
    Robert -- seems you are on to something there.

     

    Dividends (handicaps) do cause us to "look" at the company -- and go "well, looky there!"

     

    Then, as a good penhen we do further dd and check out the peacock and his strutting about.

     

    If we like what we see -- we get it on.

     

    Thanks for the science inflection -- love what evolution reveals.
    12 Jun 2013, 09:28 AM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (20746) | Send Message
     
    Author’s reply » Hi maybenot,

     

    Thanks for reading my article!

     

    I agree that it is worthwhile to look at what evolves, because what evolves is likely to continue to survive and grow.

     

    Robert
    12 Jun 2013, 09:39 AM Reply Like
  • David Fish
    , contributor
    Comments (9283) | Send Message
     
    Great analogy with the peacock, although I'm a bit reluctant to agree that dividends are a disadvantage. Still, it's clear that these companies are more than capable of "overcoming" any negative aspect that dividends may "entail."
    12 Jun 2013, 09:51 AM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (20746) | Send Message
     
    Author’s reply » "I'm a bit reluctant to agree that dividends are a disadvantage."

     

    Dave, of course I agree with you, but as we well know, many folks at SA have expressed their wish for companies to never pay a dividend, as that reduces share price, which they see as a negative.
    12 Jun 2013, 10:00 AM Reply Like
  • David Van Knapp
    , contributor
    Comments (13242) | Send Message
     
    Fish, I got it...enTAIL.

     

    Robert, really good article! Charlie Munger says to invert. This turns the conventional line of inquiry on its head. I think the conventional wisdom that companies hamper themselves by paying dividends is wrong, at least a great deal of the time.

     

    Dave
    13 Jun 2013, 08:51 PM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (20746) | Send Message
     
    Author’s reply » DVK, thanks for explaining Fish's pun. I didn't get it. :-(

     

    I'm flattered that you think I have "done a Munger". My first time! :-)

     

    Thanks,

     

    Robert
    14 Jun 2013, 08:48 AM Reply Like
  • User 6707651
    , contributor
    Comments (999) | Send Message
     
    I think dividends provide an advantage in that they 1) can't be faked - dodgy accounting or not, the money has to be paid 2) take money off the balance sheet that may tempt otherwise prudent managers to utilize their resources and make asinine acquisitions (see Microsoft and Cisco for the best examples) 3) are a demonstration that a company has a working business plan that is producing profits
    12 Jun 2013, 10:29 AM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (20746) | Send Message
     
    Author’s reply » User, I absolutely agree with all your points.

     

    Robert
    12 Jun 2013, 11:14 AM Reply Like
  • Miz Magic DiviDogs
    , contributor
    Comments (5151) | Send Message
     
    Great blog! Bring on the peacocks! :)

     

    Miz
    12 Jun 2013, 02:18 PM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (20746) | Send Message
     
    Author’s reply » Thanks, Miz!

     

    Happy Peacock to you!

     

    Robert
    12 Jun 2013, 02:22 PM Reply Like
  • Diver Down
    , contributor
    Comments (67) | Send Message
     
    Fun and interesting analogy, RAS!

     

    ...just make sure those fabulous feathers aren't tacked on to a turkey like PBI!

     

    Gobble, gobble.
    12 Jun 2013, 04:00 PM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (20746) | Send Message
     
    Author’s reply » Thanks, Diver - I will do my best!

     

    Robert
    12 Jun 2013, 04:39 PM Reply Like
  • Bob Wells
    , contributor
    Comments (7753) | Send Message
     
    Nicely Done Robert....

     

    Bob
    12 Jun 2013, 05:39 PM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (20746) | Send Message
     
    Author’s reply » Thank you, Bob!

     

    Robert
    13 Jun 2013, 08:25 AM Reply Like
  • Chumpmenudo
    , contributor
    Comments (741) | Send Message
     
    RAS, I really enjoyed the article, thanks.

     

    My thought on dividend payers runs along the same lines. Paying dividends forces good behaviors/habits, and is a proof of fitness.

     

    I once heard a good speech given by a Toyota executive where he said they had a saying within the company: "Tough times create good habits, and good times create bad habits."

     

    Perhaps dividends are a way to force good habits even during good times ;-)

     

    Best,

     

    Chump
    12 Jun 2013, 06:57 PM Reply Like
  • maybenot
    , contributor
    Comments (6633) | Send Message
     
    Chump -- good point, it does seem to hold a company to less radical or nearsighted thinking.

     

    I like good habits.
    12 Jun 2013, 07:34 PM Reply Like
  • dividendbonanza
    , contributor
    Comments (482) | Send Message
     
    Chump, that is a great quote from the Toyota exec. It reminds me of observing many people that grew up during The Great Depression, they learned to be frugal and maintained that mindset through their life. I like companies that understand the tough times approach, especially those that share the rewards with us via dividends.
    12 Jun 2013, 07:45 PM Reply Like
  • Chumpmenudo
    , contributor
    Comments (741) | Send Message
     
    I agree; and not just frugal, industrious!
    12 Jun 2013, 07:52 PM Reply Like
  • PendragonY
    , contributor
    Comments (11202) | Send Message
     
    Exactly Chump,

     

    A quote I like is "The prospect of imminent death focuses the mind wonderfully!" Having to pay out a good size chunk of change every quarter causes those companies to be more focused on efficiently using the remaining cash.
    13 Jun 2013, 06:57 AM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (20746) | Send Message
     
    Author’s reply » Chump, I like that quote!

     

    Thanks,

     

    Robert
    13 Jun 2013, 08:25 AM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (20746) | Send Message
     
    Author’s reply » Pen, I believe that quote is from Oscar Wilde, and I agree with the quote and with your point about focus and efficiency.

     

    Robert
    13 Jun 2013, 08:26 AM Reply Like
  • Guitar Man
    , contributor
    Comments (227) | Send Message
     
    Excellent article, Robert. Nice analogy, too.

     

    In my book, no disadvantages whatsoever for DG companies/stocks. When a well-managed, high-quality company raises its dividend, it's always for good reasons.

     

    Advantage: Investors.
    12 Jun 2013, 07:48 PM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (20746) | Send Message
     
    Author’s reply » Thanks, Guitar Man!

     

    I agree there are no disadvantages to dividend growth companies.

     

    In fact, I'm delighted that many folks who care only about capital gains might view dividends as a "disadvantage" - they don't compete with me for the companies I want to own, so I can buy them for less!

     

    Robert
    13 Jun 2013, 08:27 AM Reply Like
  • Tim McAleenan Jr.
    , contributor
    Comments (1999) | Send Message
     
    Robert, great points! I'm a sucker for a good analogy. Very creative.
    12 Jun 2013, 08:58 PM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (20746) | Send Message
     
    Author’s reply » Thanks, Tim!

     

    I'm still hoping to be in your league some day.

     

    Robert
    13 Jun 2013, 08:27 AM Reply Like
  • AgAuMoney
    , contributor
    Comments (4635) | Send Message
     
    Great analogy, Robert!

     

    I've never thought to apply handicap theory to dividend growers, but it sure seems to fit.

     

    Everything I look at as advantageous to me as a dividend growth investor, could at the first level analysis be a disadvantage to the company. Only by looking deeper can we see it might actually be better for the company, like a peacock's tail. Or maybe like working out...
    12 Jun 2013, 11:50 PM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (20746) | Send Message
     
    Author’s reply » Ag, good point about working out - I hate to do it, but I feel worse if I don't. :-(

     

    Robert
    13 Jun 2013, 08:28 AM Reply Like
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