captainccs

10 by 10: A New Way to Look at Dividend Yield and Growth

Dividend reinvestment is a good idea only if the underlying stock is your best buy at the time of the reinvestment -- it might or it might not be.

I love the 10 by 10 math, it's a great guide. But one must not forget that the company has to be able to cover the growing dividend from earnings and cash flow. Can the company grow at the required rate? Again, advantage to high dividend yield companies provided the dividend is well covered by earnings and cash flow.

Dividends: A Company's Leading Indicator

I believe it's a case by case issue, can the company invest the money better than you can? Typically new, growing companies can use cash wisely, for example, True Religion and Buffalo Wild Wings are using it to grow their retail chain. On the other hand, older, tired companies like Microsoft and Bank of America, instead of wasting cash on "diworsification" and empire building should return most of the earnings to shrehiolders via dividends.

Buffett is an interesting case: no dividends and no stock buy backs. Stock appreciation of BRKA from inception on Jan 12, 1990 is 13.3% vs. 5.4% for the S&P 500 and 7.6% for NASDAQ. Considering taxes, you would have had to earn more from dividends than Buffett's 13.3%. But then, had you bought BRKA in the second quarter of 1998 at close to $80 K, you would be in sad shape.

Buying at the right time is very important, the lower you buy the higher the dividend yield you get.