Chris B

Tough Times for Dividend Investors

Dividends are being cut because they don't make business sense right now.

Today's "dividend aristocrats" are increasingly the companies who chose to take on (or maintain) debt at ~7-10% to pay dividends to their investors, who are in turn earning 2% on those dividends in money market and bank accounts. Those investors are doing the equivalent of borrowing from the bank to earn interest in a savings account.

That math just doesn't compute for me.

Rating the Top 12 U.S. Banks - From Hidden Gems to Zombies

"In this context, management’s dividend policy is a good indicator: If the dividend is maintained, rather than being sharply cut or suspended, management is probably genuinely confident about the bank’s position and outlook."

Wrong. It means that the bank is withdrawing desperately needed cash from itself as a roundabout way of compensating the stockholding executives, all of whom see the writing on the wall. And they're borrowing money to do this - at junk bond like interest rates.

Over 20% of USB insider shares have been sold in the last 6 mos. as yield-chasers have until recently kept the stock price propped up. finance.yahoo.com/q/it...

Folks, if you owned a company outright, would your net worth increase if you made your company borrow at 8% to pay a dividend, and then put your dividend in a bank account earning 3% (at the same level of risk/certainty as the interest on your debt)?

No. Paying 8% to earn 3% is a negative carry trade. As an added bonus, you would get to pay a 15% dividend tax for this value-destroying trade!

Even if the company has 0 debt, you're just trading $1 of equity for $1 is cash (and paying taxes, so make that 0.85). In theory, you're invested in the stock because you think the company will have a higher ROE than you could get with cash. What's the point of reversing that trade through dividends, but not selling the stock?

Yet to some stock buyers, this somehow seems like a good deal. Stocks are not bonds. If you want yield, buy bonds. If you want to buy stocks, consider the whole business model. In my opinion, bank dividends are a negative in this environment.

The Banker's Choice

OK, so no banks will be collapsing anytime soon. That was step 1 of getting out of this crisis. The losses to the FDIC from just a handful of large bank collapses would have been bigger than TARP.

Step 2 is helping out the consumer. Pouring more cash into the already overflowing banks isn't going to put people to work so they can buy houses, cars, products, and services. It will take a massive amount of work to update our infrastructure, reinforce our defenses against natural disaster, decrease our dependence on unreliable fossil fuels, and rebuild our inner cities. It's time to put all those unemployed people to work on projects that will pay dividends for years.

Has GE Capital Stopped Lending Entirely?

I bet USB is cleaning them out.

Rescue Funds Fueling Buyout Deals Instead of Loan Increases

Great.... for this our national debt has been doubled to a sum that we will never be able to pay off. Perhaps I'll start playing with mud and sticks now so that I can have a future in homebuilding.