Dividends: A Good Problem Or Sign Of Weakness?

Includes: ABT, DOV, JNJ, XOM
by: Pey Shadzi

A few months back at the solar company I manage in San Diego, the president of our company called an emergency meeting. "Listen up everyone, today we find ourselves in an interesting situation."

As it turns out, a marketing venture we had taken on weeks earlier just happened to be wildly successful and a new wave of customers were literally causing our phone to ring off the hook asking for bids and signing contracts. We broke a company record for monthly and quarterly sales during this short time. As the meeting continued and we brainstormed ways of dealing with our newfound business, a coworker leaned over to me in a cavalier manner and quietly whispered, "well this is a good problem to have, wouldn't you say?" As I leaned back in my chair, I wasn't so sure.

As my head hit the pillow that night, those words never stopped running through my head. ...Good problem to have, wouldn't you say? Good problem to have, wouldn't you say?...

After thinking about it a bit more over the last few months, I've somewhat resigned myself to the idea that there is no such thing as a "good problem." A problem is something you have to deal with and take care of. A success is something in which you are grateful for and illustrates your ability to perform.

Then, as I often do, I began thinking about dividends, wondering if blue chips ever feel they have a "problem" of making too much money. I mean, why else would they dish out so much money to their shareholders each and every quarter?

Practically speaking, companies that pay dividends usually have more money than they know what to do with.

Ironically, when a company dishes out billions of dividend dollars to investors annually, it could be considered a "good problem to have" by my coworker. In other words, their profits are so juicy that they're free to distribute excess cash to one of their most prized possessions: you, the shareholder.

But then again, we don't normally think about dividends as a "problem;" rather, we think of them as an exciting way to compound our wealth, increase our net worth and support ourselves when we are lucky enough to live off dividends and other sources of income. But the argument could be made that dividends are a "good problem" for a company to have. I suppose it's ultimately up to you to decide.

Some growth-oriented investors may argue that a dividend is a sign of weakness, a sign that a company has lost its ability to grow and has become somewhat stagnant. I would agree that a company who dishes out a good percentage of its earnings to shareholders could instead use that capital to grow their business. Sometimes this is successful venture, often times not. Using history as our guide, when a company beings to pay a dividend, with few exceptions it generally means it's planning on being around for the long haul.

Personally, I like the idea the companies I own want to reward me for owning a small piece of their business. Better yet, there are a slew of high quality, dividend-paying, well-funded, popular companies out there willing to dish out generous cash distributions to their shareholders on an ongoing basis. Here are a few I own and love:

1. Johnson & Johnson (NYSE:JNJ). With a history of paying dividends since 1944 and a positive upward trend -- $0.16 per share back in 2000 to $0.57 per share this year in 2012 -- JNJ is serious about rewarding shareholders. JNJ's current dividend yield is about 3.5% and with a moderate payout ratio of 54% seems very safe. Few other companies can claim they love their shareholders as much as Johnson & Johnson.

2. Abbott Laboratories (NYSE:ABT). ABT's history of dishing out extra free cash flow to investors in the form of a dividend began in 1924 when annual sales were only $2.2 million. In 2010, Abbott reported global sales of $35 billion. Abbott is another company with serious ambitions of rewarding shareholders who faithfully hang on to its shares. ABT currently sports a yield of nearly 3.5% and, having increased dividends year-after-year for many decades, it's safe to say ABT is likely planning on increasing their dividend for many more to come.

3. Dover Corporation (NYSE:DOV). This dividend aristocrat's history of paying dividends spans back over 50 years. Taking a more recent look though shows DOV has been able to consistently and impressively grow its dividend over the last few years from $0.115 per share back in 2000 to $0.315 per share in 2011. That's some impressive growth and with a payout ratio of only 27%, it's likely DOV will be able to continue to grow its dividends for the long haul.

4. ExxonMobil (NYSE:XOM). XOM has faithfully increased its dividend every year since 1982. Though it's only providing investors with a 2.2% yield, XOM's payout ratio is incredibly manageable at 22% which means we will likely see dividend hikes in the not-so-distant future. With $420 billion in annual revenue and $11 billion cash on hand, it's a safe argument that XOM will continue to reward shardholders for many more decades.

We may not always think about it this way, but when a company decides to pay a dividend to its loyal shareholders, we could consider its ability to generate more cash than what it needs to operate a "good problem." When these companies decide to faithfully raise their dividend for many decades, I suppose you could consider this a "good problem" for shareholders (though you'd never catch me using that phrase). If you ask me, I would prefer to call the ability to consistently reward shareholders year-after-year and decade-after-decade an incredible opportunity to build wealth and secure financial independence.

Disclosure: I am long JNJ, ABT, DOV, XOM.

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