dimanche 10 mai 2020

The curse of high dividend

According to many people on Twitter, dividends seem an important aspect to consider before investing on a specific stock.

First thing that comes to mind is that dividends were important when I was beginning on the stock market. That came from Stephen Jarislowsky, in his book. He said something like: "Everyone in the company gets paid. I think that investors should be paid too, because they are the ones who take all the risks!". Great sentence. True and correct. 

However, excellence of a company doesn't come with dividends. That sentence should also be considered.

Back in 2009, I owned some shares of Yellow Pages. It was one of the worst stocks in Canada. And one of the best dividend stocks (14% dividend in 2009-2010). 

If I would have been able to understand the metrics about Yellow Pages, I would have been horrified instead of being excited. To me, that company, even if it's one of the worst possible examples, represent the fact that dividends can't compensate for all the rest. 

The higher the dividend, the less a company keeps money for itself to pay back debt, to buy back shares, to invest in itself, to buy another company, to keep money for a crisis like COVID, etc. In that regard, a dividend reduces the possibilites that a company could have. 

Plus, these days, we've seen many GREAT companies cut their dividend. There may be very little chance that this would occur in the future, but right now, we see that dividends shouldn't be taken for granted. For instance, Disney, TJX, Estee Lauder and Richelieu Hardware, all great companies, have suspended their dividends because of the crisis. 

Plus, very few high dividend stocks are great performers in the long term. Let's take a look at some names (I've taken stocks from various sectors: energy, banks, publicity, public services and technology):

Suncor Energy
Current dividend: 3,5%
Performance last 5 years: -39%
Payout ratio: 90%

Scotia Bank
Current dividend: 6,8%
Performance last 5 years: -20%
Payout ratio: 52%

Wells Fargo
Current dividend: 8%
Performance last 5 years: -54%
Payout ratio: 69%

Current dividend: 4,7%
Performance last 5 years: -27%
Payout ratio: 43%

Current dividend: 7%
Performance last 5 years: -14%
Payout ratio: 105%

Current dividend: 5,3%
Performance last 5 years: -28%
Payout ratio: 64%

All of these stocks have had a negative performance over the last 5 years. During that time, the S&P500 had a performance of 42%. 

The shareholders of these 6 big companies that are qualified of "Blue Chips" by many, have been paid to keep shares that did way worse than the market over the last 5 years. 

2 commentaires:

  1. the good thing about dividends is most of the times (but not always) they are paid from free cash flow. so the quality of the business is descent. investors would be better served to look at free cash flow generation only as an indicator of whether to own the business than "whether it pays a dividend". a free cash flow yield of 5% with an ROIC of 25% will weed out most all of the stocks mentioned above.

  2. Investing in dividend stocks are more effective if you're looking for a higher guarantee of steady income. This only works of course if the dividend doesn't get cut and the stock price will one day at least be even to what you bought it at -- Canadian bank, utility and telecom stocks?