jeudi 21 octobre 2021

Don't talk to me about dividends

It's not my first post about dividends, but I feel like it's my duty to be one of the few people who writes publicly against the importance given to dividends.

Everytime someone writes that he received a certain amount of dividend over a specific period of time, they don't tell us how the stock performed over the same period of time. And nobody becomes rich because of dividends. People become rich because of capital appreciation. 

If you like a business because of it's dividend, it's exactly like liking a business because it gives you some money every quarter. But does the business performs well? The dividend doesn't tells you nothing about that. 

Actually, a high dividend shows that a business cares more about it's shareholders than about itself. 

Yes, that's great to receive money. But what about the company? Does it grow? Will it be much bigger 10 years from now or will it stay the same size? If it stays the same size because it gives all it's money to you and other shareholders, you won't get much richer. You'll just have a sideline revenue that allows you to pay for some luxuries like a few lobsters every quarter. You won't buy a Ferrari with your dividends except if you own 50 000 shares of your favorite canadian bank.

For fuck's sake, chose your stocks among the stocks that have the best growth perspectives, the best profit margins, the best ROE or if it's a monopoly or oligopoly. Don't buy a business because it gives you 200$ every quarter. 

I never talk about dividends with Vicario and that guy, besides being highly desirable, knows what's important to consider. 

Be Smart Rich is desirable too but he doesn't like when I show him my appreciation.

4 commentaires:

  1. But I'm curious to see how many free shares of Royal Bank I get in 20

  2. Sorry Terminator,

    But I disagree...

    There's a line from the famous film noir, 'Double Indemnity'...
    "I never knock the other guy"

    Especially wise words when it comes to investing in the stock market. There is no single successful way of doing it. There are various approaches to making long term profits in the stock market. An investor has to develop the right approach to fit his own psychological makeup and circumstances. Sometimes that may even involve combining different approaches.

    Your argument against dividend investing is too simplistic. The object of dividend investing is not necessarily is invest in high yield stocks (which can often in itself be a red flag), but to invest in stocks that consistently raise their dividend over time. If they do that the share price will follow suit.

    The best investment I ever made was in Brookfield Infrastructure Fund which i bought in the summer of 2010. It was a spinoff out of Brookfield Asset Management (I love spinoffs...thank you Joel Greenblatt). It's a limited partnership so they pay distributions whereas a corporation would pay the end it's the same thing except there is no Canadian tax credit, but since I hold it in my RRSP that is not relevant.

    Check out the long term chart of BIP.UN...There are huge capital gains and my 'yield on cost' (the yield on the cost of my original purchase has got be at least 15 percent and probably more than that).
    Another important point is the age of the investor. In Canada the government forces an investor to withdraw money from his/her RRSP when he/she turns 71, and that gradually increases over time, so the importance of income from your investments becomes more important as you get older.

    In my own dividends have contributed greatly to my over all return.

    But having said all this I don't just invest for dividends alone. I'm always on the lookout for an interesting growth opportunity or spinout if I think it will offer me value over time.
    To sum up, everybody is different and remember it is wise to never 'knock the other guy'

  3. This is my take/view on dividends. To the extent we are ONLY interested in companies that generate above average returns on invested capital, we find ourselves looking at companies that produce growing amounts of free cash flow. This excess cash needs to be re-deployed and so we like to see mgmt exhibit a history of being smart about this deployment. The holy grail of investing is finding companies that are able to re-invest into their business at incrementally high returns. Think CSU or ATD.b or DOL or CACC. If options don't exist we'd prefer that they buy back shares assuming the shares are trading at a level where the forward return of doing this is high (let's say double digits +) as this is most tax efficient. If shares are too high then we'd like them to return this capital to us in the form of a dividend or build cash on the balance sheet and wait for better opportunities to arise. While paying dividends is third on the preferred list of things to do with excess capital it certainly beats lighting the capital on fire which many management teams do by making poor acquisitions, diworsifying the business or the slew of other ways they destroy capital. In short, I'm not a massive fan of dividends but it beats putting the cash in a barrel, dousing with gas and lighting a match.

  4. In Canada we have such little "growthy" companies, we almost have a non-existent genomics industry, no real homegrown drug development companies - we can't even produce our own vaccines, and we give away/share way too much of the intellectual property we generate as a country. The US market gives plenty more opportunities to find growing companies that make a solid impact to our portfolio's. I agree with Penetrator completely, growth needs to be front and center, anything else is a bonus.