Author Topic: Larry Swedroe argues against investing for dividends  (Read 3054 times)

talltexan

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Larry Swedroe argues against investing for dividends
« on: November 09, 2017, 08:49:11 AM »
https://www.advisorperspectives.com/articles/2017/11/06/slaughtering-the-high-dividend-sacred-cow?

I've generally argued for dividends in the past, but I'm thinking of changing my strategy. Reactions?

seattlecyclone

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Re: Larry Swedroe argues against investing for dividends
« Reply #1 on: November 09, 2017, 09:41:49 AM »
A lot of us have been arguing against a dividend focus for years. Assuming a company can get equal returns investing its profits back into its own business compared to what its shareholders can get by receiving the profits as cash, the former option is more tax-efficient. The investor gets to realize their taxable income on their own schedule by selling shares, rather than on a schedule set by the company.

Of course the assumption above isn't true for all companies; many are in a stage of their life cycle where their industry isn't growing as fast as the market as a whole. In this case a dividend can make a lot of sense, but then what doesn't make much sense is reinvesting that dividend right back into the same company! When they admit that their business, while profitable, doesn't have much of a growth future ahead of it, you would do well to listen!

smallstache

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Re: Larry Swedroe argues against investing for dividends
« Reply #2 on: November 09, 2017, 10:56:28 AM »
A dividend is the investor's only tangible share of a corporation's profit. The belief in solely investing for capital appreciation is misguided wishful thinking.

NoStacheOhio

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Re: Larry Swedroe argues against investing for dividends
« Reply #3 on: November 09, 2017, 11:08:46 AM »
A dividend is the investor's only tangible share of a corporation's profit. The belief in solely investing for capital appreciation is misguided wishful thinking.

That wasn't the argument being made in the article. He was advocating an agnostic approach to dividends (i.e. diversification is the most important factor).

If you look at a company like Amazon. They spent a lot of time being "unprofitable" because they plowed all of their available cash (and then some) into the company. They could've flipped a switch and turned massive profits (and paid a handsome dividend) almost immediately.

Stimpy

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Re: Larry Swedroe argues against investing for dividends
« Reply #4 on: November 09, 2017, 11:30:26 AM »
https://www.advisorperspectives.com/articles/2017/11/06/slaughtering-the-high-dividend-sacred-cow?

I've generally argued for dividends in the past, but I'm thinking of changing my strategy. Reactions?

Same arguments I heard before.  Obviously if you hold all your divs in an ira/401k account this argument dies.  Also I believe they are talking about high paying dividends.  You should know those are risky.  (Kinder Morgan anyone?)

If you look at a company like Amazon. They spent a lot of time being "unprofitable" because they plowed all of their available cash (and then some) into the company. They could've flipped a switch and turned massive profits (and paid a handsome dividend) almost immediately.

This is true, but can you please tell me how Coke can plow all their cash into a new drink?????  (Ok Coke is probably a bad example.)  Amazon is growing and is able to expand, they are seeing ways to grow and prosper.  Won't argue on that but there are some business where the investment area's a not so vast. 

Look at P&G, while I am sure there are places they can grow, it really is a company where if they are not careful they will spend billions to only get millions.  It is more efficient to give the cash back to the investors then it is to keep plowing billions for minimal returns (or losses.)   


talltexan

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Re: Larry Swedroe argues against investing for dividends
« Reply #5 on: November 09, 2017, 12:01:06 PM »
https://www.advisorperspectives.com/articles/2017/11/06/slaughtering-the-high-dividend-sacred-cow?

I've generally argued for dividends in the past, but I'm thinking of changing my strategy. Reactions?
Welcome to the 21st century.  This is accepted financial investment wisdom among industry and academic profesionals.

CFOs of well run companies in a mature stage buy back shares to further concentrate ownership among existing shareholders.  It is a much more tax efficient way to distribute profits to shareholders.  It also allows them to efficiently use offshore cash to the benefit of shareholders without paying local national corporate taxes on repatriated funds (i.e. returned to US as profits).

Those who say otherwise don't understand how to optimize financing and taxes.  Shares and debt are how companies finance their business enterprises and CFOs are duty bound to optimize the acquisition and distribution of enterprise cash flows.  Historic pressure to pay dividends weighs on them, but they understand  it is an irrational shareholder request.

It's interesting that the example of Kinder Morgan (disclosure: I own KMI) came up right before this. Kinder is trying to change their model away from being debt financed, which sounds like the opposite of what you're describing here, PizzaSteve.

alexpkeaton

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Re: Larry Swedroe argues against investing for dividends
« Reply #6 on: November 09, 2017, 12:28:38 PM »
CFOs of well run companies in a mature stage buy back shares to further concentrate ownership among existing shareholders.  It is a much more tax efficient way to distribute profits to shareholders.  It also allows them to efficiently use offshore cash to the benefit of shareholders without paying local national corporate taxes on repatriated funds (i.e. returned to US as profits).

+1 to this. It avoids the double-taxation of dividends, and allows investors to choose when to recognize income as capital gains.

NoStacheOhio

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Re: Larry Swedroe argues against investing for dividends
« Reply #7 on: November 09, 2017, 12:40:13 PM »
If you look at a company like Amazon. They spent a lot of time being "unprofitable" because they plowed all of their available cash (and then some) into the company. They could've flipped a switch and turned massive profits (and paid a handsome dividend) almost immediately.

This is true, but can you please tell me how Coke can plow all their cash into a new drink?????  (Ok Coke is probably a bad example.)  Amazon is growing and is able to expand, they are seeing ways to grow and prosper.  Won't argue on that but there are some business where the investment area's a not so vast. 

Look at P&G, while I am sure there are places they can grow, it really is a company where if they are not careful they will spend billions to only get millions.  It is more efficient to give the cash back to the investors then it is to keep plowing billions for minimal returns (or losses.)   

Maybe I came off more dividend-hostile than I meant.

Obviously companies at different stages of maturity have different models that make sense. I think Amazon is also somewhat unique in how diversified their business is (to me, their core business is basically AWS/cloud/powering the Internet).

I'm not arguing that all dividends are bad, just that the average investor should be mostly indifferent when it comes to whether or not a particular company pays out. Indexing makes this really easy to accomplish; you hold some companies that do and some that don't and it's pretty much good.

acroy

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Re: Larry Swedroe argues against investing for dividends
« Reply #8 on: November 09, 2017, 01:06:13 PM »
Bleh - one more big reason the tax code needs to be thrown out & start again!

Dividends are just a way to return value to the shareholder. They often don't make tax sense. Share buy-backs are an attractive alternative.

talltexan

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Re: Larry Swedroe argues against investing for dividends
« Reply #9 on: November 10, 2017, 06:58:50 AM »
That is an excellent point about the CFO's incentives and options.

One thing I'd add to it is that certain companies--I work for a large utility company, for example--are expected to pay a dividend as part of their "brand". Investors buy expecting the dividend, and understanding that total return is lower than market return because of this dividend.

talltexan

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Re: Larry Swedroe argues against investing for dividends
« Reply #10 on: November 10, 2017, 09:46:35 AM »
That is an excellent point about the CFO's incentives and options.

One thing I'd add to it is that certain companies--I work for a large utility company, for example--are expected to pay a dividend as part of their "brand". Investors buy expecting the dividend, and understanding that total return is lower than market return because of this dividend.
Yup.  It is irrational financially, but expected.  A better deal would be to issue a regular credit against the shareholder's utility bills instead.  Run the numbers on that...assuming the IRS didnt consider it income, it would be tax free returns.  That would encourage broad ownership of the utility by its customers too, a better governance with respect to investments in maintenence (e.g. prevent forest fires and gas line ruptures from skipping necessary, but costly safety updates).

Because my employer is a publicly traded, for-profit company,There may be regulatory issues preventing this. I am aware of Power Co-Ops that may well be able to do something like this, but they are also nonprofits.

ChpBstrd

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Re: Larry Swedroe argues against investing for dividends
« Reply #11 on: November 10, 2017, 09:51:17 AM »
Dividends are just a way to return value to the shareholder.

A dividend is the investor's only tangible share of a corporation's profit. The belief in solely investing for capital appreciation is misguided wishful thinking.


Suppose I offered shares in my company. The purpose of the company is to take $10 from each investor and then repay them a $1 dividend from funds received (10% yield! Woo hoo!!). We also have a sustainable business plan for at least the next 10 years. Would this shell game be a return of value to the shareholder? This sounds like a joke, but it actually resembles the operations of some of these companies.

IMO, the reason investors hand companies their money in exchange for stock is to use the funds to engage in productive activities that will increase the value of their investment. If you wanted to put your cash into a company that will pay it back to you, that's a checking account.

Quote
CFOs of well run companies in a mature stage buy back shares to further concentrate ownership among existing shareholders.  It is a much more tax efficient way to distribute profits to shareholders.  It also allows them to efficiently use offshore cash to the benefit of shareholders without paying local national corporate taxes on repatriated funds (i.e. returned to US as profits).

Those who say otherwise don't understand how to optimize financing and taxes.  Shares and debt are how companies finance their business enterprises and CFOs are duty bound to optimize the acquisition and distribution of enterprise cash flows.  Historic pressure to pay dividends weighs on them, but they understand  it is an irrational shareholder request.

+1. I'll add that many of these "dividend aristocrats" are borrowing from bondholders at 7-10% rates so that they can pay their 2-4% dividends to stockholders. That is, they could have used the dividend money to pay down debt, which would directly increase the percentage of the company's assets owned by equity holders AND reduce interest expense AND reduce the riskiness of the company, allowing them more flexibility to refinance the rest of their debt at lower rates, survive a recession, or make profitable investments. Either paying down debt or buying back shares is an efficient way to boost share prices.

More importantly, paying a dividend is a company's admission that they are out of ideas. They've run the numbers, and can't get a good ROI from expansion, marketing, R&D, acquisitions, new products, efficiency improvements or automation, vertical integration, safety improvements, margin changes, etc. That is, the people running your company are at a loss for how to improve things. This is either a sign that management needs to be fired, or a sign that there truly are no good options for the company. Either way, I'd GTFO of the stock.

I'll admit it. I'm hostile to dividends*. Buybacks, organic reinvestment, debt reduction, and R&D are all signs that the managers I'm hiring will deliver the value creation I'm investing in.

*Exceptions: REITs, MLPs, and BDCs due to special tax rules that make dividends preferable.

NoStacheOhio

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Re: Larry Swedroe argues against investing for dividends
« Reply #12 on: November 10, 2017, 10:00:39 AM »
Dividends are just a way to return value to the shareholder.

A dividend is the investor's only tangible share of a corporation's profit. The belief in solely investing for capital appreciation is misguided wishful thinking.


Suppose I offered shares in my company. The purpose of the company is to take $10 from each investor and then repay them a $1 dividend from funds received (10% yield! Woo hoo!!). We also have a sustainable business plan for at least the next 10 years. Would this shell game be a return of value to the shareholder? This sounds like a joke, but it actually resembles the operations of some of these companies.

IMO, the reason investors hand companies their money in exchange for stock is to use the funds to engage in productive activities that will increase the value of their investment. If you wanted to put your cash into a company that will pay it back to you, that's a checking account.


True of IPOs, but we're talking pretty much exclusively about the secondary market here.

ChpBstrd

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Re: Larry Swedroe argues against investing for dividends
« Reply #13 on: November 10, 2017, 03:45:18 PM »
Dividends are just a way to return value to the shareholder.

A dividend is the investor's only tangible share of a corporation's profit. The belief in solely investing for capital appreciation is misguided wishful thinking.


Suppose I offered shares in my company. The purpose of the company is to take $10 from each investor and then repay them a $1 dividend from funds received (10% yield! Woo hoo!!). We also have a sustainable business plan for at least the next 10 years. Would this shell game be a return of value to the shareholder? This sounds like a joke, but it actually resembles the operations of some of these companies.

IMO, the reason investors hand companies their money in exchange for stock is to use the funds to engage in productive activities that will increase the value of their investment. If you wanted to put your cash into a company that will pay it back to you, that's a checking account.


True of IPOs, but we're talking pretty much exclusively about the secondary market here.
From my perspective as an investor, it doesn't matter who I'm buying it from. The question is, what does the company do with its money?