OhNoNotimAgain wrote:Many responses have focussed on the merits or otherwise of dividends and in a way it is a pity that the discussion has gone that way.
In my view dividends are just a way of quantifying a value bias. The other three fundamental measures of a company; book value, revenue and profits are all very subjective as Patissiere Valerie is only the latest in a long line of corporate failures to demonstrate.
The attractions of dividends are twofold.
One is that they are a tangible and verifiable measure that the company is actually generating surplus cash in a way that the other three measure do not. Selecting companies, and biasing a portfolio towards, companies that generate cash is one way of avoiding overhyped and overvalued stocks that can crash and burn. Yes I know lots of dividend payers have crashed and burned but the evidence is that fewer of them do. It is not foolproof, but it is quite an effective filter.
Their second, and to my mind, less important factor is this issue of compounding returns.
If you believe, as I do, that only three things matter when it comes to investing:
Reinvesting income
invest for as long as possible
Minimise costs
Then it makes sense to do everything possible to maximise the first two and mimise the last.
The caveat is that this has to be across the whole market and not just a handful of high yielding stocks because yield is a function of price and price can indicate a seriously wounded stock, a yield trap if you like. But if you invest across the whole market yoyu get the winners, which get bigger, and the losers, which eventually fade away.
A bit like a horse race. Bet on all of them and you are bound to get the winner.
As to the magnitude of the dividend effect I have long ago given up trying to quantify it.
There is no tangible and verifiable measure that a company is generating cash if it pays dividends, for one you get scrip divs, secondly company could be borrowing or flogging the family silver to cover the cash element of dividends.
Dividends re future earnings are merely a function of the efficiency of management to make future decisions with the profits earned, for some companies there may be few productive avenues of inward investment so if management retain they may say start doing ill advised purchases and therefore their paying dividends is a good way to partly fetter what they do , for others paying dividends and foregoing future profits on projects/expansion that might have been beneficial could, for the investor, be expensive long term.
It is surely impossible to have a carte blanche dividends good/dividends bad overview, surely each company's needs re its future apital expenditure and growth has to be factored into the equation.