Normal rules still apply even when times are not normal


Originally published at:
As a leading investment bank releases research pointing to a tripling of U.S. corporate debt since the financial crisis, and other worrying trends arise, where can investors find some comfort in their investment portfolios. It is probably a function of the human condition to think that current conditions are not “normal”. However, that view has…


…securities paying out cash to shareholders will, if maintained, deliver better returns than
those that don’t.

Simplistic nonsense. A company’s ability to grow or generate cash will be a greater factor in determining the long-term returns. How much of this is paid out as a dividend for it to be re-invested is immaterial - unless the Board squanders it on fripparies such as trying to buff up future dividend payouts by making ill-judged takeovers, etc.

But leaving emotional considerations to one side. Two companies/funds that have equivalent rates of growth (or cash generation): one pays a 5% dividend, the other pays nought. At the end of each year the relevant dividend is re-invested at the xD price to buy further shares/units. At the end of the investment term - however long this might be - the value of the assets is the same. That is, if you ignore the transaction costs for re-investment… and other trivia, such as the re-investment price could be higher or lower than the xD price.

There are other considerations to be made, and ones that ought to rule out the use of such absolutist terms like will when considering the returns from equities.


You are correct in what they say there @arkwelder, but I think investing in the types of companies that pay dividends is more rewarding in the long run because that of itself engenders a financial discipline upon management.

Not in every case of course, you need to be careful that they’re paying the dividends from money they earn rather than borrow, and it has to be sustainable and still leave them with the resources to invest in growing their business.

This is why it is beneficial to invest in them via a fund or a trust, or buy a basket of income paying companies yourself.

I think that in the real world the dividend paying stocks @robert_davies favours would, on average, outperform your growth stocks over the long run, because of the extra discipline of paying dividends.

We saw the other day an example of a growth company that wasn’t listed, forking out on an extravagant £2.5 million a year office in the Gerkin - Powa Technologies, who have just gone belly up.


Far too often, the ‘compounded dividends’ argument is put forward as being the reason to invest in companies that pay dividends, and usually higher dividends. If it makes sense to re-invest dividends then it can also make sense for that cash flow to not be paid out as a dividend and to be re-invested by the company in itself in order to grow its business. ‘Growth’ stocks can also pay dividends, you know! The term isn’t confined to those companies that provide no dividend. The key words are cash flow.

So I don’t really see why do you think that Powa Technologies is relevant here. It may have been a speculative technology startup, but as it didn’t have any sales it can’t really be described as having any growth either, nevermind cash flow. It did have a lot of debt, though.

The discipline is not in paying dividends, the discipline is in the rate of increase of cash generation. Once that goes then even favoured companies that have a long history - or discipline - of paying dividends will suffer. What is the point of stock market analysts?