Investors Weigh Dividends or Growth
https://money.usnews.com/investing/dividends/articles/2018-07-24/investors-weigh-dividends-or-growth
Pioneering economist Fischer Sheffey Black opened his controversial 1976 paper, "The Dividend Puzzle," by posing the following question: Why do corporations pay dividends?
No one would blame you if you viewed that opening sentence as something straight out of Investing for Boneheads. But Black was anything but a bonehead.
Black fired a financial shot across the bow at companies that offered consistent dividends and crowed about it. Writing in refreshingly plain English for an academic, Black declared, "The harder we look at the dividend picture, the more it seems like a puzzle with pieces that just don't fit together."
Nor was Black one to sit in his ivy-covered, ivory tower at MIT, where he taught finance. He went on to become a partner at Goldman Sachs Group (ticker: GS) and became a hero to options traders who would literally stop work to give him a standing ovation when he visited exchanges.
In the face of such an investment heavyweight, who could possibly mount a solid counter-argument in favor of the company dividend? To be sure, many variations on Black's theme carry considerable heft today.
"The blue chip-dividend love affair is over," says Robert Karn, president of Karn Couzens & Associates in Farmington, Connecticut. Karn sees the dead stop as something of a "divid-end."
"There are many examples where dividend payers have been outpaced by growth stocks," Karn says. "Although a 4 to 5 percent yield beats most bonds, and there is the potential for share-price appreciation, there are also many blue-chip companies with effectively stagnant growth."
Even casual investors will favor the likes of Amazon.com (AMZN), a high-flying company that has never offered a dividend. You'd be hard pressed to find any Amazon shareholder who questions Jeff Bezos's strategy of plowing money back into the company instead of doling it out quarterly.
And yet, dividend fans certainly don't fly solo – and have an arsenal of facts working in their favor.
Ten years ago, just before the start of the financial crisis, "Accenture stock (ACN) was priced at $41.76 paying a 50 cent dividend for a yield of 1.2 percent," says John Burke of Burke Financial Strategies of Iselin, New Jersey. "That's not particularly impressive. But if I told you that they'd increase that annual dividend to $2.66 – a 432 percent jump – you would have wanted to buy as much as you could. "
True, Accenture's dividend still sits below the 2 percent mark. "But the stock price is over $166 per share, an increase of almost exactly four times," Burke says.
Moreover, Black's paper never delved into the finer distinction between dividends in one sector versus another.
"For example, companies within the financial, consumer staples and utilities sectors have traditionally paid good dividends and are classified as value companies," says Jakob Loescher, a financial advisor with Savant Capital Management in Rockford, Illinois. "Other sectors, such as technology and health care, have a growth orientation and more often reinvest profits instead of paying out healthy dividends."
In other words, think of high-tech's Amazon versus health care's Johnson & Johnson, (JNJ), a dividend king with 55 consecutive years of dividend growth. "For a diversified investor, both styles of company should be in a portfolio," Loescher says.
"Purchasing dividend-paying equities is absolutely to be considered on a case-by-case basis," adds Steve Frazier of Frazier Investment Management in Wakefield, Rhode Island. "There's no blanket rule as to if or when an investor should or should not include them in their portfolio. Often dividends are paid by more established, slower growing companies that tend to be associated with lower volatility industries and more established corners of the marketplace."
And in just as plainspoken a way as Black, Ryan Krueger of Krueger & Catalano Capital Partners in Houston offers a spirited defense of the dividend.
Says Krueger: "For all the understandable questions and concerns Wall Street has created in the mind of an investor about what is really real anymore, dividends are one of the few answers I need only one hand to count."
Krueger points to the dividend as a bellwether of consistency. That is, companies that pay them out without missing a beat are saying something about their commitment to making the gravy trains run on time.
"There are companies who've paid a dividend to shareholders every year they've been in business, some stretching back over a century of time," he says. "There isn't one manufactured investment product from Wall Street that has that kind of track record."
And here lies another crucial factor to consider: Is the company plowing all their money back into growth speeding toward a moment of reckoning?
Tesla (TSLA) has never offered a dividend, but its ambitious growth agenda has never kept up with the production goals of founder Elon Musk. As recently as May, the company has spent an average $8,000 per minute while failing to turn a profit – a pace that could see it insolvent by year's end.
"Dividends and increased dividends are signs that the company believes its future is bright," says Benjamin C. Halliburton, chief investment officer for Tradition Capital Management in Summit, New Jersey. "They are one indicator that management is looking out for shareholders' interests and believes that business will be better in future years."
Of course, Fischer Sheffey Black had solid points to make in terms of how the numbers add up – or fail to – when it comes to the dividend puzzle he saw. Plus, he was able to pull off some academia karate chops in his defense, including the mysterious Miller-Modigliani Theorem.
But in the irrationally exuberant world that is Wall Street, many puzzle pieces fly in the face of logic or defy easy explanation. Round pegs are jammed into square holes every minute of the trading day.
Clearly, when it comes to the dividend, opinions differ and always will. But if at least one thing can be agreed upon, perhaps it is this: For all they mean to an investor's financial statement, steady dividends may hold more value as a statement in general: that a company is intent on sticking around.
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