I've always failed to understand why high dividend stocks are perceived to be superior, even by professionals. How is a 5% div stock different than 0% div stock where the holder sells 5% of it every year (assume no transaction costs of course, let's also ignore tax because it is prevalent in regions without cap gain tax such as HK). It appears many of these fans are biased by the illusion of unchanged stock shares while gaining periodic payments. But we all know the cash is simply taken from the market cap on ex div (right?). So the characteristic of high dividend alone should not be a positive trait. I would even consider it slightly negative (assume the extreme case of a 100% dividend stock - why would anyone want to buy that?). Looking forward to hear your thoughts. Thanks.
Dividend should be paid out of profits. High dividend is an indicator (though not conclusive evidence) of high profits, rising dividend of rising profits. Stock prices are completely irrelevant to the few people who have so much invested in dividend-paying shares that they will never need to sell any shares during their life-time. But if dividend is 5% across the portfolio, that obviously calculates out that you need to have capital equivalent to 20 years' income in shares in order to get the 5% dividends. Actually, falling share price often represents falling market cap and this often leads to reduced dividend payments, so the prudent long-term investor should still keep an eye on share price, which is more volatile than dividend rates.
IMO, if a business has cash flow that they do not need to reinvest for growth, pay down debt or reduce costs, I would hope they would return that cash to shareholders so they can make investments with a higher return than cash (1 year T-bill about 2%-repos are lower). However if the company can use that money to grow, pay down debt or reduce costs, I would not prefer the dividends.
I generally buy same 50-60 stocks and always they have to pay dividends, automation is incredible but occasionally will print out when it needs human touch, and it either has something to do with options or dividends. Dividends are at times a two edge sword and one has to get into the guts of the financials when they are paid out. As Robert posted reasons of not paying a dividend, I often wonder if the CEO might be trying to get a raise through his stock options, and this alarms my systems as these stocks can tank after. https://www.sciencedirect.com/science/article/pii/S0929119914000078 http://abcnews.go.com/Business/rules-investing-dividend-paying-stocks/story?id=18275522 https://hbr.org/1990/05/ceo-incentives-its-not-how-much-you-pay-but-how
Dividends are OK as long as they're not the tail wagging the dog. Recently failed UK form Carillion was apparently at one point recently borrowing money to pay dividends. But as for spending money on share buy-backs, that's just management admitting they can't think how to invest the money. Time to take the money and run.
Where did you see this perception? Rest of your post is true. It is total return that matters to the investors. BRK.A/B does not pay any dividends. It is considered as one of superior stock by professionals. AAPL only pays nominal dividend, it is considered as quality stock by investors. High dividend stocks like Utility stocks is not very well regarded by investors, it is mostly considered as bond proxy.
Normally when a company pays a dividend over a long period of time, it has shown the ability to stay profitable through different market conditions. The tax implications for qualified dividends are a bonus.
I agree that the OP begs the question. As @Robert Morse pointed out, professional money managers generally expect a company to invest money in their business if they expect to earn a return greater than the risk free rate and otherwise return it to shareholders. In general if and how much a company pays in dividends is an indicator of if it's industry is mature or high-growth and not much else. It doesn't indicate a stock is "superior" and that term is meaningless when referring to a stock from a professional standpoint anyway given all the forms of "superiority" a stock can take (absolute returns, volatility, market correlation.....?)
Just wanted to add this. Modigliani Miller theorem is taught in most of the Finance 101 classes. https://en.wikipedia.org/wiki/Dividend_policy#Irrelevance_of_dividend_policy "The Modigliani and Miller school of thought believes that investors do not state any preference between current dividends and capital gains. They say that dividend policy is irrelevant and is not deterministic of the market value. Therefore, the shareholders are indifferent between the two types of dividends. All they want are high returns either in the form of dividends or in the form of re-investment of retained earnings by the firm."
If a company has held their dividend for over 10 years, it usually mean many things. They have their debt to asset ratio under control. They paid their dividend during a down market (2007-2009)...Even when they were losing money. They have a fairly strong foothold in their industry...They are holding or gaining market share of their industry. When you see companies like RiteAid, Radio Shack, J C Penneys drop their dividend, you know both market share is being lost and you look to see if they will be able to turn it around...They won't. If the company announces a large stock buy back (and is paying a constant dividend), you know it is a mature company (with market share) and they have nowhere to grow their company. I try and buy dividend paying companies and do cover calls with them. Many times I make 7-10% during a bull market. But also in a bear market I can make 5-7% from the dividend and the covered calls...Keep writing them, when they expire. I know that many of you are on the other side of my trades...You are making your 100% profits. More power too you. But when the market crashes and your options expire worthless...I'm chugging along with my 5-7% profits (bear market). Just me...