There’s a lousy idea floating out there, that it is a bad thing for a tech company to pay dividends (also here). Not true! Companies that pay dividends treat their capital more carefully, because now their equity has an explicit cost. Studies that I have read indicate that dividend-paying stocks do better then those that do not pay dividends, in the long run.
That said, it doesn’t mean that companies that pay high dividends do better than those with low dividends. It is well-known in REIT stocks that those that pay low but growing dividends have outperformed those with high dividends that grow slowly. The right combination is that a small dividend is paid, and the company uses the retained earnings wisely, in order to grow the business profitably, leading to increases in dividends.
When Microsoft started paying a dividend I was a skeptic, because Microsoft was overvalued at the time. No degree of financial engineering would change that. Dividends are at most a modest positive for any stock. Better you should look at the underlying ability to grow free cash flow and be able to reinvest it well.
That’s where investors should focus. Dividends are good, but growing dividends are better.
Copyright David Merkel (c) 2007-2014
Disclaimer: David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves.
Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.
Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.
Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.
Page optimized by WP Minify WordPress Plugin