A Difference of Opinion on Dividends

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cannew
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A Difference of Opinion on Dividends

Post by cannew » 03 Jul 2013 11:43

I don't agree with the opinions expressed but it's interesting to read a different point of view.

http://www.retailinvestor.org/truths.html#yoc

Time permitting read the entire article.

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Re: A Difference of Opinion on Dividends

Post by FinEcon » 03 Jul 2013 11:57

Berkshire Hathaway has never paid a dividend, what is the 30 year return on a share of Berkshire?

You should agree because the statement that dividends account for x% of the return is rubbish. The return flows from the underlying economics of an asset base regardless of the form or timing. Car wash, bond, rental apartment, royalty payment, it doesn't matter. Studies like Mr Seigels and so many other acamdemic types contribute nothhing realy useful and only serve to propogate the never ending cycle of jibber jabber amongst academics of a certain discipline. Would you learn Karate from people who study it and write about it or those who do it sucessfully? How about piano? How about investing?
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Re: A Difference of Opinion on Dividends

Post by ghariton » 03 Jul 2013 13:50

cannew wrote:I don't agree with the opinions expressed but it's interesting to read a different point of view.

http://www.retailinvestor.org/truths.html#yoc

Time permitting read the entire article.
I must say I had trouble following the author. But I think that his point comes down to this: If you don't withdraw money from an investment every year, the accumulated total after X years will be greater than if you do. That is true whether you withdraw the money in the form of dividends, or cashing in some capital gains, or anything else.

Seems reasonable to me.

As to the role of dividends, and in particular whether dividend payout policy can affect the total wealth of shareholders, that is controversial and there is a huge literature (including by academics :wink:). It has been discussed at great length here and on predecessor forums. If anyone is still interested after all that, I would be pleased to write a summary.

I obviously disagree that academic research and publications are useless. I think it's important to understand WHY things happen, rather than just being practical, which usually reduces to extrapolating trends. A bit like the turkeys who associated the farmer's coming with food, and would rush up when they saw him coming, competing to be the first at the trough. Then came Thanksgiving...

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Re: A Difference of Opinion on Dividends

Post by NormR » 03 Jul 2013 14:06

Comes down to the ability to earn money on marginal retained earnings. Many/most firms can't really use all of their retained earnings effectively. They should pay dividends (or buy back shares depending on price) instead.

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Re: A Difference of Opinion on Dividends

Post by FinEcon » 03 Jul 2013 14:36

NormR wrote:Comes down to the ability to earn money on marginal retained earnings. Many/most firms can't really use all of their retained earnings effectively. They should pay dividends (or buy back shares depending on price) instead.
That's the first part of the process but if the investor is NOT faced with frequent reallocation of funds, what is it exactly an investor does?

To clarify, George's point about academics being useless in a general sense is not what I meant. I'm claiming that we practitioners have to be very, and I mean very, careful about what we accept as readily applicable truths in this area.
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Re: A Difference of Opinion on Dividends

Post by tidal » 03 Jul 2013 14:57

Mostly just fancy ways of saying "it depends. Talk to MEEEE."

Miller-Modigliani and "dividend indifference" has some useful - albeit abstract and overtly relaxed - assumptions. Duh. The "controversy" is about the essentially unknowable idiosyncrasies of applying it to investorx and firmy. Whatever.

By the way, any FWF stats experts about? Anyone up to taking out the farcical "5%" claim made elsewhere yesterday? What's the deal? Free passes for innumeracy, depending on topic? I guess I have to step up. Again? Sigh.
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Re: A Difference of Opinion on Dividends

Post by ghariton » 03 Jul 2013 16:29

tidal wrote:Anyone up to taking out the farcical "5%" claim made elsewhere yesterday?
Not sure what claim you're referring to. Could you provide some guidance?

George
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Re: A Difference of Opinion on Dividends

Post by ghariton » 03 Jul 2013 16:30

FinEcon wrote:I'm claiming that we practitioners have to be very, and I mean very, careful about what we accept as readily applicable truths in this area.
Totally agree.

George
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Re: A Difference of Opinion on Dividends

Post by ghariton » 03 Jul 2013 16:36

NormR wrote:Comes down to the ability to earn money on marginal retained earnings. Many/most firms can't really use all of their retained earnings effectively. They should pay dividends (or buy back shares depending on price) instead.
Yes.

But I do remember a study based on interviews with CEOs and CFOs a few years ago (perhaps by Campbell Harvey) that reported that many companies would give priority to paying dividends, over and above investing in profitable opportunities, if money were tight.

Which is why we sometimes see companies simultaneously paying out dividends and raising money through new equity issues. It is conventional wisdom that money raised through new equities is more expensive than retained earnings. Presumably that extra cost is outweighed by the "signalling" to dividend-focussed investors.

George
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Re: A Difference of Opinion on Dividends

Post by tidal » 03 Jul 2013 17:14

ghariton wrote:
tidal wrote:Anyone up to taking out the farcical "5%" claim made elsewhere yesterday?
Not sure what claim you're referring to. Could you provide some guidance?
don't worry about it. I'll do it myself.

But just to hint at the risible mistakes that regularly pass FWF scrutiny with impunity... Let's just say we're drawing randomly from a bag that has 200 chips numbered - one each - from 1 to 200.

What are the odds that I am going to draw a chip numbered from 191 to 200?

5%? Or 2.5%?

What are the odds that I am going to draw a chip numbered from 1 to 10 and/or 191 to 200?

5%????

Discuss.

Because, for starters, this type of casual howler gets made - regularly and apparently obliviously - by certain self-professed FWF authorities... and typically no one challenges... oh, wait, the "challenger" gets challenged with threat of "ban", of course, as it is too impudent to point out, publicly - can't we all just compromise?... Maybe 2+2=4.5?

It's a pathetic joke and it diminishes the entire FWF project.
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Re: A Difference of Opinion on Dividends

Post by NormR » 03 Jul 2013 18:23

ghariton wrote:But I do remember a study based on interviews with CEOs and CFOs a few years ago (perhaps by Campbell Harvey) that reported that many companies would give priority to paying dividends, over and above investing in profitable opportunities, if money were tight.

Which is why we sometimes see companies simultaneously paying out dividends and raising money through new equity issues. It is conventional wisdom that money raised through new equities is more expensive than retained earnings. Presumably that extra cost is outweighed by the "signalling" to dividend-focussed investors.
I agree that there is a remarkable amount of behavioral stuff when it comes to dividends - both from investors and companies. (I might also add in the academics who don't like the idea that behavioral stuff matters.) It's an interesting area.

I'll also note that explicit variable dividend policies are rare. Even rarer are variable dividend / buyback policies of the type I suggested.

On your second point, it's not a bad way to find bad dividend stocks :wink:

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Re: A Difference of Opinion on Dividends

Post by parvus » 03 Jul 2013 22:45

Oh, I think there's a great deal to the behavioural thesis. Despite Miller-Modigliani, dividends do matter. One reason is that few retail investors look at how stock buybacks simply compensate for new stock options issued, even if that is duly noted in small type in the annual report. A second, of course, is that CFOs are generally the worst market-timers of all, not buying back the stock at all cheap. (I could look up the research on SSRN.) It seems to me that stock buybacks ought to be rare events. But then I may be betraying a value bias.

Where M-M gets more interestng is that it is indifferent as to ways of raising capital. Apple isn't at all, it's borrowing at low rates to pay out dividends to keep retained earnings offshore. Taxes matter. But M-M said, "let's imagine no taxes."

Sure, and let's posit our results on perfect equilibrium, even though it is a rare state of economic affairs.
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Re: A Difference of Opinion on Dividends

Post by parvus » 03 Jul 2013 22:54

tidal wrote:
ghariton wrote:
tidal wrote:Anyone up to taking out the farcical "5%" claim made elsewhere yesterday?
Not sure what claim you're referring to. Could you provide some guidance?
don't worry about it. I'll do it myself.

But just to hint at the risible mistakes that regularly pass FWF scrutiny with impunity
<snip>
It's a pathetic joke and it diminishes the entire FWF project.
It would be helpful if you let us all in on the "pathetic joke." Pray, do tell.
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Re: A Difference of Opinion on Dividends

Post by couponstrip » 04 Jul 2013 17:41

FinEcon wrote:
That's the first part of the process but if the investor is NOT faced with frequent reallocation of funds, what is it exactly an investor does?

To clarify, George's point about academics being useless in a general sense is not what I meant. I'm claiming that we practitioners have to be very, and I mean very, careful about what we accept as readily applicable truths in this area.
And not unique to economics or finance. Any discipline's literature is littered with poorly designed and executed studies with inadvertant assumptions and worse, neglected facts/data that would completely change the results of the experiment if properly considered.

In medicine, only a small percentage of the published literature is ever actionable for these reasons, and that percentage is less than 5, perhaps less than 2. Critical analysis of any published literature is an essential practitioner's tool. Otherwise we all blindly run with "proven" theories like rebalancing bonus, dividends make up 70% of all returns, hormone replacement therapy, and frontal lobotomies.

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