It's dividend season 💸
Dividend stocks have a large following. Whether rightly so is a hotly debated and controversial topic at the moment.
I have looked into the matter a little more closely and have come to the conclusion: It depends 😄
A thread🧵
#Dividende
Let's start with the myths.
1️⃣Mythos:
Dividends are free money.
Even if it seems that dividends come out of nowhere into the account: It's not. The money simply moves from the company account to your private account. So "left pocket / right pocket"?
Not quite: While the money is moving from your left pocket to your right pocket, someone else is reaching into that right pocket: the state in the form of a flat tax.
So the bottom line is that as a shareholder you have become somewhat poorer.
2️⃣ Myth:
Dividends are a safe passive income
The distribution creates a kind of "current" income that automatically comes into your account without your intervention.
But: Virtually you have lost the same "income" also via a price reduction (ex-dividend).
If the same company would renounce a dividend, you could realize the same passive income also via a partial sale. No difference.
And: income from dividends is by no means certain. Dividends can fall or fail.
3️⃣ Myth:
Dividends generate compound interest
I read here and there that you can create a compound interest effect by reinvesting your dividends.
If you only consider the "new" cash flow from dividends, this is true. But not in the overall view.
The "old" shares have suffered a price loss due to the dividend payment.
And this distribution triggers taxes that would not have been incurred if the shares had been retained. This even reduces the compound interest effect. 🚨
And as Charlie #Munger once aptly said:
The most important rule is not to interrupt the compound interest effect unnecessarily. And that's what a distribution does, unfortunately.
In summary, these 3 myths are actually errors in thinking.
The payment of dividends destroys c.p. - all other things being equal - purely financial value for the shareholder. 📉
Spoiler: But there are also psychological benefits, which I will discuss later.
Additionally, I still see a signal coming from a dividend payment, which is also not enticing for my personal investment profile:
If I, as a company, pay out a dividend yield of, say, 3% (relative to the share price), then it does mean:
"Will you shareholders please take the money, we as management can't use it in the company right now with a yield above 3%."
So if I as management had any number of measures/initiatives that generated a return on investment of, say, 20%, then I would never let the money flow out of the company, would I?
So to me, that signals 2 things:
Either: Mgmt is simply bereft of ideas and knows "nothing better" to do with the money.
-> Not good at all. 🚩
Or: The company or the market is very "mature" and there are de facto no measures that would bring an excess return.
-> I think this is fair and very honest. ✅
That said, I personally don't find such companies that interesting. But they are often great cash cows.
What do you think?
Even if this all sounds very critical at first, I am definitely a "dividend fan". I will write a separate post about this.