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Jason Zweig: Companies Are Hoarding Dividends
By JLP | March 17, 2010
Interesting Jason Zweig piece in last weekend’s WSJ regarding dividends:
Last year, the companies in the Standard & Poor’s 500-stock index reduced their dividends by $48 billion. Today, payouts are running at an annual rate of $206 billion. So far, dividends are down 9.4% from 2009′s first quarter.
It continues…
But many other companies are declining to pay dividends not because they are unable but because they are unwilling. U.S. nonfinancial companies have amassed nearly $1 trillion in liquid assets. While much of that is in marketable securities, senior index analyst Howard Silverblatt of S&P estimates that more than $580 billion is pure cash, which could effortlessly be paid out in dividends.
Firms may sit on cash for good reasons—as a precaution against a further slump in the economy, as a war chest for acquiring competitors at cheap prices or as a funding source for building new factories or developing innovative products.
Personally, I’m a fan of dividends. Why? Control. If the company pays me a dividend, I can choose to spend it, invest it somewhere else, or reinvest it back into the company. If the company holds it, then they are in control. And, as Zweig mentions in his article, the company may not always have my best interest at heart.
Yes, dividends are taxed while share buybacks are not. This can be remedied by holding the stock in a tax sheltered account.
Anyway, if you have a couple of minutes, read Zweig’s short piece.
Topics: Investing | 15 Comments »
March 17th, 2010 at 12:09 pm
A dollar is a dollar. Its worth the same if a corporation keeps it or if they choose to pay it out in dividend. Offering a dividend adds exactly -zero- value.
If you want a dividend from a company that does not offer one (or too small of one for your liking), you can do it yourself! Just sell a couple shares each quarter to meet your needs. Exact same net effect.
Yes, a corporation controls their dollars in the same way that you control your shares.
March 17th, 2010 at 12:15 pm
Sorry if that came out harsh; this is a topic that really grinds my gears. Dividends aren’t magical dollars that appear out of nowhere, they come right off the income statement and their payout is reflected almost immidiately in their stock price. Yet, there’s a perception that this is a desirable feature.
Same false perception that stock splits add value. One share at $100 is exactly the same as two shared at $50.
March 17th, 2010 at 12:18 pm
Brian,
I agree with you regarding stock splits.
March 17th, 2010 at 12:36 pm
Brian — dividend payments are a desirable feature. Firstly, it _proves_ that a company actually does have money/earnings. A company rife with fraud and accounting tricks can’t actually make a dividend payment — even though it’s ‘books’ might state otherwise. Show me the money!
Secondly, dividend payments show a management team that doesn’t waste excess earning on potentially dumb expansion ideas, and are actually working for their shareholders.
Lastly, dividend payments show a management team confident in the company’s future earning potential.
When a large swath of the S&P 500 companies are slashing their dividend payments, that to me is a clear signal that they are not confident in what the future has ahead and are hoarding cash as an insurance policy, or worse, using cash to bring their books back in line with traditional accounting principles / ratios.
March 17th, 2010 at 1:15 pm
BG – I agree that having profits is a desireable feature. (especially over a long term.)
What makes no difference is into which bucket a company chooses to place cash profits, mine or theirs. A dollar is still a dollar.
Two nearly identical companies, A and B. Today each is worth $100 a share. Tomorrow B chooses to pay a dividend of $1 a share. What will the stock prices be at the end of the day? A: $100, B: $99. Dividends add no net value. none. zip. If I want a $1 out of company A, I can just sell 1% of my shares. (taxes vs. fees may actually work in my favor in this case. I’m not a tax attourney)
What about all the companies that pay no dividend? Is that a negative indicator? No. not an indicator of anything other than having excess cash. That’s not inherently bad -or- good. See AAPL, GOOG, etc.
–Brian
March 17th, 2010 at 3:05 pm
Brian) I agree with that — put there is a difference between a ‘book’ dollar and a ‘real’ dollar. Company B actually paying the dollar out makes it real.
Company A….well….maybe they never had the dollar to begin with? You can’t prove it.
Perhaps that is why dividend paying stocks outperform their non-dividend paying counterparts: that’s a fact.
March 17th, 2010 at 5:57 pm
Aren’t dividends taxed at your capital gains rate as well? I think if I ever invest in stocks again, it will be strictly with dividend stocks.
March 17th, 2010 at 7:55 pm
#7 Yes, some portion of dividends may be taxed as qualifying dividends…thus they are netted out of the original total dividend paid (See a sample 1099-Div and you’ll see the separate boxes) and taxes are paid on that net as it assimilates into your Form 1040.
I’m starting to move some of our sideline money out of our paltry 1.1% savings acct into some dividend stock b/c of the potential for growth (and most likely better tax treatment as time goes on…)
March 17th, 2010 at 10:29 pm
*smacks head on wall*
March 18th, 2010 at 6:00 am
How about the idea that company pays dividends when it see no way to invest money in its ordinary operations. bad sign so.
March 18th, 2010 at 7:14 am
Brian, was your smack b/c of my comment?
You have to admit putting non-emergency fund cash into a good stock (whether dividend-paying or not) has a greater probability of earning more than a 1% savings account. Thus this would be something most reasonable people would choose to do if they want to keep up w/inflation, etc. Esp. reasonable people who are in a higher tax rate
March 18th, 2010 at 3:21 pm
Stacey- There’s a couple things to consider.
Yes, there’s a significant chance of earning more than 1%, but there’s also of earning less. This is a question of when you need the money and what your level of risk tolerance is.
Assuming you need the money in the far future, investing in other than cash is likely a good choice.
The phrase ‘a good stock’ makes me grimmace. That’s all eggs in one basket. The keys to success in long-term savings is buy and hold, and diversification, and tax minimization. Check out accounts like Roth-IRAs and 401ks, and investments like index funds and ETFs.
March 18th, 2010 at 10:46 pm
Brian, hope your head is feeling better.
We are full contributors to husband’s 401k. We have a decent amount in E and I-series bonds. We also have E-fund in laddered cds. So when I speak of investing in “good” stocks (don’t grimace again) I’m talking about the P&Gs (we started our drip in 2001, thus we are “buy and hold” people!), Clorox, etc of the world. Stuff I use every day and believe in. Our retirement funds are either in Target date funds or diversified, so I don’t feel I’m going to lose sleep over my stock purchases. I’ll feel more proactive than earning my measly 1% on our savings accts, tho’ of course we will still keep some funds there for immediate needs.
BTW, Roth acct is a great idea, but we make too much. Already have some index funds in the 401ks/IRA rollovers. Need to get more comfortable w/ETFs…still like the idea of a handful of solid (notice I didn’t say “good” stocks?!!) to round things out.
March 20th, 2010 at 9:52 pm
” I’m a fan of dividends. Why? Control. If the company pays me a dividend, I can choose to spend it, invest it somewhere else, or reinvest it back into the company. If the company holds it, then they are in control.”
Huh? If you want the cash, sell the stock (you have the “control”). Receiving a dividend and reinvesting it is much less tax efficient than the company reinvesting it.
It all comes down to specifics, some companies can make better use of the capital by reinvesting it, others should be making distributions. Whether a company pays a dividend or not is only one piece of the puzzle.
April 26th, 2010 at 8:04 pm
Stacy,
2010 is a special year since the gov removed the income limits for IRA conversions to a Roth. The conversion rule may live longer than 2010 but it depends when the gov changes the law. You may move your money to a non-deductible IRA (2009 and 2010 contributions) and then convert it to Roth IRA. As well, you may also move money from existing traditional or Rollover IRA to a Roth in addition to the traditional IRA contribution that you made in 2009 and 2010. Of course, the law allows you to spread the tax hit over 2010 and 2011. Additionally, if you close your 401k account with existing company (even your own company if you decide to close the business), you can move the money to rollover IRA and the convert this to Roth. In essence, you have several ways to fund your Roth since the change in the income limit rule. Unfortunately, you still can not contribute directly into the Roth since the income limit rule still stands, but the conversion income limit rule no longer exist as of 2010 or until they change the law to the old conversion income limit rule