This thread is for my homeboy homeboy604 and anyone else who might not understand dividends. When a company pays a dividend, your total $ stays the same. If you reinvest automatically, you own more shares buy the share price drops. If you collect the cash, it just shifts your money from x in a stock to x-div stock + div cash. Both are net worth neutral.

yes. But the company earned the dividend so your net worth went up.

Dividends help long-term investors seeking long-term capital gains tax treatment. For a short-term trader, it seems like a nuisance.

They're net worth neutral relative to each other, but the actual payment itself is kind of like a condensed nugget of capital appreciation.

The problem is corporations acquiring other corporations is a net loser.
Corporations investing the money is often a loser.
Companies that do not provide dividends end up with higher stock option plans and higher wages to executives.
Their cash is often raided by private equity.

Siegel divided the S&P 500 dividend-paying stocks into five groups, ranked from highest to lowest dividend yield. From Dec. 31, 1957, through Dec. 31, 2013, the highest-yielding stocks produced both the highest returns and the lowest beta. The two highest-yielding groups significantly outperformed the S&P 500 for both return and risk.

Thus if you avoid the dividend paying stocks, it has historically been negative to your net worth.

Good point. Dividends paid = $ that a dumb CEO can't squander. If you read Warren Buffett's letters to shareholders, he's written a lot of good stuff on the subject of retained earnings and why a company's dividend policy really depends on the quality of management, and thus, why Berkshire will never pay a dividend.

Although given WB's recent track record, it might not be a bad idea for him to start paying some out.

I'm not saying to avoid them, as many stocks and index funds pay them making it almost impossible to avoid if you're interested in equity investing. But I just reinvest them since I don't want cash, I want total growth.

My main point was there's nothing to excited about when you receive a dividend as it's just them essentially selling some of your shares for you.

As to companies not having anything better to do with the money, that's another aspect which in many cases might be true.

BRK has done some pretty major stock buybacks over the last decade. WB basically agrees with you.

There are tax considerations

I think a lot of people don't understand that when you get a dividend you are taxed on the full amount, but when you create your own dividend through selling shares, you are taxed only on the gain (source):



Also, there's a good bogleheads thread on dividends from earlier this year.

I've always thought it was funny that WB loves stocks that pay dividends, but refuses to pay one himself. I guess he trusts himself a lot more than other CEOs.

the main advantage that holding dividend paying companies over passive indexing (there are many other advantages as well) is that, if you choose your portfolio wisely, you most likely will not have any interruptions to your income stream. you receive and ever increasing dividends.

conversely, by selling your index funds and "creating your own dividend" your portfolio model may force you to sell inopportune times. investors not living off their portfolio won't have this concern as they likely will not sell, but for a retiree this is likely not the best means of investing for them.
one way around being forced to sell in inopportune times is keeping a cash emergency fund on the side. the issue there is it would have to be pretty sizable to hold you out through 1-2 years of living expenses. i think there are some significant opportunity costs associated with that.

Well you can't blame him for that - he has an amazing track record. But I think he's legitimately lost his mojo. IBM was a really dumb investment.

I believe he's stated he hates when companies pay dividends because he wants control over his allocation and he could sell if he wanted to. Something along those lines.

I agree with the IBM part. As a BRK.B shareholder, I wasn't happy with Buffett's IBM investment from the get go. But to be fair, including divi's he's basically BE/slightly down on his IBM investment. (Still kinda crap given that the money was locked up for years)

But then again, a more recent investment in Heinz was a homerun.

https://thisisthemodernworld.com/tag/heinz/

I'm also eager to see how his massive PCP investment is gonna play out in the coming years.

Not really. Dividends are cash and are worth what they're worth. The value of a stock buyback depends on the valuation of the company. If you can successfully identify when your stock is cheap and complete your buybacks at those times, it's much better than a dividend. WB believes he has an edge in identifying when BRK is cheap.

The OP is technically right. That being said many of the better, older stocks pay dividends. A company that allocates its capital intelligently is one of the things WB looks for. WB would prefer that the company bought back stock rather than issued dividends... But he would much prefer dividends to a company taking the proceeds from a stable profitable business and gambling those proceeds on stupid ****.

I'm with WB. At the same time I don't think the random dividend payments I get are some horrible thing that makes the world a worse place.

EDIT: And obviously the issues with dividends go away instantly when you're investing for income and you need those dividend payments to live on.

WB believes that the business should allocate capital as long as it can generate reasonable returns from that capital. BRK's business is capital allocation. He's going to keep allocating capital until he feels that he can't generate adequate returns and then he'll probably buy back his own stock (to a point where he thinks it's overvalued) and then stuff the money into more normal capital allocation vehicles.

I doubt that point will ever come. WB is probably the best capital allocation guy on the face of the planet. I always shake my head whenever anyone starts off on some 'WB has lost his edge because look at his results over the last 3-5 years!' rant. It's awkward because it's actually probably a really good leading indicator for taking WB's position. People have said that WB has lost his edge every time his results have flattened for a year or two for the last 30 years. So far they have all been wrong. He might be going senile but he'll be dead before we ever find out that this time it was senility.

EDIT: Also I'll take the stock picks of a senile Warren Buffett over any of you (except maybe ahnuld) any day of the week.

I think Buffett's weakness is that he's the old school "let's invest in these old great companies" but things change far more rapidly than what he's used to in the internet era. (and that strategy at least used to crush, so it's definitely an understandable one to have)

Just taking KO for one, adding debt + declining or stagnant growth (sure they're trying to add other products but people keep drinking less sugary crap like coke every year and it's starting to look like it's headed the cig path with added taxes/social stigma). I think it's a sell at these prices and obviously it keeps going up so lol me and what do I know. I can't think of an arguable reason to buy it other than "it's still definitely going to exist in 20 years".

I don't like it when companies borrow $ to increase the div or make one of the #stats look better; to me that's just "hey how do I get a fatter bonus" from the CEO while decreasing the value of the business long term (but getting a boost in the short term)

It's a funny coincidence you mentioned Coke because one of the few major criticisms Buffett had was that he didn't sell Coke in the 2000 stock market bubble when KO had a PE of 47. Yes KO with a PE around 50. It only got that high because as the general public kept funneling more and more money into mutual funds the top holdings in all these mutual funds got bid up and over-inflated.

Net worth is just numbers on a balance sheet

You can collect dividends and still have the same number of shares. You'll eventually run out of shares.

on the most basic level the OP is completely right.......... they are just giving you your own money and now you have less invested in the company

some people seem to think they are magic.... they are not

some dividend thoughts - many have been mentioned already......... i think if dividend stocks have great long-term performance it's more low valuation ratio more than DY driving it.

a company paying a 3% to 4% dividend suggests that the company has real cash flow. less chance of fraud or stupid valuation. i.e. if it pays 4% dividend, it almost can't be expensive ......... not sure, what was enron's yield in good times? that's one company that might counter my comment but not sure there are that many.

years ago - and probably with some people still today - dividends were good to avoid transaction costs. i.e. get yourself nice little 4% "annuity" through dividend stocks and bonds...... now transaction costs are nothing. but maybe people value incredible convenience.

i'm trying to get my head around dividends vs. capital gains - and as noted vs short-term capital gains........... short-term capital gain taxation is to really be avoided strongly..... if i own 3% DY company that i'll own forever then i'm paying small DY tax each year vs. a reasonable capital gains tax on a much bigger gain at the end.

two questions:

is it possible to build a nice, well diversifed S&P 500 portfolio with close to zero DY? or too many good DY companies? i think the latter.

what are the DY's on huge ETF's? it strikes me the DY's often aren't that high, or are they matching the DY of the underlying index? that makes sense but i know there are games to turn a dividend into a long term capital gain.... i.e. SPY could give you the return of the S&P 500 but all in capital gains. the problem i think is that all futures contracts are marked-to-market end of year for tax purposes.

some of that could be wrong.

man youre a genius working out that interest doesnt exist at a given moment

This is wrong. A company pays a dividend, and this dividend payment is taken out of the company's retained earnings. If the company didn't pay out dividends, it could use its retained earnings to make investments to help increase the value of the stock, hopefully increasing the stock price, and thus the shareholder's net worth. When a company pays dividends, the company is giving it's shareholders money out of its retained earning ' s base, which it can no longer use to reinvest into the company's operations. Thus, when a company pays you a dividend, your net worth increases, assuming that the company could not have reinvested that income to otherwise increase the value of the stock.

So a dividend is neutral to your net worth when a company could either pay it out as cash to shareholders, or reinvest it back into the business and increase the value of the stock at the same monetary expected value as paying out a dividend. In other words, dividend payments are almost never EV neutral to your net worth. Either you want your company to pay you a dividend if it couldn't otherwise reinvest profitably back into the business. Or you want your company to not pay dividends if they can earn a high return on investment from their retained earnings base.

Easiest way to think about this is this: Imagine a zero inflation scenario, and a company with flat earnings. They will earn the same amount each year, and the only way they can grow is acquisitions. But let's say they don't do that and pay out 100% of their earnings.

This company would then be assigned a certain fair value yield. Let's say that government bonds yield 3%, and this yield also does not change. Assume they sell some item with predictable stable demand like food products.

This company would then be likely valued at a 5% yield. So your annual return would be 5% over 10 years IF you reinvest. If you simply hold the cash, or if the company would simply hold the cash (not giving you a chance to grow your stake in the company), your net worth would go up less.

So let's say you own $200k worth of stock, and you get a $10k dividend. If you reinvest at a 5% yield, and company is still valued at 5% yield after 10 years, you would have a networth of $335k

But if the company hoarded the cash instead (and they started debt free with zero net cash), and the market values the cash at 100%, your stake would now be worth $300k. Giving you a ~4.15% IRR instead of 5%.

Usually though, the market values the cash at a discount (see Japan and Korea), and your return would probably be only about 3%, despite the 5% earnings yield.

So dividend payout is positive to your net worth here.

BUT it would be negative to your net worth, if they can reinvest let's say 100% of their earnings at a 50% return. If you buy this company at a 5% earnings yield, you should not want a dividend. You would want them to reinvest as much as possible to grow earnings.