Dividend Myth?
I'm fairly convinced dividends are a myth because whether "pay me now or pay me later," the total return is identical to capital appreciation (assuming all other things constant; we could debate about whether a company would improve efficiency or growth by not paying the dividend but that's all hypothetical).
Furthermore, periodic redemption of shares (e.g. every quarter or every year) strikes me as synthetically equivalent to receiving a dividend check in the mail. However, one real difference would seem to be the stock commission. That does seem like real loss to the investor such that if one needs cash on a periodic basis to cover living expenses, for example, a real benefit to dividend payers vs. growth stocks might be realized.
In Finance, I've found many things seem different but are in fact the same. Am I missing something here? Is there a real cost to dividend stocks that lessens their value to the small extent that a periodic stock commission would for non-dividend payers?
One thought I had was the cost to dividend companies. They must have administrative fees associated with issuing all those checks on the periodic basis not to mention banking costs for different accounts, managing the sub-accounts, etc. These increased expenses/liabilities could lower cash on hand and maybe ultimately filter through to a lower stock price but this seems like such a small drop in the bucket that it's not even meaningful (and only theoretical, besides, whereas a periodic stock commission would be clearly measurable).
I hope what I've said makes some sense and I'd be interested to hear others' thoughts on this. Thanks!
Hey, I can give my opinion on this.
I totally understand what you're saying. Why should a company release a dividend, since holding onto that cash and putting it to work would allow, in theory, for the equity share to increase in value (perhaps at an even higher clip)?
I tend to enjoy dividends because I feel like it separates me from the random-walk of the stock price, which I kind of take into consideration sometimes if a stock I am looking at/holding isn't in an earnings season or competing outright for some special event contract or something. Dividends allow me to forget the daily fluctuations of the asset price and allow me to take a fully fundamental approach - not take the fundamental approach and then hope its realized in the asset price. I just feel like its a lot easier for me to predict consistent dividend payouts with financial statement analysis, rather than make a bs DCF model/ EBITDA multiplier thing and "predict" where I think the stock price may go. But that's just me.
Once theory to consider is also by this Harvard professor (I forget his name). But he basically said a steady dividend actually helps a company, rather hurt it - contrary to the whole "but that cash could be used for operations instead!" thing. He went on to say: when management knows they must pay out a quarterly dividend, they tend to keep the company more lean and better manage budgets and don't overspend. When a company is sitting on a lot of cash, especially if its internally generated cash (not debt), they tend to overspend be it acquisitions or hiring a lot of people. etc.
But yep, I like dividends.
And hopefully someone from a treasury department can help answer your question regarding extra administrative costs. But I doubt it's that much extra. I'm sure a brokerage/bank upsold this service with whatever other services a company's treasury department uses with the bank.
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