Why Do Uneducated People Like Dividends?

My favorite is when people complain about companies not paying dividends because "they want to keep the cash for insiders".

Meanwhile, the company could be owned 80% by insiders so if they were to pay dividends majority of them would actually go to insiders anyway, while Joe-the-investor would see no net change in their portfolio value.

Then the same people complain that the dividends were a payday for management.

tripleB said:
1) Dividend income is taxed twice. The corporation does NOT get a tax deduction for paid dividends. They pay their effective tax rate (which is usually around 30% given the 35% federal tax) on the dividend money, then when you get the dividend, you pay taxes on it again. This would be like your father paying income tax on his paycheck, then giving you a $10 weekly allowance that you have to pay $3 to the government in taxes on.

If you hold dividend producing stocks in an IRA or 401(k) those dividends are not taxed when you get them. Also do not kid yourself, the effective corporate tax rate that big companies pay is waaaay below the nominal corporate tax rate. Just to use Boeing as an example:

http://en.wikipedia.org/wiki/Boeing#Taxes_paid

"In April 2009, BusinessWeek magazine reported that Boeing was one of 25 US companies that paid the least US taxes. Based on the magazine's analysis of company financial records for 2005 to 2008, Boeing paid an average annual tax rate of 3.2 percent, much less than the standard 35 percent corporate tax rate."

Edit: If you're buying REITs or an REIT fund/ETF and holding those shares in a tax-deferred account then you do even better. REITs don't have to pay taxes on their income as long as they pass the vast majority of it on to their shareholders.

I imagine most businesses try to zero themselves out at the end of the year (or whatever their filing year end is) and thus that is why they have little taxable income for the entity but it will still get taxed as it will go out to someone either as wages or a purchase for equipment (which will subsequently get paid to the providers of said equipment as wages).

centrifuge41 said: In economic theory, a stock's current price is the net present value of all future dividends. How is this theory to work out for stocks that do not generate dividends?

I guess Berkshire Hathaway which pays 0 dividends shouldn't have beat the SP500 by 300x over the last 50 years and instead should be worth zero.

JustAce said: People who are in retirement or reaching that age would rather have a predictable income not based on their short term trading strategies.

How is a non-guaranteed dividend considered predictable income?

Wouldn't a greater form of predictable income be selling $1000 worth of shares of stock each month?

"Sunset" industries and firms are more prone to paying dividends because they do not need as much cash for investment.

High tech and other firms that are in growth mode should conserve cash for internal investment and expansion.

Xnarg said: tripleB said:
Wouldn't a greater form of predictable income be selling $1000 worth of shares of stock each month?Consider transaction costs.

Transaction costs are zero if selling a Total Stock Market or SP500 index fund.

tripleB said: JustAce said: People who are in retirement or reaching that age would rather have a predictable income not based on their short term trading strategies.

How is a non-guaranteed dividend considered predictable income?

Wouldn't a greater form of predictable income be selling $1000 worth of shares of stock each month?

Nothing is certain in life, and I know your argument is to turn to bonds but those always have the possibility of default as well. However, investing in stalwarts is for the most part a sound strategy. There will always be anomolies in the market such as the collapse of GM but the bonds fared just as poorly as the common. For the most part these are safe investments that allow people to prosper from the growth of the market and the company while still having a reliable expectation of income.

You also forget that once you sell those shares of stock, you must find something to reinvest in. Not everyone has an active interest in the stock market and constantly wants to search for new ideas. I'm in the same mindset and age range as yourself, I am not one looking to invest in dependable dividend paying firms but its naive to believe that they are good for no one.

Dividends are also a way to keep institutions invested in companies, keeping the stock price up and serving as another tool in keeping a company from becoming a take over target.

BBB, you are right and wrong...

The problem is that enough people foolishly don't care about dividends, that companies can sell stocks without providing dividends. The market is now a big gamble based on confidence that other people are willing to pay more for something that may be completely worthless. As long as others continue to pay into this system (buying stocks with no real value), it works.

JustAce said:
Nothing is certain in life, and I know your argument is to turn to bonds but those always have the possibility of default as well.


Not if they are treasury bonds.

JustAce said:
You also forget that once you sell those shares of stock, you must find something to reinvest in.
Not if you are spending the money. If you are not spending the money then theres no need to sell the stock

riznick said: BBB, you are right and wrong...

The problem is that enough people foolishly don't care about dividends, that companies can sell stocks without providing dividends. The market is now a big gamble based on confidence that other people are willing to pay more for something that may be completely worthless. As long as others continue to pay into this system (buying stocks with no real value), it works.

Not entirely correct. You're assuming that dividends are the only way that companies can return cash to shareholders, but they return cash to shareholders via stock repurchases as well. Example:

Company A and B both have 100 shares outstanding, and expect to earn $100 this year and every year into the future with no growth. The market demands a 10% rate of return. This year both A and B pay 100% of their free cash flow in dividends. The value of their respective stock is ($100/100 shares)/10% or $10. The holder of the stock ends up with $11 in value -- $10 from the shares, and $1 from the dividend they just received.

Next year, company A continues this policy, but B decides to pay $0 dividend and repurchase stock instead. The value of B's stock is $10 so their $100 earnings can be used to repurchase 10 shares. The value of the stock now can be calculated to be ($100/90 shares)/10% or $11.11 -- the same as the value a shareholder in the dividend paying company would realize if they reinvested their dividend at 10% return p.a.

Given these scenarios, the only real difference between a dividend paying stock and one that repurchases stock is the tax treatment for the owners of the stock. Considering that dividends are tax disadvantageous when compared to long term capital gains, investors should prefer to have earnings paid out in the form of share repurchases rather than in the form of dividends.

ppatin said: Dividends on a stable, blue-chop company can be a lot more reliable than the share price. Take Altria (one of my favorites, making money off of people's vices makes me smile) as an example. over the past couple years they've fluctuated between $24 and $15 a share. The big drop wasn't because there was anything wrong with the company, they were just caught up in a bad market, but if you'd had to sell some shares when they were at their low price you'd still be screwed. The whole time they kept paying a steady, reliable dividend though. Keep smoking people!

You're missing the point though. The reason dividends tend to be stable is because when companies adjust their dividends it tends to be viewed as a negative sign for the stock. Therefore, companies tend to not want to adjust their dividend policy except when absolutely forced.

Why does this matter? The cash a company pays out in dividends doesn't come from nowhere, it comes from the company's treasury. If the management of the company feels compelled to maintain a dividend during economic downturns they may feel the need to not invest in projects that would produce positive returns in order to be able to maintain a dividend level. This will ultimately mean that my stock will be worth less than it otherwise could be.

OP has a way in insulting people. Not sure what his educational level is. I hold dividend-paying stocks because one of which is my employer. We get a 75 cents matching on each dollar invested in the 401K. I don't look for dividend-paying stocks. Does it make people like myself educated? educated? or what?

centrifuge41 said: In economic theory, a stock's current price is the net present value of all future dividends. How is this theory to work out for stocks that do not generate dividends? I prefer the greater fool theory.

cameron2003 said: Me don't know. Me love dividens.Me agrees wit yu. Mi dividens portfolyo yeeldz 16.87 per cents. But, wat doo I no, im uneducatated.

From an EMH perspective, if dividend stocks really sucked, their prices would fall until they were a worthwhile buy. Just giving qualitative statements like "dividends suck tax-wise" or "the stock price might fall" doesn't say much without any quantitative measurements (the same goes for "cash flow is king"). All of that information is supposed to be factored into the price anyways. This isn't to say that I think everyone is rational (we've all read plenty of articles to the contrary), that I believe in a strong form of EMH, or that I dream about dividends every night. I do think they have a place for some people, depending on their risk profiles.

I do agree with some of your points though, especially #2. I have no idea why anyone would invest in a company for which they thought that dividends were the only thing preventing the CEO from pushing the company into bankruptcy through unnecessary luxury purchases. FWIW, there are tons of uneducated preaching "buy bonds" and "buy growth stocks" as well. I don't think they're limited to only investing in dividend stocks, nor do I think dividend stocks are only limited to uneducated buyers. Just my 0.02.

Profits belong to the shareholders, and dividends are just distributed profits. People own stocks believing management will make the right decision regarding the hard earn income of the company. If management sees that growth opportunities aren't there (ie capital projects will under earn the cost of capital inclusive of equity) then it is more efficient to pay out the dividend to shareholders. There are quite a few "growth at all cost" managers who run cash cow companies but pay no dividend and instead use the cash to fund crappy budgets and stupid acquisitions; they are destroying shareholder value. It is proper stewardship of a company to pay dividend and manage capital structure as efficiently as possible.

tripleB said: gwu1986 said: cameron2003 said: Me don't know. Me love dividens.Me agrees wit yu. Mi dividens portfolyo yeeldz 16.87 per cents. But, wat doo I no, im uneducatated.

How do you have a 17% yield on your porfolio unless you are using Junk Bonds and crap stocks?Nope, all stock dividends. Dividends of 6,330 on a 37,516 cost basis.

(I don't believe they are "crap" stocks: MO, PM, KFT, XOM, SO, WEC, RDS.A, KO, PEP, BMY, GE, BAC.PR.H, Q). But, I am "uneducated so what do I know.