While tech stocks such as Apple (ticker: AAPL) and Netflix ( NFLX) continue to cook up tasty earnings — and cryptocurrencies offer, if nothing else, a non-stop sugar rush — shareholder dividends often muster all the excitement of steel-cut oats crusted on the stovetop.
It’s easy to see why. Dividends, even in the best of times, are ho-hum. Frumpy. They lack that headline-grabbing bite. All too often these payments — extended to shareholders as a result of quarterly excess earnings — are held in low esteem by some investors.
How low? Well, Apple survived decades without giving back a penny. Amazon.com ( AMZN) doesn’t deliver, via Prime or otherwise. And in the universe of bitcoin and other cryptos, dividends simply don’t exist.
[See: 9 Dividend Aristocrats for Stable Income.]
“Once a company starts paying a dividend, investors get used to them and it can be hard to eliminate or reduce dividends,” says Sameer Samana, global equity and technical strategist at the Wells Fargo Investment Institute, based in St. Louis. “For that reason, many companies choose buybacks or special dividends, which can be much more discretionary.”
“Companies very simply don’t pay dividends because they feel they have better things to do with their money,” says Bill DeShurko, chief investment officer with FundTraderPro, a roboadvisory that manages 401(k) accounts.
Tops on the list, DeShurko says, “is to reinvest in the business for growth. That means more R&D, physical expansion, marketing. As a shareholder, if a company can invest a dollar and grow by two dollars, isn’t that better than receiving a $1 dividend?”
The better-off-growing factor figures heavily for companies such as Alphabet ( GOOG, GOOGL), Facebook ( FB) and Berkshire Hathaway ( BRK.A, BRK.B). So says J. Keith Baker, a faculty member and chair of the mortgage banking curriculum at North Lake College in Irving, Texas,
“All of these companies, to some extent, are sitting on a pile of cash and could easily pay a sustained dividend to shareholders,” Baker says. But with very high-profile projects — driverless cars, for example — Alphabet is betting on that reinvested money yielding returns beyond any dividend.
“This was the same path that Microsoft ( MSFT) took when it was growing and producing innovative products, rolling out nearly every year,” Baker says.
He adds: “Berkshire Hathaway simply doesn’t pay a dividend because Warren Buffett believes that reinvesting all earnings into the businesses that are owned, or could be acquired, is a better use of funds.”
To borrow from Buffett’s nickname: Now that’s an Oddity of Omaha.
“Buffett himself is famous as a value investor and it would be surprising — and a bit ironic — to see his portfolio not holding a large number of firms paying healthy dividends, in part to keep investors in the money,” says David L. Maurice, vice president of Carrier, Maurice & Webb Wealth Advisors.
Meanwhile, when a dividend drops even in the slightest, to quote Buffett’s Roman Empire doppelganger, consider it caveat investor: Let the shareholder beware.
“When a company cuts its dividend it is often a sign that the company is unhealthy, which may cause the stock price to drop,” says John H. Robinson, owner of Financial Planning Hawaii in Honolulu.
“Additionally, some mutual funds are bound by prospectus to only invest in dividend-paying companies,” Robinson adds. “So when a dividend is eliminated the price may take a hit as the shares are sold from these fund portfolios.”
Nor does the equation “hefty dividend equals healthy stock” necessarily hold water.
“Look at BP ( BP),” says Joseph Inskeep, a financial advisor at Advanced Wealth Strategies Group in Round Rock, Texas. “It pays a hefty divided and it did poorly. From June 1, 2013 to May 16, 2018, the stock has only increased in value by 12 percent.”
[See: 7 Small-Cap Stocks With Big Dividends.]
While BP never reduced or suspended its dividend during that stretch, the Dow Jones industrial average rose 25 percent during 2017 alone.
Yet if dividends had nothing going for them, why would companies offer them in the first place?
“Often times the decision comes down to making a marketing decision that is friendly to shareholders,” says Dan Stewart, president and chief investment officer of Revere Asset Management in Dallas. “Paying a dividend can keep a shareholder base happy and engaged. But the best reason is that the company has matured with excess cash and fewer growth opportunities.”
Consider 3M Co. ( MMM), which has enjoyed 60-plus years of dividend growth. Its dividend per share currently sits at $4.70, double what 3M paid in 2012. In that same period, 3M stock has dipped about 11 percent as the company hopes to land a grand slam along the lines of the Post-it note.
But at least one dividend aristocrat looks poised to enjoy the best of all worlds — including a phenomenal blockbuster drug in the making.
While paying out an ever-increasing dividend that dates to the Kennedy White House, Johnson & Johnson ( JNJ) has watched its stock rise 45 percent in the past five years. It currently trades at $124 per share and earnings could go through the roof when it introduces a planned nasal spray based on ketamine.
Originally developed as a battlefield anesthetic, ketamine has recently been discovered to treat depression with surprising efficacy. Last month, J&J reported that its esketamine spray passed its most recent clinical trial with flying colors. In fact, the FDA awarded esketamine “breakthrough” status in 2016 and is fast-tracking it through the approval process.
Robinson — a self-described disciple of random walk theory and efficient market hypothesis — advises clients, “We do not invest in individual stocks for the purpose of outperforming the broader stock market. Instead, the rising dividend stocks we purchase fill a unique objective: providing an income stream that rises at rate that is consistently higher than inflation over time.”
He adds: “Hopefully, we get some capital appreciation over time, too. If we happen to outperform the broader large cap markets in some years, it is pure luck.”
[See: 9 Mature Tech Stocks to Buy for Dividends.]
Or, sewing oats over stale oats.
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Why Dividends Are Important for Investors originally appeared on usnews.com
