Excellent post Jeff. As a Financial Advisor who has to survive in this wacky system you really hit the nail on the head. The irrationality of the stock market these days has certainly kicked the old "tangible value" system to the curb. Obviously, there is still value in dividend of "value" stocks but they just arent sexy and wont turn you into a millionaire overnight :). Thanks for the relevant and entertaining posts. keep 'em coming!
You're neglecting, in your analysis, the historical growth of these firms' profits and revenues. It is not unreasonable to expect a firm to grow by a lot if it has shown an ability to grow a lot before. Other firms, like JP Morgan Chase and Bank of America do not have such large valuations and more modest growth. There are also ways besides dividends for firms to return profit to shareholders. Share buybacks are very real.
There certainly are some firms with overly high prices. But most are, if not fair, at least reasonable. Consumer goods firms tend to be less so because a lot of people buy their stock because they buy that firm's products, but don't perform any analysis at all. If you check some non cosgood firms you may be surprised by the reasonableness of their prices.
I think there is a bit of an oversight or misinterpretation maybe regarding dividends. It's portrayed as a good thing you get out of a company. And while it's right, and there is growth and value stocks, it's kinda pointless to say the one or the other is better, and there is also not a whole lot which changed. What people have to understand, is that a company which made 10% profit, can reinvest the profit or share that profit - and for you it makes no real difference. Why? Because if the company keeps the money and reinvests it, it's worth is now 110%. If it pays it to the shareholders, they own the company and the profit now, which has exactly the same value as if the company just reinvested it. As an individual investor you are even likely to reinvest your 10%. So instead of having 10 shares worth 11 dollars each, you get 1 dollar per share paid out, and buy another share for that, ending up with 11 shares worth 10 dollars each. No difference.
Only differences can be taxes depending on the country you live in. Because if dividends are taxed right away, you actually can't reinvest everything again but only the amount after taxes. While if the company reinvests it, you kind of profit from the forbearance of any taxes.
And while this text is talking about individual companies only, investing into individual companies is always a bad idea with high risk. If all your money is on one company, and that one company is toast, then your money is gone.
The stock market always rewards risk with reward. There are very few exceptions. And one exception is diversification. Because instead of investing into some "average company" you split your investment to 1000 avergage companies in 100 different countries. You don't lose any of your rewards, but you vastly reduce your risks. And this is why investing into funds is so attractive.
And there is actually something to look into from historical perspective:
In the past funds were actively managed by...well...managers who needed (or wanted) to get paid.
These days they are more and more funds replaced by "passive management". These funds are then called ETFs. They are just a replication of an index. Like the MSCI ACWI, which is an index of the world ecomony. A bit like NASDAQ 100 or S&P 500 (for which you also got ETFs), but for the whole ecnomony in the world. ETFs on these indexes on average outperform actively managed funds -and they are cheaper to maintain (down to 0.2% or so per year). Of course it is never guaranteed that the world economy will increase, but historically it always did with a couple of gaps of 10 years or so in between, which is why you should have a horizon of longer periods like 15 years to make sure you (almost) definitely make profit. But these ETFs are only really accessible for a few years /decades now. Previously you had to give some manager your money and hope for the best. And even in a scenario where the manager made a profit of the amount of inflation, the 1% or so he is taking from that money every year as payment, still made you lose value.
I hope my explanations added a bit of extra information and increased the viewing angle.
This is, of course, the New Thinking. It's the special verbal trickery used to shame people into not getting the money that is theirs.
Read the section of PSE again. It's very important. Stocks used to be something people could use to retire. You owned a business, it gave you cash, and you used that cash to buy things you needed to STAY ALIVE.
Now companies tell you that dividends are for dummies, hang on to all the money, and it is never seen again lol. This allows stock prices to become entirely uncoupled from any comprehensive theory of their value. And then money managers skim off the top, while kindly increasing our "viewing angle."
I have to disagree, but it might also depend on your personal background. I don't know the situation in the US. I know that in Skandinavia pension investment funds are very successful. Single stock always came with huge risks, whether it is now or 50 years ago. In fact one of the German stock "Deutsche Telekom" sold as the "Stock for the People" in the 90s burnt a lot of Germans in the Dot-Com Crash and lots of these people never touched any stock again. In Germany retirement has never been tied to stocks. Neither by the government, nor by individuals. It's actually a recent development that political parties are now suggesting it, as the old "Generation Contract" where the young provide for the old won't work for much longer anymore due to demographic changes and increased lifespans.
Besides of that, you can always take your money out. Whether you get 10% dividends paid, or you just sell 9-10% of your stock, it grants you the same money. It's your investment, your money, and with todays online brokers its as easy as never before to "take what is yours" out from your funds/bank account.
In the U.S., retirement is tied to the stock market. This is, of course, madness. That is actually part of what I want people to take from my piece.
"Whether you get 10% dividends paid, or you just sell 9-10% of your stock, it grants you the same money."
This is a bit of clever misdirection. First, no company pays a 10% dividend now. Second, if they chose not to pay it, there is no guarantee the stock price would go up 10%. In fact, there are very good reasons to expect this would NOT happen.
Always take the cash, man. Seriously. It's yours. If they won't give it to you, they're up to something. It won't be growing the company.
Fortunately, the whole argument is moot. Dividends CAN'T exist anymore, for reasons given in the article. Again, it's a work of history.
One minor thing I will mention, though I don't know if it makes any difference here: share price will actually go down in direct proportion to the amount of dividends paid out--so while there is no guarantee that a stock price will rise after a company decides not to pay out a dividend, it will have avoided the inevitable fall in share price from dividend payouts.
Yeah, that's what I meantioned before. Dividends aren't any "extra money" which comes out of the void. Dividends reduce the price of the company value. Ofc that is not done at the time of the payout. Sometimes it's when the amount of the dividend is decided/confirmed, and sometimes it's already anticipated before that and the up and down due to that is likely so small that it's not apparent in the daily volatility. I mean Intel with 2.5% dividend is already considered as high dividend payer but daily ups and downs of 1-2% would hide that even IF that effect would show on a single day, which it doesn't.
While I totally get your arguments Kordanor, lack of dividends are NOT immediately offset by a higher price.
Growth and value are two very different things. While they look and seem the same as long as you are contributing to your investment portfolio, or very similar if you are not investing and not withdrawing either, they look completely different when drawing down.
I have used portfoliovisualizer.com extensively to backtest all kinds of different portfolios and to verify and understand the mathematical relationships that I learned about from an online finance class at Yale (Robert Shiller). The book from the class taught that there are 11 principals of money. Period, Liquidity, Quantity, etc. Once you dig into these 11 different characteristics of investments, you realize that dividends and growth are not the same mathematically. Often, a business does not need and cannot use the excess cash to invest back in the business. With many mature businesses, excess cash will often be wasted, so it's actually better to pay it out to me, and let me invest it somewhere else.
I'd check out this book if you're not familiar with these concepts:
Ofc the 10% was just to have an easy to understand example. And while you are right, that the stock is not going up by that amount at that very moment, that's a completely different thing.
Ofc they will not suddenly rise the next day after they didn't pay out the dividends. I mean that's not how the stock market works in general as prices always reflect what is expected from the future.
And as you mentioned the actual amount is less. It's actually so low that you can hardly make out a increase from a missing dividend and daily volatility. But that doesn't change that the money is either paid out to you, or is "working for you" in the company. To say that it just "vanishes" into the void, or goes into the pockets of some manager sounds a bit like a conspiracy theory. And if growth companies needed to pay dividends they wouldn't have had the option to expand that quickly. Maybe the speed of growth is a different now than it had been 30 years ago (but since then we already had the dotcom "generation"). Back 50-100 years ago, when more money was gained via phsyical productions and communication was done via telegraph and snail mail.
Just sitting on cash and have it not work for you is definitely a bad idea. Always has been. Just that in the past both, interest and inflation have been higher, eating each other up, but creating a nice illusion of gains as numbers increased.
And as I mentioned before, diversification is always the way to go. Investing into a single company was always and still is a bad idea. Just that you don't remember any companies anymore which died like 30 years ago and left investors without a dime (Texaco, PG&E, Enron, or also Radioshack, which just isn't quite dead yet)
I shouldn't keep feeding this, but this level of gaslighting is so intense that it requires a response.
"To say that it just "vanishes" into the void, or goes into the pockets of some manager sounds a bit like a conspiracy theory."
This is madness. We have known that executive compensation has been out of control for decades. We know where all the profits end up going!
"Just sitting on cash and have it not work for you is definitely a bad idea."
Maybe it is. Maybe it isn't. But it's NOT YOUR DECISION. I OWN THE COMPANY. IT'S MY MONEY.
"And as I mentioned before, diversification is always the way to go."
This is correct. Yes, you should own multiple stocks, all of them generating cash for you. Don't buy just one stock. But this is completely, utterly irrelevant to all the facts I spat in the post.
This exchange is very illustrative, though. When shareholders try to advocate for themselves, there will always be those who attempt to shame and gaslight them and get them to abandon their own rightful interests. This is why I said repeatedly in my post that I would be mocked. Because I knew I would. It's how the system defends itself. And will continue to defend itself, until it breaks.
I was referring to "my grandfather advised me to buy PSE stock. And I did. It was a good, stable investment. Utility companies pretty much always make money, and PSE paid dividends like clockwork."
Excellent post Jeff. As a Financial Advisor who has to survive in this wacky system you really hit the nail on the head. The irrationality of the stock market these days has certainly kicked the old "tangible value" system to the curb. Obviously, there is still value in dividend of "value" stocks but they just arent sexy and wont turn you into a millionaire overnight :). Thanks for the relevant and entertaining posts. keep 'em coming!
You're neglecting, in your analysis, the historical growth of these firms' profits and revenues. It is not unreasonable to expect a firm to grow by a lot if it has shown an ability to grow a lot before. Other firms, like JP Morgan Chase and Bank of America do not have such large valuations and more modest growth. There are also ways besides dividends for firms to return profit to shareholders. Share buybacks are very real.
There certainly are some firms with overly high prices. But most are, if not fair, at least reasonable. Consumer goods firms tend to be less so because a lot of people buy their stock because they buy that firm's products, but don't perform any analysis at all. If you check some non cosgood firms you may be surprised by the reasonableness of their prices.
https://www.smbc-comics.com/comic/ags
I think there is a bit of an oversight or misinterpretation maybe regarding dividends. It's portrayed as a good thing you get out of a company. And while it's right, and there is growth and value stocks, it's kinda pointless to say the one or the other is better, and there is also not a whole lot which changed. What people have to understand, is that a company which made 10% profit, can reinvest the profit or share that profit - and for you it makes no real difference. Why? Because if the company keeps the money and reinvests it, it's worth is now 110%. If it pays it to the shareholders, they own the company and the profit now, which has exactly the same value as if the company just reinvested it. As an individual investor you are even likely to reinvest your 10%. So instead of having 10 shares worth 11 dollars each, you get 1 dollar per share paid out, and buy another share for that, ending up with 11 shares worth 10 dollars each. No difference.
Only differences can be taxes depending on the country you live in. Because if dividends are taxed right away, you actually can't reinvest everything again but only the amount after taxes. While if the company reinvests it, you kind of profit from the forbearance of any taxes.
And while this text is talking about individual companies only, investing into individual companies is always a bad idea with high risk. If all your money is on one company, and that one company is toast, then your money is gone.
The stock market always rewards risk with reward. There are very few exceptions. And one exception is diversification. Because instead of investing into some "average company" you split your investment to 1000 avergage companies in 100 different countries. You don't lose any of your rewards, but you vastly reduce your risks. And this is why investing into funds is so attractive.
And there is actually something to look into from historical perspective:
In the past funds were actively managed by...well...managers who needed (or wanted) to get paid.
These days they are more and more funds replaced by "passive management". These funds are then called ETFs. They are just a replication of an index. Like the MSCI ACWI, which is an index of the world ecomony. A bit like NASDAQ 100 or S&P 500 (for which you also got ETFs), but for the whole ecnomony in the world. ETFs on these indexes on average outperform actively managed funds -and they are cheaper to maintain (down to 0.2% or so per year). Of course it is never guaranteed that the world economy will increase, but historically it always did with a couple of gaps of 10 years or so in between, which is why you should have a horizon of longer periods like 15 years to make sure you (almost) definitely make profit. But these ETFs are only really accessible for a few years /decades now. Previously you had to give some manager your money and hope for the best. And even in a scenario where the manager made a profit of the amount of inflation, the 1% or so he is taking from that money every year as payment, still made you lose value.
I hope my explanations added a bit of extra information and increased the viewing angle.
This is, of course, the New Thinking. It's the special verbal trickery used to shame people into not getting the money that is theirs.
Read the section of PSE again. It's very important. Stocks used to be something people could use to retire. You owned a business, it gave you cash, and you used that cash to buy things you needed to STAY ALIVE.
Now companies tell you that dividends are for dummies, hang on to all the money, and it is never seen again lol. This allows stock prices to become entirely uncoupled from any comprehensive theory of their value. And then money managers skim off the top, while kindly increasing our "viewing angle."
I have to disagree, but it might also depend on your personal background. I don't know the situation in the US. I know that in Skandinavia pension investment funds are very successful. Single stock always came with huge risks, whether it is now or 50 years ago. In fact one of the German stock "Deutsche Telekom" sold as the "Stock for the People" in the 90s burnt a lot of Germans in the Dot-Com Crash and lots of these people never touched any stock again. In Germany retirement has never been tied to stocks. Neither by the government, nor by individuals. It's actually a recent development that political parties are now suggesting it, as the old "Generation Contract" where the young provide for the old won't work for much longer anymore due to demographic changes and increased lifespans.
Besides of that, you can always take your money out. Whether you get 10% dividends paid, or you just sell 9-10% of your stock, it grants you the same money. It's your investment, your money, and with todays online brokers its as easy as never before to "take what is yours" out from your funds/bank account.
In the U.S., retirement is tied to the stock market. This is, of course, madness. That is actually part of what I want people to take from my piece.
"Whether you get 10% dividends paid, or you just sell 9-10% of your stock, it grants you the same money."
This is a bit of clever misdirection. First, no company pays a 10% dividend now. Second, if they chose not to pay it, there is no guarantee the stock price would go up 10%. In fact, there are very good reasons to expect this would NOT happen.
Always take the cash, man. Seriously. It's yours. If they won't give it to you, they're up to something. It won't be growing the company.
Fortunately, the whole argument is moot. Dividends CAN'T exist anymore, for reasons given in the article. Again, it's a work of history.
One minor thing I will mention, though I don't know if it makes any difference here: share price will actually go down in direct proportion to the amount of dividends paid out--so while there is no guarantee that a stock price will rise after a company decides not to pay out a dividend, it will have avoided the inevitable fall in share price from dividend payouts.
Yeah, that's what I meantioned before. Dividends aren't any "extra money" which comes out of the void. Dividends reduce the price of the company value. Ofc that is not done at the time of the payout. Sometimes it's when the amount of the dividend is decided/confirmed, and sometimes it's already anticipated before that and the up and down due to that is likely so small that it's not apparent in the daily volatility. I mean Intel with 2.5% dividend is already considered as high dividend payer but daily ups and downs of 1-2% would hide that even IF that effect would show on a single day, which it doesn't.
While I totally get your arguments Kordanor, lack of dividends are NOT immediately offset by a higher price.
Growth and value are two very different things. While they look and seem the same as long as you are contributing to your investment portfolio, or very similar if you are not investing and not withdrawing either, they look completely different when drawing down.
I have used portfoliovisualizer.com extensively to backtest all kinds of different portfolios and to verify and understand the mathematical relationships that I learned about from an online finance class at Yale (Robert Shiller). The book from the class taught that there are 11 principals of money. Period, Liquidity, Quantity, etc. Once you dig into these 11 different characteristics of investments, you realize that dividends and growth are not the same mathematically. Often, a business does not need and cannot use the excess cash to invest back in the business. With many mature businesses, excess cash will often be wasted, so it's actually better to pay it out to me, and let me invest it somewhere else.
I'd check out this book if you're not familiar with these concepts:
https://www.thriftbooks.com/w/foundations-of-financial-markets-and-institutions-4th-edition_frank-j-fabozzi_franco-modigliani/286694/item/123359/
Ofc the 10% was just to have an easy to understand example. And while you are right, that the stock is not going up by that amount at that very moment, that's a completely different thing.
Ofc they will not suddenly rise the next day after they didn't pay out the dividends. I mean that's not how the stock market works in general as prices always reflect what is expected from the future.
And as you mentioned the actual amount is less. It's actually so low that you can hardly make out a increase from a missing dividend and daily volatility. But that doesn't change that the money is either paid out to you, or is "working for you" in the company. To say that it just "vanishes" into the void, or goes into the pockets of some manager sounds a bit like a conspiracy theory. And if growth companies needed to pay dividends they wouldn't have had the option to expand that quickly. Maybe the speed of growth is a different now than it had been 30 years ago (but since then we already had the dotcom "generation"). Back 50-100 years ago, when more money was gained via phsyical productions and communication was done via telegraph and snail mail.
Just sitting on cash and have it not work for you is definitely a bad idea. Always has been. Just that in the past both, interest and inflation have been higher, eating each other up, but creating a nice illusion of gains as numbers increased.
And as I mentioned before, diversification is always the way to go. Investing into a single company was always and still is a bad idea. Just that you don't remember any companies anymore which died like 30 years ago and left investors without a dime (Texaco, PG&E, Enron, or also Radioshack, which just isn't quite dead yet)
I shouldn't keep feeding this, but this level of gaslighting is so intense that it requires a response.
"To say that it just "vanishes" into the void, or goes into the pockets of some manager sounds a bit like a conspiracy theory."
This is madness. We have known that executive compensation has been out of control for decades. We know where all the profits end up going!
"Just sitting on cash and have it not work for you is definitely a bad idea."
Maybe it is. Maybe it isn't. But it's NOT YOUR DECISION. I OWN THE COMPANY. IT'S MY MONEY.
"And as I mentioned before, diversification is always the way to go."
This is correct. Yes, you should own multiple stocks, all of them generating cash for you. Don't buy just one stock. But this is completely, utterly irrelevant to all the facts I spat in the post.
This exchange is very illustrative, though. When shareholders try to advocate for themselves, there will always be those who attempt to shame and gaslight them and get them to abandon their own rightful interests. This is why I said repeatedly in my post that I would be mocked. Because I knew I would. It's how the system defends itself. And will continue to defend itself, until it breaks.
I was referring to "my grandfather advised me to buy PSE stock. And I did. It was a good, stable investment. Utility companies pretty much always make money, and PSE paid dividends like clockwork."
I wont reply to the rest.