Thursday, October 18, 2007

Dividends Ultimately are the Only Thing that Matter

I do a seminar on how to research stocks and one of the first lessons I try to convey to my students is that the reason you invest in a company is NOT the fact that you will try to sell it for more down the road, but that you should really invest in a company for dividends.

For ultimately, that is all a company will ever pay until the point it is either sold or goes bankrupt. Therefore dividends are the only cash flow provided by the company over the course of its life and are therefore the real driver of its value.

So a while ago I had pulled some data to get the average dividend yield for the S&P 500 from, and I'm glad I did because they started charging for it when I went to look for an update this morning. Here's my old chart;

Noticed that back in the Great Depression, based on dividend yield stocks were a steal, at one point dividends providing a near 10% of the firm's stock price. But with the nearly 20 year bull market stocks increased at a rate faster than dividends, driving the dividend yield to its historic low of just 1.1%. So roughly, based on the amount of dividends the firm was paying, you'd have to wait almost 100 years to break even.

But that was at the peak of Dotcom Mania and I wondered if the dividend yield, like the S&P 500's P/E ratio had recovered to more normal levels. This required I find more up to date data and found a data series going back to 1927, but then had to supplement it with an old Excel chart I had found (the source of which I did not notate so I don't remember where it came from, but nonetheless I assume it's legit);

And what a whopping recovery. Instead of realizing dividend return of 1.1% you can now expect a full 1.8% return! Seems the market is still partying like it's 1999.


Disposable Info said...

I'm sorry - I feel immodest posting links, but I did a post about this exact topic awhile back. I was (am...) pretty sure the implications are pretty dire.

I'll give you a gift (my version of the graph), at least, Captain, since you've offered me hours of graphs & info to satiate my desires for such things.

Funny enough I used Robert Shiller data, again, for dividend / S&P info - It seems like every time I'm commenting on your blog it pertains to that guy. I swear I'm not obsessed...

Anonymous said...

Dividends nearly at alltime low and corporate profits at an alltime high... Why do firms save the profits for themselves when financing by loans is so easy today?

Captain Capitalism said...

Hey Dtrum,

You're right, but corporations are borrowing money to buy back their shares in record volume. I saw an article about a month or so ago that showed due to low interest rates, corporations are buying back shares and leveraging up. Not that I can blame them.

Bill Gilles said...

These Corporations have to buy themselves back. There is simply too much risk, regulation and oversight for a public company to compete with a privately held firm. Sarbannes-Oxley is but one cause. Another is the weak dollar and foreign currencies have to buy something. And all this just spooks publicly held managers to buy back their own stock as a defense mechanism against takeovers.