The Key to Good Returns is Good Dividends
Historically, income from dividends and growth in those payments have accounted for almost all the long-term return to investors.
In the US, over the period from 1871 to 2009, dividends accounted for nearly 90 per cent of the return to investors.
In various European countries, since 1970 dividend payments and dividend growth have accounted for between 80 and 100 per cent of investors’ returns.
“In periods when stock prices are falling, dividends provide a positive offset to the negative returns from continuing to hold on to shares,” says Allen Brooks, MD of energy investment bankers PPHB.
“Dividends, and especially dividend increases, represent positive statements by managers about the health and outlook for their companies.”
They are also one measure of the soundness of a company. Reported earnings can be manipulated using favourable accounting assumptions. Dividends cannot – they are cash paid out.
Of course, dividends aren’t everything. They may be financed out of extra borrowing (as BP is now doing) in anticipation of profits recovery, but that is something that makes me very uncomfortable.
And dividends may be reduced or not paid at all, so there is more cash available to management to finance expansion. Nothing wrong with that, in a growth business – providing you’re satisfied that money you would otherwise be able to invest yourself is being better invested by the managers.
CopyRight – OnTarget March 2011 by Martin Spring