Why the most common argument against dividends is wrong!

by , 26 February 2019
Why the most common argument against dividends is wrong!
The most common argument you hear from investors who aren't interested in dividends is that the company should be able to find something better to do with its cash than give it back to shareholders.

They say the funds should be used to grow the business either by investing in the business itself or by acquiring new ones.

These are valid points but here's where they are wrong…

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A bad acquisition is a 1000 times worse than paying a dividend!
 
No shareholder in a company wants their capital invested in a dog.
 
And bad acquisitions happen much more often than you realise and to some of the most savvy businesses.
 
Just consider these horrible acquisitions made by Woolworths and Famous Brands.

 
  • Woolworths: In 2017, Woolworths spent around R511 million to fix Australian retailer David Jones. But ploughing money into its Australian business wasn’t successful. In 2018, the company announced it reduced the carrying value of David Jones assets by around R6 billion.  Woolworths even admitted it overpaid for David Jones when it bought the retailer for about R20 billion. This cost shareholders a cut in dividend of 18%!
     
  • Famous Brands: In 2016, Famous Brands ventured out of South Africa when it bought UK fast-food chain GBK. But since the acquisition, GBK hasn’t delivered the desired returns.. It also lost market share to other UK premium burger chains. GBK’s operating loss widened to R40 million. The consequence of this failed acquisition saw Famous Brands scrap its dividend for the first time in 13 years. Zero value returned to its shareholders!
     
Today, both stocks have lost value because of management’s poor acquisitions. And consequently, investors have lost a lot of money.
 
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It’s a fact – Dividend paying companies have consistently outperformed non-dividend paying companies by as much as 100% - Here’s why!
 
Dividends have more reliable and consistent earnings. And a general investing rule of thumb is.. stock prices follow earnings. 
 
Douglas J. Skinner and Eugene F. Soltes, professors at the University of Chicago and Harvard University, found that: 
 
“…reported earnings of dividend-paying firms are more persistent than those of other firms and that this relationship is remarkably stable over time.”
 
In fact, over the last 20 years, dividends have been one of the most effective and consistent sources of investment returns.  Over 47% of the JSE All Share Index’s total return can be attributable to dividends!
 
And over a 10-year period (since 2008 the financial crisis), JSE dividend-paying companies returned nearly 100% more than non-dividend paying companies.
 
One of my favourite dividend-paying stocks right now will grow dividends by 10% - double its competitors.
 
So without question, high dividend-paying shares should form part of your investment portfolio.
  
See you next week,
Joshua Benton,
Managing Editor, Real Wealth
 
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Why the most common argument against dividends is wrong!
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