Hello friends, in today’s article we see the what is the dividend? or the hullabaloo about dividends from chapter 7 of common stocks and uncommon profits book. in chapter 7 Philip A. Fisher explains what is the dividend and how they important for the small investor. If you want to dividend, then how much money you have to save in your bank account and how much money you have to put in your account.
What is the dividend?
There is one quote from Warren Buffett that says, ” I am 85% is ben graham and 15% Philip A. fisher” Because they follow benjamin graham as a mentor,
but after charlie Munger tells them to invest in a better company than an undervalued company, from that warren buffet follow the scuttlebutt method from this book.
Let’s start with chapter 7,
The author says, whenever a company that has been paying no dividend, or a small one decided to pay a substantial dividend.
the board of directors says the time has come to do something for shareholders. The company giving dividends to shareholders is doing good or without paying dividends a company can do better. for these two cases to happen let’s see
Two cases happen when a company retains earnings:
1 ) Shareholders get benefits from retained earnings when the company spends money on building a new plant and launching new products or developing assets.
2) Shareholders get no benefit from retained earnings: In this situation, three reasons may affect.
a) Management piles up cash and liquid assets far beyond the needs of a business to get a sense of confidence and security.
b) When Substandard management gets a sub-normal return on capital already in business and uses retained earnings to enlarge inefficient business to justify bigger salaries.
c) Earnings are vitally needed yet cannot increases shareholder value
for examples
A) Spending money on assets like A.C, If in your store there is no any A.C like instrument then customer go the competitor’s store. If you don’t spend money on this instrument, then they can’t increase the volume of business.
B) Other examples, is Depreciation expense this expense comes when the value of that machinery is in end, then you have to replace the whole machinery and equipment.
( After 10 years machine working capacity is over, then the price of that machine is going high in these 10 years, so the cost has to take from the retained earnings.)
If the company have opportunity to increase earnings while invest retained earnings or dividend. so the company doesn’t need to give a dividend to the shareholder.
the company doesn’t have to increase the yield of dividend instead that invest in somewhere to increase the value of that money.
There are some misconceptions about dividends, let’s see what is that
Misconceptions:
1 ) If a company has increased its earnings and does not raise dividends, it is said that This is favoring large stockholders at the expense of small ones because people think,
Their investment is big so dividends are also big but tax brackets also big. The Capital gain tax is minimum than the dividend income tax rate.
The authors say, ” If you give small shareholder dividend, firstly company give the dividend expense tax after shareholder give dividend income tax pay,
whatever the small tax bracket is and shareholder wants to invest that money in some other stocks, then you have to pay the trading cost.
So cutting money from this all stuff, you get very low in form of a dividend.”
The small investor does not get that much money, which affords the expense of his home, because their investment is small.
If the Investor does not needs a dividend for home expenses, then the company does not need to give a dividend, instead,
the company can do invest in another new opportunity to increase company value or stocks.
2) Dividend return is a factor of safety: (misconception)
Because company give high yield on dividend, then stocks not overprice or not fall
but studies show bad stock return give those stocks, that give high yield dividend or not a low dividend yield company.
The author recommends don’t buy these stocks of a company, that focus on the dividend yield. Which are difficult in the company.
Regularity and dependability of dividend:
The most important thing about retained earnings is their regularity and dependability.
The companies that have fixed retained earning policies enjoy a high p/E multiple.
According to policies is based on a fixed percentage of earnings to be returns and other remaining pay the dividend.
The dividend payout ratio, when increase, the company is sure by paying dividend company is capable to get benefit from the funds by using them,
we can and advantage of new opportunity and the new payout ratio is maintained while business is going slow downtrend.
Whatever the companies policy, that doesn’t matter, but that policy does not change, with the time, company get the permanent investor, those investor is happy with that policy.
If a policy is consistent, then retained earnings yield is ending.
if you want outstanding profit the don’t focus on the retained earnings.
the weird things about retained earings are that ” those people give less attention on a retained earning that people get the maximum retained earnings.”
5 to 10 years this time is the best dividend return give from low yield stocks, those his earnings retain and grow and they increase that many dividends then high yield stocks stay behind.
But remember the dividend policy is consistent if any company change his policy regularly is not attract the permanent dividend so this company stocks are too long range is not good.
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