Comments on: The fallacy of dividend paying stocks – Part III http://7million7years.com/2009/03/18/the-fallacy-of-dividend-paying-stocks-part-iii/ How to make 7 million in 7 years ... Sat, 11 Feb 2012 22:32:23 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Adrian http://7million7years.com/2009/03/18/the-fallacy-of-dividend-paying-stocks-part-iii/comment-page-1/#comment-2493 Adrian Sun, 07 Jun 2009 15:38:50 +0000 http://7million7years.com/?p=1470#comment-2493 @ Bob - Thanks; you are right ... I have seen many companies buy, but not integrate well. @ Bob – Thanks; you are right … I have seen many companies buy, but not integrate well.

]]> By: Bob http://7million7years.com/2009/03/18/the-fallacy-of-dividend-paying-stocks-part-iii/comment-page-1/#comment-2492 Bob Sun, 07 Jun 2009 15:11:44 +0000 http://7million7years.com/?p=1470#comment-2492 It may be true that a company is capable of investing in its main line of business, but there is nothing to show that managers are competent to invest in other companies or other lines of businesses. There is evidence that buying markets rather than growing them costs more. Many managers make mistakes about buying businesses, they pay too much, can't merge the operations, etc. Berkshire is not a good example, because it is a holding company which is designed to invest in other companies. Just because you're buying a company for dividends doesn't mean that you can't research it just as well as someone buying for future share growth. It may be true that a company is capable of investing in its main line of business, but there is nothing to show that managers are competent to invest in other companies or other lines of businesses. There is evidence that buying markets rather than growing them costs more. Many managers make mistakes about buying businesses, they pay too much, can’t merge the operations, etc. Berkshire is not a good example, because it is a holding company which is designed to invest in other companies.

Just because you’re buying a company for dividends doesn’t mean that you can’t research it just as well as someone buying for future share growth.

]]> By: Adrian http://7million7years.com/2009/03/18/the-fallacy-of-dividend-paying-stocks-part-iii/comment-page-1/#comment-2496 Adrian Thu, 19 Mar 2009 03:42:53 +0000 http://7million7years.com/?p=1470#comment-2496 @ Jeff - I agree; if you were to invest in a dividend-paying company (and why not? If it's a GREAT company that happens to pay dividends?) you would want to take a MACRO view and ensure that they aren't sacrificing future profits just to appease current shareholders with some 'dividend cotton candy'. @ Rick - Thanks for your comments; I agree with your #1, but I think you can do even better: http://7million7years.com/2009/02/25/the-fallacy-of-dividend-paying-stocks-part-ii/ IF you can reuse dividends to make other great investments, then more power to you ... it's a GREAT strategy, as this two part series from Phil Town demonstrates: http://www.philtown.com/phil_towns_blog/2008/04/your-own-berky.html @ Jeff – I agree; if you were to invest in a dividend-paying company (and why not? If it’s a GREAT company that happens to pay dividends?) you would want to take a MACRO view and ensure that they aren’t sacrificing future profits just to appease current shareholders with some ‘dividend cotton candy’.

@ Rick – Thanks for your comments; I agree with your #1, but I think you can do even better:

http://7million7years.com/2009/02/25/the-fallacy-of-dividend-paying-stocks-part-ii/

IF you can reuse dividends to make other great investments, then more power to you … it’s a GREAT strategy, as this two part series from Phil Town demonstrates:

http://www.philtown.com/phil_towns_blog/2008/04/your-own-berky.html

]]> By: Rick Francis http://7million7years.com/2009/03/18/the-fallacy-of-dividend-paying-stocks-part-iii/comment-page-1/#comment-2495 Rick Francis Wed, 18 Mar 2009 20:07:14 +0000 http://7million7years.com/?p=1470#comment-2495 Adrian, I agree it ideally shouldn't be a big difference if profits come from dividends or share appreciation. However, I can think of a few good reasons that you may want the flexibility of dividends: #1 The market doesn't always seem to realize the value of good companies. Wouldn't it make sense at the 301 stage to have dividends to give you the option to not have to sell at prices you believe are too low? #2 Buying and Selling shares has a transaction cost. If I want to add a new investment and there are no dividends then I have to sell shares and pay transaction costs in order to have the cash to buy something else. #3 Increasing share prices instead of paying dividends can lose some of the profits to management as they typically have large numbers of stock options. Jeff, I wouldn't immediately rule out all dividend paying stocks- consider See's Candies. This is one of the companies Buffet loves BTW- it doesn't really have growth potential, so investing more in it's business isn't likely to be a great investment. However, it is a wonderful cash cow- and Warren has used that cash to invest in other businesses. If you can find such a gem and they distribute profits as dividends why shouldn't you invest in them? -Rick Francis Adrian,

I agree it ideally shouldn’t be a big difference if profits come from dividends or share appreciation. However, I can think of a few good reasons that you may want the flexibility of dividends:

#1 The market doesn’t always seem to realize the value of good companies. Wouldn’t it make sense at the 301 stage to have dividends to give you the option to not have to sell at prices you believe are too low?

#2 Buying and Selling shares has a transaction cost. If I want to add a new investment and there are no dividends then I have to sell shares and pay transaction costs in order to have the cash to buy something else.

#3 Increasing share prices instead of paying dividends can lose some of the profits to management as they typically have large numbers of stock options.

Jeff, I wouldn’t immediately rule out all dividend paying stocks- consider See’s Candies. This is one of the companies Buffet loves BTW- it doesn’t really have growth potential, so investing more in it’s business isn’t likely to be a great investment. However, it is a wonderful cash cow- and Warren has used that cash to invest in other businesses. If you can find such a gem and they distribute profits as dividends why shouldn’t you invest in them?

-Rick Francis

]]> By: Jeff http://7million7years.com/2009/03/18/the-fallacy-of-dividend-paying-stocks-part-iii/comment-page-1/#comment-2494 Jeff Wed, 18 Mar 2009 17:41:01 +0000 http://7million7years.com/?p=1470#comment-2494 Adrian - Another timely and relevant post as always. In reading Buffettology, I'm coming to the conclusion that when you search for excellent businesses, NOT paying a dividend might very well be one of the criteria you SHOULD look for. The reason being that the company could use the retained earnings to grow (i.e. earn more in the future which will increase the company's value) and that you forgo the ensuing tax bill that would come from the dividend payout (assuming you're investing in a non-tax advantaged account). What do you think? Adrian – Another timely and relevant post as always.

In reading Buffettology, I’m coming to the conclusion that when you search for excellent businesses, NOT paying a dividend might very well be one of the criteria you SHOULD look for.

The reason being that the company could use the retained earnings to grow (i.e. earn more in the future which will increase the company’s value) and that you forgo the ensuing tax bill that would come from the dividend payout (assuming you’re investing in a non-tax advantaged account).

What do you think?

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