Rising dividends good sign or neutral or bad

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skor99
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Rising dividends good sign or neutral or bad

Post by skor99 »

Upon looking at my portfolio dividend history the past few months, I see that the dividend payouts are generally higher for my mutual funds, ETFs and the stocks I own as compared to the previous year. In quite a few cases, the increase is more than inflation.
From what I have read here, one should look at total return and not focus on dividends, but the question that I have is if rising dividends portend a good outlook for stocks in general. In my view, rising dividends ( actual dollars and not just yields) are a signal that companies have confidence in the future as they generally never want to decrease dividends. Any views to the contrary ?
alex_686
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Re: Rising dividends good sign or neutral or bad

Post by alex_686 »

Sigh, another "Do Dividends Matter?" thread. In short, interpret it as a single from management that they are doing o.k. So a modestly good signal.

O.K., quick run down. In theory dividend don't matter. You have to make a couple of simplifying assumptions, such as no taxes. It does not matter if earnings are directed towards dividends, stock buy backs, cash, or new projects. In reality this holds up pretty well.

A stock's value comes from "Free Cash Flow to Equity" (FCFE). In theory it does not matter if that cash flow is from dividends, stock buy backs, or a cash merger.

That being said, dividends are considered a higher quality source of cash when analyzing a company, so it gets a lower discount rate. Stock buy backs may come and go but companies are loathed to cut dividends. If a company raises its dividend it is a strong single that it can generate at a minimum that much profit.
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not4me
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Re: Rising dividends good sign or neutral or bad

Post by not4me »

skor99 wrote:Upon looking at my portfolio dividend history the past few months, I see that the dividend payouts are generally higher for my mutual funds, ETFs and the stocks I own as compared to the previous year. In quite a few cases, the increase is more than inflation.
From what I have read here, one should look at total return and not focus on dividends, but the question that I have is if rising dividends portend a good outlook for stocks in general. In my view, rising dividends ( actual dollars and not just yields) are a signal that companies have confidence in the future as they generally never want to decrease dividends. Any views to the contrary ?
I'll let you decide if this is to the contrary or not...to some degree, I don't know that a generalization is useful, especially when you look at groups such as represented by funds & etfs. Did the increase come from companies already paying? some who stopped paying & are now re-starting? Several possibilities there.

Hopefully, the companies have strategies for their capital & dividends are part of that. You are right that they don't want to decrease dividends; especially since that might indicate the strategy wasn't going as planned. Some companies have paid dividends for decades & increased in an orderly manner. But a "unexpected" increase (especially over inflation), may signal management does NOT see opportunities ahead for a profitable use of that cash (that is, no new products/markets, etc) over their plans. They may not want the cash on their books & become a takeover target.
Stryker
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Re: Rising dividends good sign or neutral or bad

Post by Stryker »

skor99 wrote: In my view, rising dividends ( actual dollars and not just yields) are a signal that companies have confidence in the future as they generally never want to decrease dividends.
A dividend increase is a good signal, but not a perfect signal. I've had one company in the portfolio declare a dividend increase in Nov 2016 and then suspend the dividend in May. I don't win them all, but the portfolio is still doing fine.
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Top99%
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Re: Rising dividends good sign or neutral or bad

Post by Top99% »

alex_686 wrote:Sigh, another "Do Dividends Matter?" thread. In short, interpret it as a single from management that they are doing o.k. So a modestly good signal.

O.K., quick run down. In theory dividend don't matter. You have to make a couple of simplifying assumptions, such as no taxes. It does not matter if earnings are directed towards dividends, stock buy backs, cash, or new projects. In reality this holds up pretty well.

A stock's value comes from "Free Cash Flow to Equity" (FCFE). In theory it does not matter if that cash flow is from dividends, stock buy backs, or a cash merger.

That being said, dividends are considered a higher quality source of cash when analyzing a company, so it gets a lower discount rate. Stock buy backs may come and go but companies are loathed to cut dividends. If a company raises its dividend it is a strong single that it can generate at a minimum that much profit.
In *theory* there should be no difference between directing free cash to dividends Vs share buy backs. But this is really only true for *net* share buy backs. Quite a few companies use "share buybacks" as a backdoor to increase employee compensation. As a trivial example, a company could grant a 1,000,000 shares to their employees and then "buy back" a 1,000,000 shares with their free cash. In that case the "share buyback" was basically just redirecting free cash flow into employee's pockets. This type of behavior is part of the attraction for some people at least to dividends.
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Grt2bOutdoors
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Re: Rising dividends good sign or neutral or bad

Post by Grt2bOutdoors »

Indifferent - ask ConocoPhillips shareholders how a string of rising dividends led to a sharp cut in payout after price of crude fell, and is still below level paid 3 years ago.
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randomizer
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Re: Rising dividends good sign or neutral or bad

Post by randomizer »

I don't even bother trying to read the signs. I'd only make a mess of it anyway.
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Bfwolf
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Re: Rising dividends good sign or neutral or bad

Post by Bfwolf »

As it portends to future total return, I'd say indifferent. At least, it's indifferent a few minutes after the dividend was increased and the stock market reacted to it. Anything that's public information is already baked into the stock price.

You'd generally expected dividends to increase faster than inflation as you'd expected stock prices to increase faster than inflation. Are dividends increasing faster than stock prices (i.e. are yields going up?)?
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SimpleGift
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Re: Rising dividends good sign or neutral or bad

Post by SimpleGift »

skor99 wrote:From what I have read here, one should look at total return and not focus on dividends, but the question that I have is if rising dividends portend a good outlook for stocks in general. In my view, rising dividends ( actual dollars and not just yields) are a signal that companies have confidence in the future as they generally never want to decrease dividends.
A couple of classic studies suggest you are right. The first one below looks at rising dividends and the earnings growth of the market as a whole, while the second one analyzes these same factors for individual companies.
Arnott and Asness wrote:We investigate whether dividend policy, as observed in the payout ratio of the U.S. equity market portfolio, forecasts future aggregate earnings growth. The historical evidence strongly suggests that expected future earnings growth is fastest when current payout ratios are high and slowest when payout ratios are low.
Zhou and Rutland wrote:Our tests also show that high-dividend-payout companies tend to experience strong, not weak, future earnings growth. These results are robust to alternative measures of payout and earnings, sample composition, mean reversion in earnings, the effects of particular industries, time periods, and share repurchases.
Stryker
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Re: Rising dividends good sign or neutral or bad

Post by Stryker »

What a lot of people don't seem to realize is that it's not just about rising dividends, but along with these dividends quite often, but not in all cases, in a good market like we've had the last few years, the companies capital gains tend to go up over time in line with these dividend increases. This is not a static portfolio by any means. At least that's been my own personal experience. In the market of 2008 the portfolio of Canadian individual dividend growth stocks held up quite well, considering what it went through.
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JoMoney
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Re: Rising dividends good sign or neutral or bad

Post by JoMoney »

skor99 wrote:... the question that I have is if rising dividends portend a good outlook for stocks in general...?
Dividend policy is very sensitive, investors get very grumpy when a dividend is cut, so management is usually reluctant to raise or institute a regular dividend if they don't expect to be able to continue it into the future... So this might lead me to say raising a dividend means the management is optimistic about the future cash flows for the company.

On the other hand, a cash dividend being payed out is also a statement from management saying "we have too much cash, and not enough viable investment options to reinvest for further growth"... This might lead to me to say management is not optimistic on future growth, so they choose to pay out dividends rather than invest in new growth opportunities.

6 of one, half dozen of the other... call it what you like and take what you can get :?
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Bfwolf
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Re: Rising dividends good sign or neutral or bad

Post by Bfwolf »

Simplegift wrote:
skor99 wrote:From what I have read here, one should look at total return and not focus on dividends, but the question that I have is if rising dividends portend a good outlook for stocks in general. In my view, rising dividends ( actual dollars and not just yields) are a signal that companies have confidence in the future as they generally never want to decrease dividends.
A couple of classic studies suggest you are right. The first one below looks at rising dividends and the earnings growth of the market as a whole, while the second one analyzes these same factors for individual companies.
Arnott and Asness wrote:We investigate whether dividend policy, as observed in the payout ratio of the U.S. equity market portfolio, forecasts future aggregate earnings growth. The historical evidence strongly suggests that expected future earnings growth is fastest when current payout ratios are high and slowest when payout ratios are low.
Zhou and Rutland wrote:Our tests also show that high-dividend-payout companies tend to experience strong, not weak, future earnings growth. These results are robust to alternative measures of payout and earnings, sample composition, mean reversion in earnings, the effects of particular industries, time periods, and share repurchases.
Rising dividends correlating to rising earnings is not surprising to me. But I don't think this is the question the OP asked. If a dividend increase has already occurred, what does that mean for the future of the stock total return?
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SimpleGift
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Re: Rising dividends good sign or neutral or bad

Post by SimpleGift »

Bfwolf wrote:Rising dividends correlating to rising earnings is not surprising to me. But I don't think this is the question the OP asked. If a dividend increase has already occurred, what does that mean for the future of the stock total return?
That’s actually what the Arnott and Asness paper I linked to studied: whether the dividend payout ratio for the market in aggregate is correlated with future earnings growth 10 years ahead. They found a strong relationship — higher current dividend payouts forecast higher future earnings growth a decade hence, and vice-versa (chart below).
The missing link in their study is the correlation between earnings growth and total stock returns — but that connection seems pretty well established over long holding periods, I believe, in both domestic and international markets.
Bfwolf
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Re: Rising dividends good sign or neutral or bad

Post by Bfwolf »

Simplegift wrote:
Bfwolf wrote:Rising dividends correlating to rising earnings is not surprising to me. But I don't think this is the question the OP asked. If a dividend increase has already occurred, what does that mean for the future of the stock total return?
That’s actually what the Arnott and Asness paper I linked to studied: whether the dividend payout ratio for the market in aggregate is correlated with future earnings growth 10 years ahead. They found a strong relationship — higher current dividend payouts forecast higher future earnings growth a decade hence, and vice-versa (chart below).
The missing link in their study is the correlation between earnings growth and total stock returns — but that connection seems pretty well established over long holding periods, I believe, in both domestic and international markets.
I confess I haven't read the article, so apologies in advance.

Isn't the primary driver of dividend yield the price of the stock market? i.e. when the market crashes yields go up and vice versa since dividends don't change as dramatically as stock prices? So I guess I'm wondering if this study is just showing that when the stock market crashes (usually when earnings go into the toilet), that in the following 10 years earnings go up (as companies recover). Sounds like a reversion to mean argument more than anything else. Sorry if I'm misrepresenting it.

I do think there's a big question mark to be placed around the idea that a stock announces a dividend increase, the market reacts, and then the stock price is going to continue to go up faster than it would have otherwise. Doesn't really pass the efficient market sniff test.
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SimpleGift
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Re: Rising dividends good sign or neutral or bad

Post by SimpleGift »

Bfwolf wrote:Isn't the primary driver of dividend yield the price of the stock market? i.e. when the market crashes yields go up and vice versa since dividends don't change as dramatically as stock prices? So I guess I'm wondering if this study is just showing that when the stock market crashes (usually when earnings go into the toilet), that in the following 10 years earnings go up (as companies recover). Sounds like a reversion to mean argument more than anything else. Sorry if I'm misrepresenting it.
You're confusing dividend yield (dividend dollars divided by price-per-share) with the payout ratio (dividend dollars divided by earnings dollars). The Arnott & Asness study and the chart upthread are comparing payout ratios with subsequent earnings growth rates, 10 years ahead. These are all unrelated to the price of the market. Best to review the study. :wink:
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