A Reaction to the Dividend Article on FiveThirtyEight.com

By   July 16, 2014

Yesterday a friend sent me a link to this article posted on the wonderful site fivethirtyeight.com. The article makes a case that corporate America is enriching shareholders at the expense of the economy – in fact, that’s the title of the article. I’d encourage to go read the article – it’s definitely interesting.

After I read it, I had a couple of thoughts and I figured I would try to hash them out here. I certainly don’t claim to have thought this through completely and the original article was written by someone who is way, way smarter than I am, so take these thoughts with a (huge) grain of salt.

First, let’s understand the main, bottom-line point of the article:

  • Large US companies are paying out more cash than ever before via dividends and stock buyback programs. This is leaving less cash for other activities such as investment and growing the operations of the company. The author sees this as ending badly because of the insatiable desire of investors for higher and higher cash payouts.

What are my immediate thoughts on reading this article?

First, I’m surprised that the author does not differentiate between the many different classes of dividend paying companies. There are lots and lots and lots of companies out there that pay dividends at a foolishly high rate, or at a rate which makes the dividend unsustainable at its current level.

Secondly, I’m surprised that the author hardly mentions earnings in his article. For many companies, dividend increases/decreases fall somewhat in line with changes in earnings.

Thirdly, I’m a little bit fuzzy on what the author proposes as a solution. Or if we even need a “solution”. I mean, if the corporation has a legal obligation to guard the fiduciary interest of its shareholders, does this activity not fall under that umbrella?

Mostly I’m surprised that companies such as Coca-Cola or Johnson & Johnson get lumped in with dividend payers that are not very smart. When I invest in JNJ, I do so knowing that the company pays out only approximately half of its earning in dividends. That leaves a lot of room for either future dividend increases or, ideally, investment of that excess cash in order to further the profitability of the firm. And when JNJ posted a net income of approximately $13.8 billion (with a B!) for 2013, that’s a lot of cash for both dividends and investments. True, EPS growth for JNJ has not grown at an ideal rate over the last few years, but I think in the future that will change and that’s why as investors, we look at the payout ratio – how much of earnings are being paid out in dividends. Is that sustainable? Does it leave room for investing and growing the company, etc.?

Anyway, I thought this was an interesting article but it didn’t really convince me on the main points and I’m a little bit confused about why the author felt it was necessary to write it. I’d be interested in reading a longer piece on this topic with some more research and numbers included.

Did anyone else out there see this article?

 

Recent Purchases

By   July 2, 2014

I have recently changed jobs and in the process of doing so, I rolled over my old 401(k) from my company-sponsored plan into my personally-managed IRA. I did that for a couple of reasons: I wanted to be able to directly manage my investments and I also like my financial life to be simple and not very spread out.

Anyway, the exciting part of rolling over the 401(k) is that I got a little pile of cash to invest in my IRA. So what did I do? I opened up positions in the following companies:
AT&T (T)
Target (TGT)
Ford (F)
Intel (INTC)

As you may have guessed, these are all nice dividend payers. T & INTC were bought almost exclusively as cash generators. F & TGT were bought as cash generators but also with an eye towards future growth.

Additionally, I’ve continued to add funds into my regular taxable account. I’ve been slowly growing my position in Johnson & Johnson (JNJ). I have also opened up positions in Piedmont Natural Gas (PNY) and Apple (AAPL) since I lost updated you on my purchases. I was intrigued by the opportunity to get into AAPL under $100 when they did a 7-for-1 split recently. Nothing with them really changed, it’s all psychology, but that’s ok. I like them for the long term and their huge cash buffer bodes well for either stock buybacks and increased dividends down the road.

Anyway, that’s what I’ve been buying recently. Anyone else buying anything interesting?

June Dividend Income

By   June 30, 2014

I know I haven’t been posting much (read: at all) recently, so I thought I’d throw you guys a bone real quick. The end of June marks a major milestone in my dividend income progress — the first month in which I’ve received in excess of $100.00 in dividend income! I received $118.98 in dividends during June. You can track my monthly progress on my dividend income report page.

That means that at the end of June, I now have $118.98 that I didn’t have at the beginning of June. And the best part is that I didn’t have to raise a finger to make that money. That’s just my money working for me. Gotta love dividends. In addition to the dividends, June was also pretty good from a capital gains perspective, which is always nice. Capital gains are, to me, just icing on the cake. Given enough time, I’ll get my initial investments back and then some by receiving dividends so the capital gains are just a nice bonus!

Anyway, that’s all for now. I still have a long way to go in order to be receiving any significantly meaningful annual dividends, but I was happy to cross over the $100/month threshold for the first time. Now the trick is to keep growing that number.

Hopefully I’ll be able to find/make the time to write more in the near future.