Podcast Summary
Understanding the importance of dividends in managing risk: Dividends serve as a risk management tool by providing a steady stream of income and signaling financial health to investors
While maximizing expected return is a common goal in investing, it's important not to overlook the role of managing risk. This was highlighted in a recent discussion on the podcast "Unhedged" regarding the return of dividends from companies like Meta. Historically, it was assumed that large, profitable companies would pay dividends. However, Meta's recent announcement of a small dividend sent a significant signal to shareholders and the market, despite the trivial amount of money involved. Dividends represent a portion of the cash flows returned to investors and serve as a risk management tool. Daniel Perez, an investor at Federated Hermes, emphasizes this concept in his book "The Ownership Dividend." While the topic may seem dry, understanding the importance of dividends and their role in managing risk can provide valuable insights for investors.
Dividends' Significant Role in US Stocks' Returns: Dividends accounted for 38% of US stocks' total returns from 1926 to present, but their contribution fell to 17% from 2013 to 2022. High growth US companies like Meta have historically paid less in dividends. However, Meta's recent decision to reinstate dividends signals a potential reversal of this trend.
Dividends have played a significant role in the returns of US stocks over the past century, accounting for approximately 38% of total returns from 1926 to present. However, this trend has shifted in recent years, with dividend reinvestments falling to just 17% of total returns from 2013 to 2022. This decline is particularly notable for high growth US companies like Meta, which have historically had a different relationship with their shareholders. The trend of shrinking dividends in the US has been ongoing for several decades, but Meta's recent move to reinstate dividends suggests that this trend may be reversing. This shift is important because dividends contribute to compounding returns over time, and their impact on overall investment returns should not be underestimated. Despite cultural differences in this relationship between companies and shareholders in other markets, the US has seen a significant decline in dividend yields, making it less dividend-friendly compared to other markets.
Companies shift towards paying dividends as a long-term commitment: Some companies, like Meta, are introducing dividends to signal stability and predictability to shareholders, marking a shift from the previous focus on growth at all costs.
The relationship between companies and their shareholders is evolving, as some companies shift towards paying dividends as a way to signal long-term commitment and stability. This is a departure from the previous growth-at-all-costs mindset, where any excess funds were reinvested or used to buy back shares. Meta, a fast-growing tech company, is an example of this shift, as it recently introduced a small dividend alongside its buyback program. This change could be a response to investor skepticism and market volatility, as well as higher interest rates, which may make dividends more attractive again. However, it remains to be seen if this marks the beginning of a new regime for dividends, or if it's just a trend for certain companies in specific circumstances. Regardless, the reintroduction of dividends signals a new approach to shareholder relations, emphasizing a long-term, predictable payout rather than just relying on the greater fool theory.
Historically, dividends indicated financial health, but companies have shifted towards share buybacks: Companies have favored share buybacks over dividends in recent years due to tax advantages and flexibility, but the trend towards dividends may be reversing
The distinction between dividend-paying and fast-growing stocks may be blurring, as shown by Meta's decision to reinstate its dividend. Historically, dividends served as a reliable indicator of a company's financial health, with cuts signaling trouble. However, the past decade has seen a shift towards share buybacks as a more flexible way for companies to return cash to shareholders. This trend, combined with the preferential tax treatment of share buybacks, has contributed to a decline in dividends. While some signs suggest dividends may be making a comeback, the overall trend remains uncertain.
Caution towards dividends in uncertain economic climate: Companies are hesitant to commit to new dividends due to economic uncertainty, but initiating a dividend can signal confidence to investors. Social media trends can shape public perception, highlighting the importance of staying informed and maintaining a long-term investment perspective.
Corporate caution towards dividends continues in an uncertain economic climate. Following the 2008 financial crisis, S&P 500 dividends have not fully recovered, and growth has slowed down to around 5-6%, contrasting the 10% growth seen in 2022. Companies are hesitant to commit to new dividends due to economic uncertainty. However, for companies that express confidence in their ability to weather economic conditions, initiating a dividend can serve as a strong signal to investors. On the other hand, the prevalence of micro trends on social media, such as "orange peel theory," highlights the increasing importance of engagement farming and the potential for misinformation to spread. While some may view these trends as trivial, they demonstrate the power of social media to shape public perception. Ultimately, these trends underscore the importance of staying informed and maintaining a long-term investment perspective in today's complex economic landscape.
Social media: Irritating and Entertaining: Social media trends can evoke strong reactions, from irritation to amusement, and shape public discourse.
Social media trends, whether they're meant to provoke or not, continue to capture our attention. The speaker expressed her disdain for some of these trends, but then found herself embracing the "frazzled English woman look." Meanwhile, in a New York Magazine article, Bill Ackman's antics provided some unintended humor. Despite his high-profile role in academic controversies, Ackman's self-congratulatory quiz performance was a source of amusement for the speaker. Overall, the discussion showcased the power of social media to both irritate and entertain.
