Results 1 to 7 of 7

Thread: Bring Back the DIVIDEND

  1. #1
    Banned Eric Stoner's Avatar
    Joined
    Oct 2006
    Location
    NYC
    Posts
    5,150
    Thanks
    1,261
    Thanked 1,430 Times in 888 Posts

    Default Bring Back the DIVIDEND

    Althought the primary cause for the current mess are trillions in lousy mortgages and related securities; a lot of the related problems go back to the replacement of the Dividend by Earnings.

    Time was, the health of a corporation was measured by the dividends it was able to pay. Its stock price was determined, in part, by its dividend. Over the years "earnings" and earnings per share became the benchmark for stocks. Many stocks in the '90's stopped paying dividends at all so that after 2000 dividends became more and more rare. Stockholders were expected to benefit by increases in the share price. Earnings multiples became the biggest selling factor for a stock and NOT its overall balance sheet and long term prospects. New "products" coupled with a breakdown of the separation between commercial and investment banks even BEFORE Clinton signed a virtual repeal of Glass- Steagall in 1999 also played a part.

    To me, the obvious solution includes getting back to basics that would include greater transparency and ACCOUNTABILITY and the encouragement of dividends. If a company is not profitable; it can't pay a dividend so dividends encourage the other two virtues. Payment of a healthy dividend also provides a hedge against short selling because it provides a floor of essential, intrinsic value to a stock; a point below which it is very unlikely to fall.

  2. #2
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: Bring Back the DIVIDEND

    ^^^ arguably, the 90's change away from the importance of dividend payments and towards share price gains in the non-dividend paying stocks was DIRECTLY related to tax policy. Dividends are taxed as ordinary income, while share price gains are taxed as capital gains at a much lower percentage rate.

  3. #3
    Veteran Member
    Joined
    Sep 2005
    Posts
    426
    Thanks
    0
    Thanked 9 Times in 9 Posts

    Default Re: Bring Back the DIVIDEND

    Both of you are wrong.

    Stocks 101

    Lets say, you want to open an Ice Cream Shop, but don't have the Money

    I'll lend you $100 (to keep the Math Simple) and you issue me 1 share of ICS and 50% ownership (You keep the other share). So totally there are two shares

    After Year 1, your Ice Cream Shop Has
    Revenue = $200
    Cost = $100

    Profit aka Earnings= $100

    ICS Earnings Per Share = $100/2 or $50

    ICS can do three things with $100
    1) Distribute the $100 to the shareholders fully (each share gets $50). I as a shareholder can take that $50 and put in a bank and earn 2% or have to find another budding entrepreuner for better returns

    2) ICS can come to me and say. "Look, ICS made you lot of money in Year 1". We can actually open another Ice Cream Shop and earn the same kind of profit".

    Since ICS doubled my money (Return On Equity = 100%) and ICS have already proven their worth, I would gladly agree to open another shop and earn another 100% on that

    3) ICS has a cool project that'll return 100%, but that project needs $50 only. So, ICS keeps $50 for that project (I expect to earn 100% on that) and pay the other $50 as Dividend


    If you are a Microsoft, or Berkshire, or Intel or Apple or Google. I don't want you to return the money as dividends(Well Microsoft have ran out of cool projects and hence they are giving back the money), but keep doing the great stuff and earn more money for me

    OTOH, if you are a GM, or Ford. I know from your past history and your conditions, you will not put my money in good projects, so I ask you to please return all the earnings in the form of dividends

    Bottomline, if your money is handled by brilliant managers who will give you fantastic ROE ala Buffett, I don't want any dividends but please keep the money and grow it for me. In fact, BRK.A has never paid any dividends

    Sure taxes help, but ROE trumps any Tax benefits

    PS: 99% of clueless idiots running shady web-sites still think Stock prices are affected by Supply and Demand like commodities (true in a short time frame). But, in the long run, it is determined by ROE and its underlying Future Earnings Power

    i.e BRK.A stock price went from $10 to $140,000 not because there is a huge demand of BRK.A stock, but because Buffett kept earning 25-30% Year after Year on the initial $10 you paid and the market price reflects that

    Stock Price Exercise Problem
    At Year 1, two shares of ICS was worth $100. i.e on an open market it would trade at $50

    At the end of Year 2, if market thinks that ICS will grow 100% for the next 5 years and settle at a steady 12-15% Earnings Growth, by Discounted Cash Flow (DCF) analysis, its share price will trade around $1250

    At the end of Year 3, it comes up and says it grew only 80%, the market will quickly adjust the stock price to around $800.
    * Clueless idiots running shady web-sites at this point will scream,
    "ICS grew by an outstanding 80%, yet George Bush and his oil buddies manipulated its share price to make it crash to $800!!!!!." They'll also scream 'Buy Buy' because the fundamentals of ICS hasn't changed

  4. #4
    Banned Eric Stoner's Avatar
    Joined
    Oct 2006
    Location
    NYC
    Posts
    5,150
    Thanks
    1,261
    Thanked 1,430 Times in 888 Posts

    Default Re: Bring Back the DIVIDEND

    Quote Originally Posted by xanfiles1 View Post
    Both of you are wrong.

    Stocks 101

    Lets say, you want to open an Ice Cream Shop, but don't have the Money

    I'll lend you $100 (to keep the Math Simple) and you issue me 1 share of ICS and 50% ownership (You keep the other share). So totally there are two shares

    After Year 1, your Ice Cream Shop Has
    Revenue = $200
    Cost = $100

    Profit aka Earnings= $100

    ICS Earnings Per Share = $100/2 or $50

    ICS can do three things with $100
    1) Distribute the $100 to the shareholders fully (each share gets $50). I as a shareholder can take that $50 and put in a bank and earn 2% or have to find another budding entrepreuner for better returns

    2) ICS can come to me and say. "Look, ICS made you lot of money in Year 1". We can actually open another Ice Cream Shop and earn the same kind of profit".

    Since ICS doubled my money (Return On Equity = 100%) and ICS have already proven their worth, I would gladly agree to open another shop and earn another 100% on that

    3) ICS has a cool project that'll return 100%, but that project needs $50 only. So, ICS keeps $50 for that project (I expect to earn 100% on that) and pay the other $50 as Dividend


    If you are a Microsoft, or Berkshire, or Intel or Apple or Google. I don't want you to return the money as dividends(Well Microsoft have ran out of cool projects and hence they are giving back the money), but keep doing the great stuff and earn more money for me

    OTOH, if you are a GM, or Ford. I know from your past history and your conditions, you will not put my money in good projects, so I ask you to please return all the earnings in the form of dividends

    Bottomline, if your money is handled by brilliant managers who will give you fantastic ROE ala Buffett, I don't want any dividends but please keep the money and grow it for me. In fact, BRK.A has never paid any dividends

    Sure taxes help, but ROE trumps any Tax benefits

    PS: 99% of clueless idiots running shady web-sites still think Stock prices are affected by Supply and Demand like commodities (true in a short time frame). But, in the long run, it is determined by ROE and its underlying Future Earnings Power

    i.e BRK.A stock price went from $10 to $140,000 not because there is a huge demand of BRK.A stock, but because Buffett kept earning 25-30% Year after Year on the initial $10 you paid and the market price reflects that

    Stock Price Exercise Problem
    At Year 1, two shares of ICS was worth $100. i.e on an open market it would trade at $50

    At the end of Year 2, if market thinks that ICS will grow 100% for the next 5 years and settle at a steady 12-15% Earnings Growth, by Discounted Cash Flow (DCF) analysis, its share price will trade around $1250

    At the end of Year 3, it comes up and says it grew only 80%, the market will quickly adjust the stock price to around $800.
    * Clueless idiots running shady web-sites at this point will scream,
    "ICS grew by an outstanding 80%, yet George Bush and his oil buddies manipulated its share price to make it crash to $800!!!!!." They'll also scream 'Buy Buy' because the fundamentals of ICS hasn't changed
    Not quite. Didvidends were often RE- INVESTED.

  5. #5
    Banned Eric Stoner's Avatar
    Joined
    Oct 2006
    Location
    NYC
    Posts
    5,150
    Thanks
    1,261
    Thanked 1,430 Times in 888 Posts

    Default Re: Bring Back the DIVIDEND

    Quote Originally Posted by Melonie View Post
    ^^^ arguably, the 90's change away from the importance of dividend payments and towards share price gains in the non-dividend paying stocks was DIRECTLY related to tax policy. Dividends are taxed as ordinary income, while share price gains are taxed as capital gains at a much lower percentage rate.
    That was then. Aren't dividends tax free now ?

  6. #6
    Veteran Member
    Joined
    Sep 2005
    Posts
    426
    Thanks
    0
    Thanked 9 Times in 9 Posts

    Default Re: Bring Back the DIVIDEND

    Quote Originally Posted by Eric Stoner View Post
    Not quite. Didvidends were often RE- INVESTED.
    Wrong.

    Dividend Re-Invested never goes to the Corporation. Only Retained Earnings goes to the corporation

    Dividend Re-investment ==> Buying Shares of the same company at the open market. i.e you pay another person to buy the share from him

    Difference between Retained Earnings and Dividend Re-Investment

    1) Retained Earnings
    ICS earns $100.
    ICS retains the earnings for future projects. i.e ICS can use that money to grow

    2) Dividend Re-investment
    ICS earns $100, but distributes it to the shareholders
    Shareholder buys ICS at open market from another seller. i.e the seller gets the
    money not ICS.

    Big difference, especially in the performance

  7. #7
    Banned Eric Stoner's Avatar
    Joined
    Oct 2006
    Location
    NYC
    Posts
    5,150
    Thanks
    1,261
    Thanked 1,430 Times in 888 Posts

    Default Re: Bring Back the DIVIDEND

    Quote Originally Posted by xanfiles1 View Post
    Wrong.

    Dividend Re-Invested never goes to the Corporation. Only Retained Earnings goes to the corporation

    Dividend Re-investment ==> Buying Shares of the same company at the open market. i.e you pay another person to buy the share from him

    Difference between Retained Earnings and Dividend Re-Investment

    1) Retained Earnings
    ICS earns $100.
    ICS retains the earnings for future projects. i.e ICS can use that money to grow

    2) Dividend Re-investment
    ICS earns $100, but distributes it to the shareholders
    Shareholder buys ICS at open market from another seller. i.e the seller gets the
    money not ICS.

    Big difference, especially in the performance
    Duh. With a widely held Dow Index or S & P corporation what usually happens tp the stock price if there is substantial dividend re-investment ? It goes UP.

Similar Threads

  1. Bring Back Hayden!
    By ManyRoses in forum Camming Connection
    Replies: 35
    Last Post: 01-09-2012, 03:28 PM
  2. if I could bring back ...........
    By ArmySGT. in forum The Lounge
    Replies: 1
    Last Post: 12-24-2007, 05:27 PM
  3. Bring Back The Snow!!!!
    By cutey5032 in forum The Lounge
    Replies: 4
    Last Post: 12-06-2007, 04:27 PM
  4. Songs that bring back memories....
    By madmaxine in forum Music Mix
    Replies: 13
    Last Post: 04-30-2005, 03:17 PM
  5. Bring back the (don't say 'draft')
    By Melonie in forum The Lounge
    Replies: 17
    Last Post: 07-02-2004, 06:59 PM

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •