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Author: babyfrog Big red star, 1000 posts Old School Fool Home Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8894  
Subject: Why this board? Date: 4/14/2004 12:05 PM
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Note: much of this post is adapted (or taken directly) from http://boards.fool.com/Message.asp?mid=18003620 . As the author of that post, I am giving myself permission to quote myself liberally.

I believe that dividends are the most important part of investing. The cash flow from dividends is a tangible reward and an often overlooked part of the "risk/reward" trade off. In addition, a dividend is about far more than the cash flow, itself. A share of stock represents a fractional ownership stake in a company. As owners, those "earnings" really belong to the shareholders. If management doesn't like that fact, then management can take a company private and do with it what it likes.

A dividend is the method by which owners' earnings are transferred from the company to the owners. Companies that pay and grow their dividends in proportion with their earnings better acknolwledge the fact that the CEO may run the company, but the CEO really does work on behalf of the shareholders.

It's hard to fake dividends. In order to pay out dividends, a company needs cash on hand and retained earnings. If a company constantly has to borrow money to pay its dividends, then that borrowing becomes evident pretty quickly, putting into question the company's accounting. Additionally, If a company claims extremely rapidly growing earnings, but doesn't adjust its dividends appropriately, that's a signal to investors that the earnings may not be as clean as they originally appear.

Dividends, if reinvested, compound quickly. A stock with a 2% dividend yield that grows its dividend by 8% a year (not difficult if the underlying company is growing Earnings per Share 8% a year) will provide around 10% compound annual 'income' growth rate to the shareholders who reinvest. In addition, if the company's yield is held constant, an increasing dividend helps promote an underlying capital gain, as well. In addition, on a large enough base, dividends can provide inflation-protected income.

Dividends are hedges against stock dilution. If a company has 1 billion shares and is paying a $0.10 per share dividend, then that company has to come up with $100,000,000 in cash. To maintain that dividend in the face of options grants or stock-funded purchases that increase the company's float to 2 billion shares, the company needs to come up with $200,000,000 . As such, it becomes a lot harder to dilute the value of the existing shareholders' shares with dividend paying stocks, because the dilution results in additional money the company has to pay out to maintain its dividends.

And of course, dividends are extremely strong signaling devices. Dividends are not guaranteed payments. As such, when times get tough or management is expecting things to go less well than they are publically claiming, they may feel pressure to reduce the dividend, maintain it as static even when they're publically forcasting earnings growth, or rise it less quickly than earnings are rising. Alternatively, if management does raise its dividends, in line with earnings growth estimates, then it is a very clear signal that the management really believes they can make those targets. That signal helps separate the truth from the accounting and helps provide a clearer picture of the overall health and strength of the underlying company.

Because of the value of dividends to ensuring decent corporate governance, companies that pay and grow their dividends often make worthwhile investments for reasons beyond just the current income from the dividends. The purpose of this board is to research, analyze, and discuss companies that fit into the dividend growth strategy.

Thanks for visiting, and I hope you stick around and participate in the discussion!

-Chuck
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