In our growing enthusiasm for technology companies, we have tended, over the past 25 years, to neglect good dividend stocks. Some have mistakenly believed that companies that reinvest all their profits into growth have found the ideal operating model for exponential and unlimited growth. While I really like holding dividend stocks in my portfolio, fast growing companies, I consider the presence of very importantpillar companies which pay good dividends in my stock portfolio.
The basis of my reasoning is that most of the studies I have read so far agree on one point: companies that consistently pay a good dividend generate a higher return for their shareholders than those that offer little or no dividend.
The explanation for this finding is not only that they pay a better dividend but also that they generate, in the long term, higher growth in their profits than companies that do not pay a dividend.
A company that pays a dividend to its shareholders must exercise discipline in its daily management. It must safeguard its sources of profit and its most profitable sector market shares at all costs.
Its business acquisition policy must be managed methodically, particularly with regard to debt and interest payable. Every dollar spent unnecessarily is an act that could jeopardize the amount paid in dividends to shareholders. Sound balance sheet management then becomes essential.
You still doubt the capital importance of the dividend, well know that it counts for nearly 50% in the total return of a stock portfolio. It is simple to understand: the net return of inflation of Canadian and American stock securities (and it is probably the same for European securities) for more than 100 years has been approximately 7%, in which one must count at least 3.5% of dividend yield.
Another argument in favor of good dividend stocks is that they offer better protection during periods of temporary depression in the stock markets. The reason is very simple: dividend yield increases with falling prices, thereby increasing the interest of investors who see their capital melting away and want to secure their assets in stocks that offer at least a good dividend yield.
Ultimately, I believe that the stock market investor should, at the very least, permanently hold around 25% of his capital in securities offering a good dividend, what I call "pillar companies"This will have the effect of offering its portfolio good protection in the event of a general market decline.
For the investor who decides to completely ignore companies with good dividends, he risks paying dearly in the long term, especially in periods of bear markets.
Martin Raymond
From the blog “investir-a-la-bourse.com”
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Often these kinds of companies (which pay good dividends) loot the war chest. WB did not like dividends too much. Better to bet on growth stocks which pay low dividends but which grow in absolute value over time.
That said, I also have some good dividend payers in PTF 🙂
Thanks for this article Martin. Personally I also invest in high dividend stocks because it allows you to generate alternative income.
As for growth stocks, as Michel says, they certainly grow over time, but you really have to choose them carefully, which is not an easy task given the economic context.
@Michel: Warren Buffet bet as you said. For high dividend stocks, you already know the result of your bet, which is the advantage.
@Xolali: precisely, growth stocks have been growth stocks for a long time. Air Liquide, L'oReal, Total, Essilor since the 1990s!
Hello Martin and everyone
Glad to read this article about investments. For me, it is important to bet on companies that offer higher dividends and are reliable.
Good continuation
Hello everyone,
In response to Michel and Xolali,
The majority of my MCA Partners Canada portfolio is reserved for fast-growing companies, but I like to focus on pillar companies that are undervalued by the market from time to time and that pay a solid dividend.
Martin
Hello Martin
very nice article and which is in the continuity of your blog which is a mine of information and reflections on focused investment to which I totally adhere.
Growing dividends are very reassuring and it would be ideal if there were no taxes. This is also why WB has never liked to distribute dividends, especially with BRK, which I have had for a long time and which therefore suits me. Our taxes in France are high.
Dividing the portfolio between non-dividend growth stocks and stocks with growing dividends is certainly a good approach.
We can also have values like KO (10% belongs to WB) where we have both in the long term and which is the very example of the growth company with increasing dividends for decades.
Congratulations again for your articles and to dividendes.ch which allows us to evolve in our thinking.
Antonio Martins
Thanks Antonio!
As I say in the article, I like to hold pillar companies that offer a good dividend. This portion of my portfolio is more stable, although it does not yield as much over the long term as the portion of my portfolio dedicated to fast-growing companies.
However, when you can combine a good dividend with a steep devaluation, you get a yield equivalent to that of a fast-growing company, say 2% to 4% in dividend and 12 to 15% in intrinsic growth when the stock becomes well-valued again, which makes a total annualized return of around 14% to 19%, not bad for a pillar company.
Martin
I fully understand Martin's point of view, which is a reality.
It therefore seems important to me to be comfortable with your investment style.
Personally, if I can avoid companies that pay a dividend, I do so, at the very least they will be companies that I can include in my PEA.
Taxation is a terrible obstacle that will permanently weigh down your investments, and we know what we are talking about in France!
I therefore simply prefer a company that is able to reinvest its profits at an attractive rate of return, i.e. significantly higher than what a dividend can bring me.
I would also like to say that, in my opinion, we need to know how to think outside the box. Historically, good dividend payers are pharmaceutical companies, consumer goods companies, energy, etc.
But good candidates can be found in other sectors.
For example, Touax, a French company specializing in the rental, management and sale of shipping containers, modular buildings, freight wagons and river barges. Well, it has been paying a dividend since 1905!
In the US, Genuine Parts, an auto parts manufacturer, has been paying a dividend for almost 60 years.
In short, there is plenty to do...
Absolutely Etienne,
There are also in the same genre Dover, Illinois Tool Works and 3M (Industry).
If you want more tracks in the same genre, this site is very good: http://dripinvesting.org/Tools/Tools.asp
Very pertinent comment Etienne,
Investors often criticize certain companies for not paying dividends to their shareholders, despite a return on equity greater than 20%, which is completely illogical.
Personally, I would much rather see such a company retain its excess funds and reinvest them in the company's operations because such returns are not common.
So the dividend yes, but not to the detriment of better internal profitability of the company.
Martin
SIICs also pay good dividends, required by their status. Foncière des murs also offers added value.
The somewhat negative point, regarding the payment of dividends for SIICs, is precisely the high distribution rate.
In the event of a dip, the company has no room to maneuver and will most likely have to cut its dividend or even eliminate it. And then there will be a massive sell-off.
When a company has a payout of 50%, it has plenty of time to see it through and will have time to readjust its activities without having to modify its dividend policy.