Dividends protect the investor against his own mistakes

Very often, the surplus money of companies is better in the pockets of shareholders than in the coffers of companies because the latter do not necessarily make good use of it. This is reflected in a better performance of dividend-paying stocks, especially when they are increased on a regular basis, according to Ned Davis' studies.

But the advantage of dividends does not stop there. It is certainly a good thing that a company performs well on the stock market, but all this is useless if on the other side the investor does not know how to manage his emotions. He panics at the slightest drop in the price or he gets all excited after a few dozen percentage points of increase.

We are totally conditioned by stock prices. Go to any financial site, it is the first element that is displayed, usually in a large and bold font. The variations are indicated in color, red when it goes down, implying danger, and green when it goes up, implying go for it, like in the highway code! We should not underestimate the conscious or unconscious message that these stimuli send to our brain. Add to that a large graph, also subject to the same color codes, and it does not take more to become totally obsessed with the prices.

Yet all this is not real, at least not in the short term. The theory of efficient markets teaches us that the variations in the prices of securities follow a random path. I am not entirely in line with this theory when it comes to considering a long-term investment, but in the shorter term I share this opinion completely. As Graham said "In the short term the market is a voting machine, in the long term it is a weighing machine". There is hardly a more accurate statement in terms of investment.

This means that focusing on price is not only useless, but it can also be counterproductive and even dangerous. The colors used to indicate price changes exacerbate our feelings of panic or greed. We are pushed to sell when the market goes down and to buy when it goes up. This type of behavior is similar to a so-called momentum strategy. It works on a short-term horizon, between 6 and 12 months, but in the longer term this approach is very risky.

The only way to break free from this stock price hegemony is to focus on fundamentals. After all, if the price is falling but the company's balance sheet and revenues are still healthy, there is no reason to sell, quite the contrary! Conversely, if the price is rising and nothing has changed within the company, there is no reason to get excited either. Sometimes, of course, this means that the market is anticipating good or bad news, but in this register we are still in a short-term, rather speculative perspective, as with the momentum strategy. As Warren Buffett said, we must focus on annual figures and look at long-term trends.

Of course, all this is easier said than done. When the market is going down the tubes, there is red everywhere and it is even on the news, so that even the average Joe knows about it. And it is exactly the same when it breaks record after record. You would have to live like a hermit and be totally disconnected to be able to ignore the surrounding excitement.

How can we remain unmoved? The fundamentals of companies, their profits, cash flow and assets are all well and good to read in financial reports, but they are not as easily accessible as the share price and, above all, they are much less concrete... At least in appearance.

This is where our friends dividends come to the rescue. Dividends are like a sample of the fundamentals of companies. They remind us in a very concrete way that the company continues (or not) to make profits, despite everything that may happen on the market. Better still, if they progress, it is even a sign that the future prospects of the company are favorable.

Dividends are even more tangible than stock prices. They are hard cash that regularly falls into your wallet, no matter what is happening around you. Your brain registers this very well. There is nothing like it to keep you from panicking and acting like a fool.