by Ram ben Ze'ev (Conservative Values)
In the fast-paced world of stock markets, the allure of quick profits often overshadows the fundamental principles of true investment. One such principle is the notion that investing entails more than mere speculation—it requires a tangible return for the investor. This return traditionally comes in the form of dividends, a portion of a company's earnings distributed to its shareholders. Without this regular income stream, investing devolves into little more than gambling, driven by erratic market fluctuations rather than sound financial strategy.
At the heart of the matter lies a fundamental distinction: investing versus speculation. While both involve the allocation of funds with the expectation of future returns, they diverge in their underlying strategies and objectives. Investing, by definition, implies a commitment to ownership and a desire for long-term growth. Speculation, on the other hand, is characterised by short-term opportunism, often fuelled by market sentiment rather than the intrinsic value of the asset.
The crux of the argument against non-dividend-paying stocks as investments lies in the absence of a tangible return while holding the asset. Without the regular income provided by dividends, investors are left to rely solely on capital appreciation—the increase in the value of their shares over time. While this may suffice for some, it neglects the crucial aspect of generating passive income from one's investments.
Consider this scenario: an investor purchases shares of a company with the expectation of profiting from future growth. However, if the company reinvests its earnings into expansion rather than distributing dividends, the investor is left waiting indefinitely for a return on their investment. In essence, they have traded ownership for speculation, banking on the hope that the market will eventually recognise the company's value and drive up share prices.
This reliance on market sentiment rather than fundamental financial metrics mirrors the dynamics of gambling. In both cases, the outcome is uncertain, and profits are contingent upon the actions of others rather than the inherent value of the asset. Without a dividend to provide a steady income stream, investors are left at the mercy of market volatility, subject to the whims of supply and demand.
Furthermore, the absence of dividends can exacerbate the inherent risks of investing in stocks. Without the cushion of regular income, investors may be more inclined to panic sell at the slightest sign of market turbulence, fearing that their capital gains may evaporate overnight. This short-term mindset runs counter to the principles of prudent investing, which emphasize discipline, patience, and a long-term perspective.
Critics of the dividend-centric approach to investing often point to high-growth companies like Tesla, which have eschewed dividends in favour of reinvesting profits into research, development, and expansion. Although it's true that such companies may offer substantial capital appreciation potential, their stock prices are inherently more volatile, subject to sharp fluctuations driven by market sentiment and speculation. This is evidenced by the more than $178 per share evaporation of Tesla's value over the last two years (e.g., $TSLA closed at $147.05 on 04/19/24).
Moreover, the argument that dividends signal a lack of growth opportunities overlooks the fact that many successful companies have managed to achieve both capital appreciation and dividend pay-outs. Many public companies have successfully achieved both capital appreciation and dividend pay-outs. These companies are often well-established and have a strong track record of growth and profitability. Some notable examples include:
Apple Inc. ($AAPL): Apple has consistently delivered capital appreciation through its innovative products and services, while also returning value to shareholders through dividends and share buybacks.
Microsoft Corporation ($MSFT): Microsoft has seen significant capital appreciation driven by its dominance in software, cloud computing, and other tech sectors, while also rewarding shareholders with steady dividend payouts.
Johnson & Johnson ($JNJ): As a diversified healthcare company, Johnson & Johnson has experienced steady capital appreciation over the years, along with a history of increasing dividend payments.
The Coca-Cola Company ($KO): Coca-Cola has demonstrated long-term capital appreciation as one of the world's leading beverage companies, while also maintaining a strong commitment to dividend payments.
Johnson Controls International plc ($JCI): Johnson Controls, a multinational conglomerate, has achieved both capital appreciation and dividend payouts through its diverse portfolio of products and services in building efficiency, automotive systems, and more.
Procter & Gamble Company ($PG): Procter & Gamble, a consumer goods giant, has provided shareholders with both capital appreciation and consistent dividend income through its portfolio of household brands.
Visa Inc. ($V): Visa, a global payments technology company, has experienced substantial capital appreciation driven by the growth of digital payments, while also returning value to shareholders through share repurchases and dividends.
The companies mentioned above strike a balance between reinvesting profits for future growth and rewarding shareholders with regular income—a strategy that aligns with the principles of sustainable wealth creation.
In essence, the debate over dividends transcends individual stocks like Tesla and speaks to the broader question of what constitutes true investment. By prioritising regular income and long-term growth over short-term speculation, investors can build a more resilient portfolio that withstands market volatility and generates sustainable returns over time.
In conclusion, investing is not merely about buying and selling shares—it's about owning a stake in a company and sharing in its success. Without a dividend to provide a tangible return while holding the asset, investing devolves into speculation, driven by short-term market dynamics rather than long-term value creation. By emphasising the importance of dividends, investors can foster a more disciplined and sustainable approach to wealth accumulation, one that prioritizes stability, income, and long-term growth.
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Bill White (Ram ben Ze'ev) is CEO of WireNews and Executive Director of Hebrew Synagogue and Director of Kestrel Assets Limited, among other companies. For more information about Bill White go to https://mayside.com.