Are Dividend Payouts Positive for Technology Stocks?

There’s a lousy idea floating out there, that it is a bad thing for a tech company to pay dividends (also here).  Not true!  Companies that pay dividends treat their capital more carefully, because now their equity has an explicit cost.  Studies that I have read indicate that dividend-paying stocks do better then those that do not pay dividends, in the long run.

That said, it doesn’t mean that companies that pay high dividends do better than those with low dividends.  It is well-known in REIT stocks that those that pay low but growing dividends have outperformed those with high dividends that grow slowly.  The right combination is that a small dividend is paid, and the company uses the retained earnings wisely, in order to grow the business profitably, leading to increases in dividends.

When Microsoft (MSFT) started paying a dividend I was a skeptic, because Microsoft was overvalued at the time.  No degree of financial engineering would change that.  Dividends are at most a modest positive for any stock.  Better you should look at the underlying ability to grow free cash flow and be able to reinvest it well.

That’s where investors should focus.  Dividends are good, but growing dividends are better.

About David Merkel 145 Articles

Affiliation: Finacorp Securities

David J. Merkel, CFA, FSA — From 2003-2007, I was a leading commentator at the excellent investment website RealMoney.com (http://www.RealMoney.com). Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and now I write for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I still contribute to RealMoney, but I have scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After one year of operation, I believe I have achieved that.

In 2008, I became the Chief Economist and Director of Research of Finacorp Securities. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm.

Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life.

I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

Visit: The Aleph Blog

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