My love of dividends knows no bounds. In fact, over the many years that I have been investing, I have judiciously built a portfolio of income shares that not only pays me a decent overall yield but it also delivers at least one dividend cheque into my account every calendar month. Yes, I get paid monthly to own shares. As a shameless income investor, I can closely identify with John D Rockefeller’s sentiment about dividends. He famously said that the only thing that gave him pleasure in life was watching his dividends roll in. I love my dividends, too….
In fact, over the many years that I have been investing, I have judiciously built a portfolio of income shares that not only pays me a decent overall yield but it also delivers at least one dividend cheque into my account every calendar month.
Yes, I get paid monthly to own shares.
As a shameless income investor, I can closely identify with John D Rockefeller’s sentiment about dividends. He famously said that the only thing that gave him pleasure in life was watching his dividends roll in.
I love my dividends, too. But for me, it is not so much watching my dividends roll in that gets me excited. Instead, it is knowing that my chosen companies are capable of paying dividends that give me pleasure.
Dividend vs. buyback
For me, dividends are a tangible indication that a company is putting the interests of its shareholders close to the top of its agenda.
Thing is, paying dividends is a big commitment and a huge obligation for any company. Once a business has embarked on a dividend-paying strategy, it can be difficult to either reduce or scrap payments later on.
Compare the payment of dividends with share buybacks. Some might argue – and rightly so – that mathematically there is little to choose between the two. In both cases, surplus cash is returned to shareholders, albeit in different ways.
Through a share buyback, the number of outstanding shares is reduced. Consequently, the remaining shares on the market should be worth more, which should boost the value of your investment.
However, dividends, unlike share buybacks, represent real cash in the pockets of shareholders, which should also boost the value of your investment. In other words, you are getting money back from the company but in a more direct way.
Interestingly, Warren Buffett once railed against the practice of share buybacks. He said that all too often repurchases are made for unstated, ignoble reasons to pump up or support a stock price.
He qualified his comments by stating that the only time that it is advisable for a company to repurchase its shares is when it has available funds beyond the near term needs of the business. Additionally, he said the stock should be selling below its intrinsic value for a share buyback to make financial sense.
Crucially, though, when companies use money for buybacks rather than paying, say, a higher divided, they are reducing your control and increasing theirs.
Consequently, as a shareholder in a company that makes use of share repurchases, you are relying on managers to repurchase shares at the right time. But with dividends it is you, rather than the company, that will be in control over how your cash is allocated.
That, for me, is the important difference between share buybacks and dividends. I want control over how my money should be allocated.
In fact, my desire to be in total control of my money goes beyond reinvesting my dividends. I want to be in absolute command over my own financial destiny too. And many of us should try to strive for that same level of control.
Start today by looking at where you are now and where you would like to be financially in another 10, 20 or 30 years’ time. Then look at how you would like to reach your financial goal. For me, investing regularly in the stock market seems like an obvious choice given the long time horizon.
Over the last ten years, the Singapore market, as represented by the Straits Times Index (SGX: ^STI), has returned around 9% after dividends are included. Admittedly, past performance is no guide to the future. But one thing we do know is that leaving money as cash is a poor alternative given the abysmal returns.
So make 2014 the year when you start to take control your financial destiny and learn to invest, better.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.