>> If Intel cuts its dividend the stock will crater
Not necessarily. It really makes zero difference to the valuation of a company. Investors really punish companies that can barely cover their dividend (or worse have to borrow). If earnings are bad and revenues are not growing, the dividend is just a hokey shell game that works for about 5 minutes.
Depends on the investor. There is an entire class of investor that is focused on stocks that reliably deliver a dividend. I wasn't aware that Intel had joined old-economy companies like oil, but I also don't fully understand the dividend investor mindset, as I can't figure out a tax situation that makes it appealing...
> I also don't fully understand the dividend investor mindset
That interesting, because I don't understand the mindset of investors who are just trading stocks like baseball cards. They don't seem to care what the company actually produce, just that the numbers tell them that the stock can sell for a little more next year.
Divided makes a lot of sense, because it keeps yielding money, for the same initial investment. So it's just extra money, but it's money you can actually spend. Sure you pay taxes on the divided, but you still hold the stock and can sell that at a late time.
Honestly I feel that it problems are the companies that never pay divided. The investors then depend on buy-backs or trading to recover their investment. This has created investors that do not care about the companies they invest in. The companies can go broke tomorrow and that's fine, as long as they can sell their stocks before it happens.
Studies have shown (take this with a grain of salt because I heard this from a podcast), that dividend stocks and non-dividend stocks have roughly equal returns in the end, with dividend stocks faring slightly worse.
This is because dividend stocks tend to appreciate less.
So taking $X in dividends every six months ends up being the same as selling $X of your portfolio every six months in the end.
Except that there are often different tax rates between capital gains and dividends. Even if there weren't tax rate differences, reinvesting dividends effectively compounds the tax rate annually, whereas the capital gains tax is a simple rate the year you realize the gain.
Though, in a tax-free retirement account, it's moot.
It is really just a matter of what a company does with its earnings. The options are: 1) invest in the business (including acquisitions, etc), 2) stockpile cash and 3) pay dividends.
If you want dividends simply sell a portion of your holdings every quarter.
When one focuses solely on dividend yield and not total return, which includes capital appreciation, it's a sign they don't really what's going on.
Where do you think the dividends are coming from? Straight from the company's market cap.
By preferring companies that consistently pay high dividend yields you're selecting for larger and established companies that have no better way to reinvest the money.
This may result in a fine choice if you want income, but the important distinction is not because of their dividend yield... it's because of their positions as market leaders.
Thus you may do just as well by selecting those large market leaders that pay no dividends but are reinvesting heavily.
That's not how it works for a publicly traded company in a free market.
Historically announcing a dividend has usually caused more people to be interested in buying, which increases your market cap correspondingly.
Yes, of course. Many investors want low risk, inflation proof investments with good dividend yields. However, Intel seems like a poor choice for such investors regardless if they temporarily prop up the dividend via cuts that will inevitably cause harm in the future. After all, what are the chances that Intel will become a higher performing organization as a result of this?
REITs and telcos are a much better choice for this investor class.
Taxes aren't ideal, but a brief philosophical defense of the dividend investor mindset:
Before the 1920s stock bubble, buying stock in a company was buying a portion of the company's future free cash flow in return for investment. The value of a stock was fundamentally coupled to running a profitable business. The dividend was the point.
The 1920s saw a major shift of valuation philosophy to a speculative mode, focusing on the price of a stock. Now, occasional crazy things happen where the price of a stock can shift dramatically even without change in the dynamics of the underlying business. Prices should reflect future earnings... but they often don't. Portfolio construction and indexing are protections against this, but the underlying philosophy goes even further in treating stock prices as random walks with underlying market beta, not as real businesses. Indexing punts out of real valuation.
I won't defend "dividend investing" with weird dividend manipulation, but I really do like having an alternative valuation model: the value of an investment is not the result of an increase in price since my purchase of that asset, but instead my recurring cash flow yield from owning that asset. I certainly have money in index funds and speculative assets, but I get a lot from a yield based valuation philosophy instead of price based valuation:
- Prices are heavily manipulated and favor insiders and funds, not individual investors.
- It feels more connected with reality.
- The growth of passive investments probably poses systemic risks (Mike Green's talks and interviews are great) and I don't want to piss in the pool too much. Yield based valuation makes me more comfortable making active investments.
- Easier to value different asset classes against each other, for example buying a house to rent out vs stocks. The valuation is my dollar yield per time per dollar invested.
- Boomers retiring and pulling money out of the system plus decay of globalization will put heavy deflationary forces on markets in the coming years. I don't feel like a price based approach to valuation provides clear guidance on how to navigate investments other than "be smart". A yield based approach lets me walk away with a return even if stocks stay flat or go down.
Pretty much all of the above comes from the book Getting Back to Business by Daniel Peris. Bit dry and dense, but very thought provoking.
Have you considered the structural implications of INTC float held by dividend ETFs alone[1], and how certain fund managers would be compelled to take action if all of a sudden Intel just stopped distributing a dividend? E.g. compare INTC holdings of Vanguard VYM[2] v. VanEck SMH[3] for about 5 minutes.
> It really makes zero difference to the valuation of a company.
Are you sure[4]? This is a bold, unsupported assertion without a single cite, as if to imply that valuation isn't a subjective craft practiced by people from diverse walks of life.
Not necessarily. It really makes zero difference to the valuation of a company. Investors really punish companies that can barely cover their dividend (or worse have to borrow). If earnings are bad and revenues are not growing, the dividend is just a hokey shell game that works for about 5 minutes.