Dealing with the dividends doubters

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Dealing with the dividends doubters

So, I’m not saying Daniel Peris got lucky. I am saying that for a long-suffering dividends nerd to put out a book called The Ownership Dividend within a week of Meta telling shareholders it will pay its very first dividend does mean he owes Mark Zuckerberg a pint.

Suddenly everyone is talking about Peris’s favourite subject — me; me and Ethan; The Wall Street Journal; The Economist; Goldman Sachs’s research department; etc. (That’s everyone, right? It’ll do.)  

Anyway, last week, he stopped by the FT’s London office to sample our delicious canteen coffee and talk about the pushback he receives (keyword: crank) and why he really does think the arc of history is bending towards his view of the world.

First off, a recap: dividends used to be an integral part of the relationship between shareholders and companies, and to a decent extent, they still are in Europe. A century ago, it was perfectly common for US companies to dish out 6 per cent dividend yields to shareholders every year. S&P 500 dividend yields went as high as 9.2 per cent in the first quarter of 1938, according to S&P Dow Jones Indices. Even IPOs paid them, as I read to my surprise in Peris’s book. (It’s really a good history lesson. Deep down, he’s a historian; it just so happens that running dividend-focused funds at Federated Hermes is his day job.)

But over the years, they shrank almost to nothing in the US, and a large chunk of listed companies — particularly those that could churn out large share price gains — stopped paying them entirely. Since 1936, S&P 500 dividend yields have averaged 3.5 per cent, but in the past 12 months, that yield was just 1.5 per cent. Widening the aperture doesn’t help; dividend yields in the past 10 years averaged 1.8 per cent. Buybacks ate their lunch. And no one cared. The vast majority of people still don’t care. To borrow a phrase from the crypto bros, as long as number go up, why should anyone care?

And look, it’s a free country. Regular financial disbursements are just not the most important thing in the world for investors looking to grow their pots of money fast, especially youngsters (hi, Ethan) looking to get on the housing ladder.

But then along comes Zuckerberg slapping an admittedly tiny dividend on his shares and suddenly there’s a sense of “oh so it’s not growth or divs? You can have both? Who knew?”

This, as they say, confirms Peris’s priors.

He says:

I don’t know Mark Zuckerberg and I don’t follow Meta and so I don’t know how clever or not clever they are in terms of sniffing the wind, but I think in this instance, either by accident or intentionally, it’s a good example of sniffing the wind that the return of the cash nexus is going to happen for all the reasons I’ve articulated: interest rates have stopped going down . . . buybacks are at least now controversial and Nasdaq companies have matured.

I wouldn’t have pressed the submit button [on the book], if I didn’t think this was going to happen because it basically forecasts that in the next decade, a lot of these tech companies are going to announce dividends. Can I give you the date? No. Next decade? Yes.

So what’s the pushback?

[It’s] the degree of comfort that people have had that a harvested capital gain is the same thing as a dividend payment. [For them] cash is cash. 

In an academic setting that may be correct. But to make it real, not academic, it has to be a harvested capital gain, which is actually selling the asset. How peculiar is it to measure success in business by selling the business, not by benefiting from the success of the business? You actually have to part with an asset.

There’s no other business type in the world that is structured that way. Real estate is designed to generate income, farmland is designed to generate income. Jobs at the FT are designed to generate income.

Lol.

But, still, who cares? Yes, dividend culture has declined in the US, but it is still, by some distance, the world’s most vibrant equity market.

That’s the second pushback: why are you complaining about the US growth market? Our companies are profoundly innovative. They don’t pay dividends but they’ve changed the world. What’s the deal? Some of that I’m not going to challenge. But some of that I will challenge. The United States has led the world economically for the better part of a century. Most of that time period, those companies also paid dividends.

It’s really only in the last 30 years that the growth-leading companies have been associated with no dividends and my answer to that is those companies have now matured. How do you know they matured? They have a close to $1tn in buybacks going on.

The third pushback is, why bother? Buybacks are better. But buybacks don’t benefit shareholders. They benefit share sellers by definition. They’re not really a cash return to shareholders, they are a cash return to share sellers.

If you’re more interested in not paying the tax man, a buyback is preferable. A dividend is taxable upon being paid, whereas a capital gain associated with the buyback that’s only taxable when you execute it. 

But subordinating investment policy to tax minimisation is a choice, not a necessity. There are investors and advisers who will bend over backwards and risk a capital loss just to avoid paying taxes, ever. So if you want to risk capital loss to avoid paying taxes, that’s a choice. Just don’t make it a mantra of modern finance.

So when dividends do go mainstream again, will Peris be doing the “I told you so” tour?

From the beach. You’ll not find me. If it doesn’t happen, I will see you in a decade and I will apologise. 

Sounds fair.

One good read

If you are the last person to read this, you have to read this: The day I put $50,000 in a shoe box and handed it to a stranger.

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