Interestingly, folks are still publishing books on dividend investing since most of the top-performing stocks in the US are tech stocks that give tiny payouts to investors. Daniel Peris is one of those rare authors who are still trying their best to push dividend investing in the US despite multiple decades of very ho-hum performance.
First, he admits that dividend investors have become underdogs in the US. He has, in fact, placed his bets that with higher interest rates, a new trend will emerge where US companies will eventually clarify their dividend policies and increase payouts to appease investors in the future. This is an incredible leap of faith, but he has great arguments for this.
When arguing for investing based on dividends, the first hurdle is Modigliani and Miller's Dividend Irrelevance Theory, which, over the years, has generated enough influence to get company bosses to dispense with dividend payouts entirely. Furthermore, tax authorities who apply a different rate to dividends and capital gains taxation make this worse. Peris found academic arguments to counter M&M, citing the stability of dividends as a reason why it remains a good factor and putting M&M within the context of a different economic era where free cash flow is often negative.
With the big argument out of the way, it's easier to understand why dividends have underperformed. A stock that returns dividends to shareholders retains lower earnings and would appreciate in price less than a stock that keeps its dividends or performs a buyback despite the same business performance. But there's a lot of pressure for growth investors to stay vested, as the lack of dividends means more volatility and a nasty drawdown if the growth thesis fails later.
At the end of the book, I suspect that Peris is nostalgic. He wants the stock markets to return to an era where investors place their assets on well-run businesses and companies. In this current era, speculators bet on technology trends that push the markets higher and higher, allowing ridiculous PE ratios to take root in the US.
This is the same fantasy in the hot Japanese Anime Frieren.
Frieren, possibly the best anime of late, invokes the same fantasies, where Fern uses only the basic offensive magics to defeat all the mages of this era. I had to make this reference as I just completed watching this series with my son.
Strangely, the Singapore market is precisely what Peris desires. In Singapore, you find our local public companies being carefully focused on a good dividend policy and selling stocks at current PEs of less than 10. If you attend AGMs, that's what the boomer uncle investors really want.
They just want to get paid and eat an excellent buffet simultaneously.
I am currently testing a few screens based on the book. There is some outperformance, but Sharpe ratios are around 0.5 at best.
Always good to have a lab to test assertions.
The real challenge with SG stocks is that while yields are high & valuations low - their operating metrics such as ROE, debt levels (considering most are real estate heavy), and corporate governance leave a lot to be desired.
ReplyDeleteI've noticed a lot of "blue-chips" stuck into dividend policies from the past that are hard to sustain - with them paying out the vast majority of their free cash flow just to pay dividends.
This leaves little for them to re-invest in their business... and the result is that profits and revenues growth has been lacklustre for years (other than banks).
REITs are in a similarly challenged position now with many REITs (even "blue-chip REITS") trading at ICRs that are perilously low and are no longer investment grade.. with some definitely being pushed into "junk levels" with the higher interest rate environment.
As s'porean investor I prefer US companies to use buybacks rather than dividends as it's more tax efficient. Even US investors are looking at total shareholder yield for a while now, not just dividend yield.
ReplyDeleteAs for stock selection, the trend now seems to be "quality" & capital efficiency, with consistently high ROA, high ROE, increasing revenue, profits, FCF over the years. The issue is more of valuation now.