Dividends are usually a cash payment by a company to its shareholders, paid from its profits with the amount normally set at the discretion of directors.
This is usually set as a cents per share amount and can be expressed as a yield (dividends per share divided by share price).
The dividend yield is often quoted in financial publications.
Dividends are a way for companies to pay a portion of their profits to shareholders.
This may make a company more attractive to some shareholders who enjoy receiving regular dividend payments into their bank accounts. But why this fascination?
I am always bemused by the high regard for dividends in NZ. Speaking with many keen investors, the first question often asked is “what is the yield?”
This implies that the yield is an indicator of the strength of the investment.
What these investors fail to realise is that some of our best growth companies and wealth-producing companies are those that pay no or negligible dividends and instead, reinvest their profits into the business; Xero and a2 Milk spring to mind.
When deciding to invest in a company, we do so because we think that the company can better utilise/ invest our money than we can and provide us with greater returns.
That is the whole reason for investing. It seems incongruous then that we would later expect that company to give us back that money in the form of dividends.
Presumably, as we still hold that company’s stock, it is still a better investor in that area than we are, so we should be asking the company to reinvest profits rather than give them back to us.
Also, the NZ regulatory and income tax environment is detrimental to dividend-paying companies and conducive to growth companies.
We pay tax on income/dividends yet pay no tax on capital gains.
So, it seems rather strange that NZ investors are so demanding of yield.
Instead, if investors require an income stream, they could sell a small portion of their growth-company shares to realise funds.
In the recent past, this was unrealistic as transaction costs on small parcels were prohibitive.
But with the advent of platforms such as Sharesies etc, this impediment has been removed.
There is a perception that NZ investors are yield seekers. Whether this perception is reality is debatable.
Unfortunately, this perception is also felt around the board tables and this has been detrimental to companies’ performance.
Some companies have paid high dividends when they should have been reinvesting profits into a growing business; even worse, some borrow to pay dividends.
Recent examples include Vital, Steel & Tube (STU), Kathmandu et al.
Somewhat farcical were the recent decisions by STU and Vital to complete capital raises and pay dividends within the timeframe of a few months.
Source: Samantha Sharif, NZ Shareholders Association
P.S. I research and interview economists, NZ investors and profitable companies to find tools & tactics that you can use to achieve financial freedom.
IMPORTANT: This article is of general nature only and readers should obtain advice specific to their circumstances from professional advisers.