Wednesday, May 14, 2008

The contrarian view on dividends

Fun as it can be to read mainstream media stories about why your particular investing style is the one true faith, destined to bring you riches and a happy retirement, for me, one of the best things about the personal finance blogosphere is when you stumble upon something that calls into question some fact you've always taken for granted, and forces you to either rethink your strategy, or confirm you're on the right course.

Take me, for instance. In general, I like dividends. I'm becoming more of an indexer the more I play this investing game, but I'm still partial to companies that generate healthy amounts of dependable cash, and have a tendency to spin off some of that to me in the form of dividends.

That bias means I frequently miss out on gains from fast-growing, sexy stocks like Google, Lululemon, and RIM in favour of old economy stalwarts like Royal Bank, Canadian Pacific and BCE. I generally don't start kicking the tires on a company until it's reached a mature level where it doesn't need a ton of cash to reinvest into expanding the business, and can instead divert a fair chunk of profits towards investors in the form of dividends. I like companies that pay me to own them, essentially, and this always struck me a as a fairly conservative way to invest.

Andy Kessler disagrees. Far from being safe and staid, Kessler thinks I'm an idiot for buying companies stupid enough to admit they can't think of anything better to do with their money. In a piece that first ran in the Wall Street Journal and is now expanded on his blog, far from saying companies that pay dividends offer investors a margin of safety, Kessler lambastes them for essentially acknowledging they have little room to grow. As he puts it: "If they won’t invest in themselves, why should I?"

I actually interviewed Kessler once for a feature I was writing on investing in nanotechnology (sadly, it's since been lost on the cutting-room floor) and he's a colourful character. So I'm not surprised to hear him espousing such a contrarian view on something as seemingly benevolent as a dividend cheque. Indeed, it's not the first off-the-wall thing he's ever said: he might be the only man in America who doesn't think Warren Buffett's the kindly old Cherry-Coke-swilling genius we all assume him to be. According to Kessler, Warren Buffett hates your guts. (Of all the things he accuses Buffett of, I'm guessing he'd begrudgingly like the fact that at least Berkshire Hathaway doesn't pay a dividend...)

All in all, I don't think I'll be changing my style too much. I still like the fact that dividends have some sort of downside protection. It's all well and good to ride Google as it increases 600% from its IPO. But what goes up must ultimately come down. And I'd feel a lot better thinking about all the quarterly dividend cheques I've cashed in over the last decade when it dawns on me that my Biovail shares are worth half as much as they were 5 years ago.

3 comments:

Anonymous said...

If your into contra investing into div. companies like BVF-T (which i own) you should check out CLCT-N (i recently bought).

Nice yield, lots of cash, niche market and just aquired another business which should help revenues in the future.

Lots of insider ownership combined with a small market cap = low daily volume, but who cares unless you've got a million bucks to put into this company.

DH

Anonymous said...

Upon reading a few more of your posts i see your love affair with Biovail spans a few years. While i have followed the company since '03i decided to buy last August.

Including some protective puts and dividends i am down close to 10% after div. payment this week. If i didn't have so many shares already and wasn't interested in other companies i would buy more under $13.

I guess well wait and see what happens with the next year before i sell. I am unsure if i will sell if BVF falls to $10 again, but i will monitor it. I've heard some interesting investors say to cut and run after -8%, but of course these aren't value investors.

That said they do have a point for preserving capital.

DH

Canadian Capitalist said...

What would you rather prefer: companies paying cash to the owners to deploy it as they please or just throw it away in empire building? I'd take the former in a heart beat.