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How Investing Works: Dividends - YouTube
Channel: CNBC
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People often talk about profit
sharing as a way
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for workers and employees to
gain a stake in the
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success of
American businesses.
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In a world with weakened
unions, how will workers
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get a cut of the profits?
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Employees overwhelmingly like the
idea of profit
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sharing as a regular
part of their pay.
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But there's been a way for
the public to share in
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corporate success for more
than a century.
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A dividend – literally
dividing the profits.
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Here's how it works.
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You find a company
that offers dividends.
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Then you buy their
stock and wait.
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Usually each quarter the company
pays out a small
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part of its profit
to shareholders something like
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10 cents a share.
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It doesn't sound like much
but over time that
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money can really add up.
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As long as you own
the stock, you'll get
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paid. Just like in
Monopoly, people bought
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utility stocks big regulated
companies for small
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but regular dividend
payments. But
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dividends have been around a
lot longer than the
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game.
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Starting in 1790 or
so when you formed
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our modern government. The
companies paid out
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most of their earnings
as dividends and investors
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expected to be paid
a pretty healthy dividend.
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I think one of the reasons
for that is you know
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we didn't have an S.E.C.
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then. And so how did
investors get information on
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how well their
investments were doing?
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One of the basic sources
of information was the
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quarterly dividend.
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Iconic companies like General
Mills, Procter &
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Gamble and Coca-Cola have
been paying dividends
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every year uninterrupted
since the 1890s.
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The public got interested in
stocks on a much
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bigger way in the
1920s. Then was
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disappointed of course
during the Depression.
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But the financial reforms I
think restoring a lot
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of confidence in the
integrity of the capital
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markets.
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Early in the 20th
century big quintessential
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American companies were
paying significant
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dividends.
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AT&T, you know it was
going to go widows and
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orphans stock.
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They had a good dividend
payout and so you know
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hundreds of thousands of
people owned stock in
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AT&T and it was considered
a blue chip stock with
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a very steady growing
dividend payout. If
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you bought AT&T stock
just after Christmas in
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2003, around twenty five
dollars a share, the
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dividend payments that you
get every quarter
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would have added up to
about twenty five dollars
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by 2019.
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The stock essentially pays
for itself in just
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over 15 years.
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Whether the price goes up
or down and you still
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own the stock.
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Over the years dividends have
made up a good
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portion of overall returns
in the stock market.
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Actually not just
a good portion.
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Since 1926 about 40 percent
of total returns have
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come from dividends.
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As recently as the 1970s and
80s you could get 4
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percent return every
year on dividends.
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But things have slowed
down in recent decades.
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Why is that?
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Especially after the FCC came
in, we had so
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much information on companies
that was required
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by the government that
we didn't necessarily
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demand that they pay
out a lot of
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dividends. But taxation had
something to do with
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it too. We taxed
dividends and capital gains.
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But see when you pay out
a dividend you know the
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corporation already paid in
corporate income tax
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on the money it pays out
as a dividend and the
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shareholder has to pay a
tax on that too.
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So that's a kind of
double taxation which may
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have discouraged paying out a
lot of money as
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dividends.
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More recently new and
exciting companies haven't
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offered dividends.
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The argument they need
to reinvest those profits
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into growing
the business.
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That's how it was with
the tech companies in the
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dot.com bubble.
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They were growing very fast
and if they paid out
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dividends then they would probably
have to go to
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the markets and issue more
stock or borrow more
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money. And there are
some negative features of
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doing that.
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And investors accepted the
idea that a rapidly
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growing company should probably
keep 100 percent
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of its earnings and
reinvested in the business
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and everybody was better
off that way.
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Some of the largest companies
in the world like
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Amazon Facebook and
Netflix don't issue
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dividends as of 2019.
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Part of the decline has
come in an era where
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stock buybacks have
boomed in popularity.
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Chevron Starbucks Qualcomm and Apple
just a few of
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the names of companies
announcing big share
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buyback programs along
with their earnings
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reports
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It's also looking like it'll
be a record breaking
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year for share buybacks
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That's when companies buy their
own stock to help
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boost the price.
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This chart shows how
yields from buybacks have
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outpaced dividends pretty much
since the mid
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2000s. In absolute value,
buybacks have been
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larger than dividends every
year since 2010
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according to Howard Silverblatt
at S&P Global.
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It's all part of keeping
more of the profits
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inside the company.
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And that rationale for
declining dividends might
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make you mad.
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I think corporate managers prefer
to hang on to
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the money that they earn
instead of paying it out
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as dividends because a good
part of their income
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may come from
their stock options.
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By keeping the money in
the company, the stock
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price tends to go up
faster but some of the
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financial research shows that
maybe the investors
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would be better off if
dividends were paid to
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them.
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Traditionally it's big
mature companies with
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stable businesses that participate
in this type
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of profit sharing.
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Once a company pays out a
dividend it can be hard
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to go back without the
market punishing it by
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pushing the stock down.
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Of course dividend yield
fluctuates with the
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price of a stock. As
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long as the company
keeps paying out the
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dividend, if the price of
the stock goes down the
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yield on the
dividend goes up.
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That can be a sign of
a bargain as long as the
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company is not
in big trouble.
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But sometimes a dividend yield
that's too high is
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a red flag.
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As of the beginning of
2019 some of the major
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companies with the
best yielding dividends
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included CenturyLink, Ford, L
Brands and yes
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AT&T. Still after all
of these years.
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So will we see a
resurgence of dividends in
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upcoming years.
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It's unclear.
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2018 saw the ninth straight
year of more dollars
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being paid out
as dividends.
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According to S&P Global
Silverblat but yields are
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still historically low.
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I think there's some
financial research that shows
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that companies that pay
out higher dividend rates
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actually have higher returns
than ones that pay
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out lower rates.
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I think there's still an
argument to be made that
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they might be socially good
if companies paid out
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more of their earnings
because when the companies
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a large share of their
earnings and reinvest it,
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sometimes they
make mistakes.
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Regardless if your investment
goals align with a
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little less risk and
stable earnings, dividend
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stocks may be
for you. Especially
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in times of volatility, you
can still make some
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income, even if
the stock falls.
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