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Valyooo (38.19)

Are you getting only half?



August 18, 2010 – Comments (15)

So my main goal with stocks is to make money (duh) and so far I am not too bad at it in real life. However, I have a problem with just about everything in life where I over think them to the point where it becames too abstract. Nonetheless I get curious though, so this was my train of thought:

If a company has a P/E of 20, that means your earnings are 5% a year. For a more established company they would pay about 50%  in dividends, giving you 2.5% and reinvesting the other 2.5% in the companys growth.  So even though you are only getting 2.5% in dividends, the other 2.5% is invest in value for your company, so you still make a gain from it.

However, when a company is selling at way about tangible book value, its about earnings, not value. So if the P/E is 20 you are getting 2.5%, but that other 2.5% is adding equipment/things like that to a share of a company which is worth so much more than the rest of the stuff they already own.  The reason stocks trade in multiples of what they are worth is their earnings power.  But 2.5% dividend is not much earning power compared to bonds and other investment vehicles.

Capital appreciation is more important than stock dividend, but is it all just an illusion?

Just a random thought, not trying to be all alstry.

15 Comments – Post Your Own

#1) On August 18, 2010 at 1:00 PM, JaysRage (76.02) wrote:

I rarely invest in dividend-payers except defensively, and even then, I'd usually rather be in cash or bonds.   

When a company pays a dividend, what they are telling me is that they can't do any better with that money than to give it back to me.  Well geez.  If I wanted my money in cash, I would have it in cash.   I invest in stocks of companies that I think can do a better job with my money than I can.  I think they can take it and muliply why would I want them to give it back to me?   It's no accident that the fastest growing companies in the world don't pay dividends.   When that money is re-invested, it is the fuel for company growth which in turn grows income, which in turn appreciates the stock.....and if I invested wisely, they'll do it at a lot faster rate than 2 or 3%   

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#2) On August 18, 2010 at 1:09 PM, Valyooo (38.19) wrote:

I'd like to add that I'm not gonna argue with statistics, I know common stock is the best investment in the long run. This is just a more abstract/theoretical question

If they are reinvesting all of the money, but the stock is trading for way over the price of the things they own, and you aren't getting a dividend, how is it worth it?

When you but it you're not giving them your money unless its an ipo. They're sending you what you're entitled to

If you had your own business would you invest all of the revenue back into it, or would you take a paycheck for yourself?

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#3) On August 18, 2010 at 1:32 PM, SockMarket (34.47) wrote:

I am switching my investing model to only invest in dividend payers. Reason being that I think that I can get a fairly safe 8% this way, I know the area, and there is little risk involved. Some theoretical returns that I think can be pretty safely achieved with dividend stocks are here. (I think you already saw it but did not look at it for this purpose)

I like dividend stocks because:

1) They generally outperform non dividend stocks. I am sure you have heard this so I won't go too far into it

2) When the price gets suppressed for a reason that has nothing to do with the company's underlying business and you DRIP the stock you are getting more shares and a lower average entry point than otherwise. Essentially you are profiting off of the drop in price and getting paid to wait for the company to hit fair value.

3) If one wants to live off investments, or partially do so, you are not selling off a piece of the capital to live. It stands to reason that the time when you would need the money the most is when the market is down (if you lost your job, etc.) which means that you will be forced to sell at precisely the wrong time. 

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#4) On August 18, 2010 at 2:09 PM, dwot (29.15) wrote:

I am reading an interesting piece:

"one can borrow against the value of stocks, for example, they are just paper certificates, inflated well beyond the liquidating value of the underlying company's assets.  One can also borrow against the value of bonds, which is an amazing trick: using debt to finance debt.  As a result of widespread loans made on such bases, the discrepancy between the value of total debt outstanding and the value of its real underlying collateral is huge."

 Any thoughts that out perform at some point may need to return to the mean, like everything else does?



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#5) On August 18, 2010 at 2:14 PM, Bludgeoner (< 20) wrote:


Certain companies, based on their business structure, are required to pay dividends .  REITS, BDC's, MLP's etc....

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#6) On August 18, 2010 at 2:38 PM, Evlampius (< 20) wrote:

dwot - ever heard about repo? or repurchase agreement? guess thats an amazing trick to you but i would just call it a financial leverage.

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#7) On August 18, 2010 at 2:38 PM, truthisntstupid (81.75) wrote:


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#8) On August 18, 2010 at 2:43 PM, truthisntstupid (81.75) wrote:

That post (#7) has a comment stream with many comments both for and sgainst dividends,  I guarantee it has all the information you seek to make up your own mind.

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#9) On August 18, 2010 at 3:26 PM, Valyooo (38.19) wrote:

Nice, thanks.

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#10) On August 18, 2010 at 5:35 PM, JaysRage (76.02) wrote:

Bludgeoner -- Yes, I am aware of that.   Those are special types of companies, and their special branding requires them to be analyzed outside of normal P/E ratio analysis that would be used for common stock.    Each of those classifications should be handled in accordance with their specializations....REITs difference from Royalty Trusts....different from common stocks.....if you're looking at P/Es and talking about dividends, my assumption is that you're talking about the MCD, MRK, XOM, KOs of the world. 

I have actually dabbled a little bit in REITs prior to the drop.   I have not spent the time to re-educate myself on them again.   When investing in a REIT, it's very important to understand the underlying real estate holdings and debt of the company.....more so than the dividend payout or earnings, in my opinion.   To me, the value of a REIT is in the land and commercial holdings....not the divvies.  

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#11) On August 18, 2010 at 6:21 PM, Teacherman1 (< 20) wrote:

REIT's can make you money in another way. Back in the 80's, I made a lot of money from buying properties from bankrupt REIT's for pennies on the dollar, because they were under court order to liquidate.

It is not a normal REIT investment, but those opportunities come along from time to time. 

The properties were not worth what they had them on the books for, but were worth a lot more than they were forced to sell them for.

These were single family dwellings, not commercial property, so they were easier to cull and flip.

Just thought I would throw that out for those who like to think outside of the box. 

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#12) On August 18, 2010 at 8:14 PM, Bludgeoner (< 20) wrote:

Jay - I just wanted to make sure that you realized there are exceptions and that you were generalizing.  I'm sure most of those div payers would LOVE to retain earnings if they had the option to.

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#13) On August 18, 2010 at 8:15 PM, Bludgeoner (< 20) wrote:

I hope I didn't sound sound like an ass in that last post....

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#14) On August 19, 2010 at 4:58 PM, JaysRage (76.02) wrote:

Actually REITs get tax breaks that make up for the dividend requirements.   If it wasn't worth their while, they wouldn't go throught the trouble to qualify.

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#15) On August 19, 2010 at 5:22 PM, Valyooo (38.19) wrote:

90% qualifies the conduit tax law, so they only need to pay 90% but they get an even bigger tax break for paying out 98%. 

But income from REITs is taxed at your normal tax bracket, right?

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