I’ve read a few books about dividend investing and remain interested in the idea, although I’m not confident enough (yet?) to allocate my portfolio that way. Portfolio manager and writer Mebane Faber has a short book called Shareholder Yield: A Better Approach to Dividend Investing that offers another tweak on dividend investing strategy.
(As tweeted earlier, the Kindle eBook version is free until the end of Monday, which was a good promo as it got me to I read it. That, and it was only 55 pages.)
The book starts with an overview of history and academic research. First, a little over half the total return of the US stock market since 1871 is due to dividends. The smaller half is price appreciation, which when people talk about the S&P 500 index is all price appreciation. Second, stocks with higher dividends have had a higher historical return than stocks with little or no dividends.
So dividends are good, but they aren’t the entire picture. There are five ways for management to deploy the free cash flow generated by the company:
- Invest in existing operations,
- Acquire other businesses,
- Pay down debt,
- Repurchase stock (reducing outstanding shares), and
- Distribute cash to shareholders.