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Originally Posted by Broken Arrow
Uh, not necessarily.
In most cases, the best performing stocks will never pay dividends. That's because... they don't have to. There is already plenty of appeal in its growth. As an added bonus, not having to pay dividends often means more cash in the coffer for growth and innovation. Microsoft was a great example of this.
Of course, Microsoft has since matured, and in order to maintain its appeal, it has started paying dividends. And the more stable (and shaky) a company is, the more they would have to pay in dividends to keep its shareholders happy.
But unlike Microsoft, not every company has a war chest large enough to pay dividends AND maintain its growth and innovation.
So, if anything, the more a company pays in dividends, the more it is a sign that things will get worse.
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Less than half of all stocks pay dividends. I have to look real hard to find stocks I like which pay them...
I have seen two companies drop a dividend which I owned (DCN and XRX). Both fell considerably once they lowered (DCN) or dropped (XRX) their dividend.
If someone was buying a stock based on the yield (higher yielding stocks) that is a recipe for disaster (because in this case I agree with your comments).
However looking at the long term history of PG, MSFT and other large companies... the ones which pay a dividend give steady long term performance of increasing share holder value. There is a tax cost to this strategy... But with dividend tax advantage right now, I think it's a good way to go.
The issue is knowing what a payout ratio is (portion of profits paid in dividends) and knowing to avoid companies with high payout ratios. MSFT payout ratio is 32%. Meaning it reinvests 68% of it's profit into it's business. I would not want a payout ratio too much higher than 50%.
PG payout is 43%
TLB payout is 52%
HPQ is 17%
F cannot have a payout ratio because it is losing $
I think we could agree from the 5 stocks, TLB (a mid cap company) and F are the least stable. A dividend is cash in my pocket... that cannot be "taken away". Much more tangible than the Enron's or Worldcom's of the world.