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Great comments from Brian and others. It's good to get some
substantial discussion going on this issue.
I'd like to add that, unfortunately, we seem to be in a "Catch-22"
situation with dividends in NZ at the moment. On the one hand, companies
with good growth potential should, as Brian points out below, not be paying
dividends.
But, on the other hand, some have argued that it is the dividends that NZ
companies pay that is actually keeping the NZ market alive. Stop paying
dividends, it has been said, and NZers will pull their money out of the market,
dragging down the NZSE from its current flat-line state.
I think Warner hit the nail on the head when he said education is the key -
NZers have to stop constantly worrying about dividend yields and start focusing
on growth prospects for a change!
Don't get me wrong, I'm not against dividends full stop and it's excellent
to have some companies on the NZSE that have good yields. I'm more arguing
that in NZ we have gone to an extreme with dividends - and some companies should
stop giving them and instead focus on reinvesting profits and focusing on
long-term growth and expansion.
For those of you that missed the article, read this:
I'd be interested in hearing other comments on this Catch-22
situation. How are we going to get out of it?
Best Regards,
Benjamin Dutton
----- Original Message -----
Sent: Thursday, August 03, 2000 12:41
AM
Subject: [sharechat] Big picture
issues
For those of you who may follow the Motley
Fool sites you will have seen this post already. Sorry. However I'm interested
in feedback/discussion re. NZ investors very high reliance on dividend
payments.
IMHO I believe NZ investors preoccupation with dividend yield is one of
the most detrimental effects on the growth of the NZ market. In fact to be
slightly contentious I will go so far as to say it has a significant effect on
the growth of the NZ economy as a whole.
Warren Buffett believes that a
company should retain all it's earnings if it can employ them at a rate of
return that is better than an investor could get by taking delivery of those
earnings via a dividend.
Surely if a company is consistently year after
year realizing a tax paid ROE of >15% it must be much more attractive for
the managers to reinvest that earning to the continued growth of the
shareholders equity thereby in effect achieving a compounding interest of in
excess of 15% if at the same time the company's Net Margin is also
consistently increasing.
I argue that if a company has excellent
management, a strong track record of growth and room for further profitable
growth, PLEASE DON'T PAY ME A DIVIDEND.
Granted I own PFI for it's
dividend but simply because we want a portion of our portfolio invested in the
property sector and investing in a property company in our situation is more
convenient and profitable than owning rental property.
Good growth
companies shouldn't feel a need to pay dividends thereby stifling
growth.
The second point I'd like to make is in regard to the '87
crash. So much has been written about it and yet I recently saw a chart which
tracked the S&P500 for the past 50 years. The October 1987 was a mere blip
on the screen.
Even the conservative old Consumers Institute will tell
you that the stock market has consistently, over a long period of time
outperformed property, fixed interest and cash. They advise that when you are
saving for retirement 70% of your portfolio should be in shares and that even
when you are retired you should still have up to 40% of your portfolio in
shares.
So why are investors still totally preoccupied with the
"crashes" or the potential for crash. I have to wonder how well individual
companies and the NZ Stock Exchange market the benefits of long term equity
investments.
I believe that more should be spoken about the huge
difference between "trading" or "playing the market" verses "long term buy and
hold" and "investing from a business perspective"
What's my point? I
don't know, I just needed to get it off my chest and hopefully get some
feedback.
Cheers, Brian
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