Forum Archive Index - June 2002

["Peter" <pmaiden@today.com.au>]

What you have touched on is the benefit of investing in high yield 
companies, especially when compared to investing in companies which 
retain a high proportion of earnings to 'invest in future growth'

One good example that supports investing in high yield companies is 
that since its inception in 1986, the FTSE 350 High Yield index has 
outperformed the FTSE 100 by 52 per cent.

Some studies in the US have shown that, after inflation, dividends 
reinvested) were the main source of appreciation of stocks over the 
last 200 years. The studies show that the conventional wisdom which 
says equities get most of their value from capital appreciation is 
false. That wisdom is based upon recent experience, and a bubble 
mentality.

What has happened is that on average and over time companies with the 
highest dividends actually show the highest growth. Retained earnings 
seem to be a drag on long term growth. Essentially showing that 
companies are not very good at investing capital - especially when 
they feel compelled to find a home for those retained earnings.
 
Another study (from the US) I can recall has also shown that the 
higher the dividend payout ratio the stronger the subsequent rate of 
earnings growth - and when payments are modest earnings growth tends 
to be weakest.

Quite interesting when viewed in the light of expected overall lower 
returns from shares over the next few (quite a few?) years. 

I can see the thinking (growth for growths sake etc) that drove the 
sharemarket during the late nineties is now changing. As markets 
revert to the mean (meaning low or negative returns for some time) 
maybe old fashioned thinking will make a resurgence.

Anybody else have any thoughts

Cheers

Peter


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