Big dividends: good or bad news?

Published on May 27, 2016

European firms in particular are paying out a huge proportion of their profits as dividends. This week I offer a few words of caution for income investors.

0:11welcome to the skill explains finance video this week big dividends a good or
0:17bad idea now I don’t like 200 million pounds of profit in a year that say what
0:23is Joyce’s quick but a relation between March alt number one they could keep all
0:28that money to themselves and if they do that as an investor you want a reason
0:32for it to maybe that funding innovation and future organic growth maybe they’re
0:36looking fund acquisitions to strengthen their balance sheet by reducing debt
0:42building up the cash reserve whatever happens to be you need a reason why
0:45they’re keeping the cash now we’re looking at the alternatives situation
0:48where you are a company decides to return it to shareholders and there are
0:51two ways they can do that i’m gonna focus on the first one here paying big
0:55dividends and buying back their own shares either route will result in cash
1:02getting out of the business into the hands of shareholders what you might
1:05think that’s happy days actually let’s consider which is better and are there
1:10any warning signs to look out for when companies take route to now did you not
1:16get a lot of companies all taking root to the European companies of hangout a
1:20higher proportion of their earnings as dividends known as a record payout ratio
1:24in the job and in more than 40 years and Thomson Reuters data suggests that
1:28nearly 60 percent of your earnings pretty big number are currently being
1:32paid out as dividends to have company’s gone too far too fast that’s the
1:37question are there any risks now what’s being said about least generous dividend
1:42hands well we’ve got top analyst at S&P global market intelligence saying we’re
1:47seeing a lot of companies trapped into their dividend policy they offer
1:50generous dividends may feel they can pull out and we’ve also got him drunk
1:55with a homie tonight but one thing actually we like companies that don’t
1:58have too much that cash flows dividends so what’s going on shortly
2:03big dividends a good use for shelters while they can be and I’m certainly not
2:06suggesting in this video
2:08dividend are bad for one simple reason let’s take a look at this chart that
2:14shows what would have happened if you don’t vested in your jet at the start
2:19one of the worst bear market
2:21nineteen seventies get your investment rolling and reinvested reinvested all
2:27the dividend she received back into shares all the end of 2015 now the
2:33bottom is the party no guide future serial no guarantee that is the point
2:37you would have basically made around morning charges its presence on a
2:43hundred and eight times your original investment in your jail a total return
2:47basis without again a hundred and eight times so I played the right way
2:53dividends can generate some pretty impressive returns added on top of any
2:56capital gain and bandwidth say a great dividends are a tangible benefit to
3:04shareholders cash in your pocket
3:06jam today waiting to jam tomorrow and post cash flow displayed on manages his
3:11manager got to run the business in a way to generate the cash needed and
3:15reinvested I can really power up your long-term return so what’s the problem
3:19was like there’s a flip side of this coin and critics are increasingly
3:23getting nervous but I level of dividend payout why didn’t my run out of ideas
3:30that returning cash to do with it they don’t think of any reason project to
3:34invest in that’s not a good thing maybe also breeds complacency all the way I’ll
3:39keep my cell is quite another dividend and not worry too much that’s not good
3:43either they might be using debt to fund these buyouts that’s even worse carrying
3:48up to
3:49dividends and big payouts can eventually we can balance sheets and ultimately not
3:56be sustainable
3:57jam today but will you get jam tomorrow to an investor what are you supposed to
4:01do and the answer is to diversify our money about why the moment do not put
4:08all your eggs in one basket do not pick a huge company that’s been a regular
4:12reliable income Perrigo I’ll take that one but even so I want you to spreading
4:17your risk out get under the bonnet see what’s going on so check the business
4:21logic is this a business with a model that is cash
4:24cash generative or not check earnings cover has it got out of control what’s
4:29the pattern over the last five years
4:31check free cash flow cover I companies in more detail and other videos to what
4:35extent is free cash flow cover the annual dividend and check that novels
4:40and look back and see what the train look like it
4:43having done your homework you like your safety checks then so spread your risk
4:48over companies that pass those tests what a warning against what can go wrong
4:54you don’t this graph belongs to another big is coming to market most reliable
5:03dividend maritime bank the dividend / capital expenditure find all the rest of
5:10it just goes to show that even the biggest steady as dividends can get it
5:14wrong the need to do a lot of ground cover there on a big debate