Dividends, "FOR" and "AGAINST"Good evening to everyone! Hopefully everybody is healthy in mind, body and soul after the Labour day weekend!
I have been in and out of several threads on Pyroenesis, and have seen an increasing use of the D-word lately....... GROSS!!!!......No, not THAT D-word, the other one! That's right.........
DIVIDENDS!
Now this post is not meant to hold a poll or have a vote on dividends, I just want to explain my reasoning for feeling the way I do about them, and maybe that will open a few discussions, or even minds along the way. At worst, I get to share my thoughts with you, and in turn, I also explain things to myself.....VERY therapeutic!
What exactly are dividends in relation to common stocks?
According to stockopedia: "Dividends are payments made by publicly-listed companies as a reward to investors for putting their money into the venture."
What this means is that if the company declares a dividend of $1 per share for all share holders on February 29, then whomever holds a share on February 29th with receive a cheque for the total of their shares multiplied by $1. GREAT!
Dividends can be irregular, occuring only on occasion when the company has an incentive to give a large amount of money back to shareholders, or, they can be regular, where the company decides to pay an amount per share each month, quarter, or year to shareholders.
DIVIDENDS ARE GREAT!.......Right?......Or are they?
What's not to like about dividends you say?
If the government of the day sent a $50 cheque to every citizen in the nation, why would we EVER complain about that!?? Well, we wouldn't complain about that! The problem, however, lies in the fact that the company is not the government, and we are citizens, not investors.
The Company brings in cash(hopefully), and it spends cash. This cash cycle is EXTREMELY important to the growth of the company. Dividends come from the company's cash flows.....The Company sells a million dollars in squeeze cheese, and now takes that money and buys more product, pays employees, taxes, buys equipment, advertises, pays off debt, pays dividends if applicable, and HOPEFULLY puts it toward growing the shareholder's equity in the company.
Now, if we think about a company like RBC (RY - Royal Bank of Canada), they pay regular dividends, but in reality, there aren't many places for them to spend that capital otherwise, as they have mostly exhausted the growth of their company, and in turn, the shareholders equity.
But if we think about a company like Pyrogenesis, a company that is just getting started, and has lots of business growth to accomplish and future R&D to do, these things cost A LOT of money. If Pyrogenesis gives some of that money to the shareholders, as enjoyable as that is, that will prevent the company from using that money to grow the company further, increase the company's product offerings, or even to buy back shares and increase the value per share for all of us.
Yes, if Pyrogenesis ran into a HUGE dumptruck load of cash, paid their bills, bought back shares when they were priced well,invested into R&D, saved some cash for more company growth and FINALLY, after all of that, couldn't find a spot to use the money where it could get a high rate of return for us, then yes, send me a cheque please....But otherwise, No thanks!
The reason we invest in companies is simple. We want our investment to grow, so one day our dollars are worth more in the future than they are now. Plain and simple. If that is not why you invest, than you are in the wrong place. The reason we invest in particular companies, hopefully, is because we have found reason to believe that the operators of that company are EXCELLENT at taking the money they have, and growing it into more money, which in turn, one day, will be reflective on the share price and we all get rich ideally!
Dividend's are excellent for people who believe they can get a higher return buy using that dividend income somewhere else.
Dividend's are poor if the company could have utilized that money to increase future cash flows of the business.
This is why I oppose dividends in a growing company in all but the most extreme scenarios.
Cheers to all!