Chart of the Week: Earnings & Dividends

Chart of the day‘s illustration shows that since 1960, higher earnings have tended to correlate with higher dividends.


Source:  Chart of the Day

A few thoughts to keep in mind when considering dividends:

Earnings have soared over the past couple of years,
while dividends have increased at a slower pace. So why are cash-rich
corporate boards holding back despite the dividend tax cut of 2003? (CotD suggests "The explanations range from executives that lack confidence in future earnings to shareholders that are not demanding enough of their corporate boards.")

Dividends, unlike earnings,
are real. They are not opinions. Enron, WorldCom,
Global Crossing and all their ilk didn’t issue much in the way of
dividends, despite their huge, illusory earnings. Dividends are actually bank checks that much "clear."

Over 50% of shares of Dividend paying stocks are in tax deferred accounts — that mutes somewhat the impact of the dividend tax cut.

Lastly, David Jackson answers the question "Why dividend-paying stocks are a mistake."   

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Quote of the Day

“The soft-minded man always fears change. He feels security in the status quo, and he has an almost morbid fear of the new. The tough mind is sharp and penetrating, breaking through the crust of legends and myths and sifting the true from the false. The tough-minded individual is astute and discerning. He has a strong, austere quality that makes for firmness of purpose and solidness of commitment.”       

Martin Luther King

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  1. M1EK commented on Jan 21

    However, Mark Cuban ( and I both have a hard time understanding why really smart businesspeople think (or at least claim) that solid business fundamentals are the reason for buying stocks which do not, have never, and claim to never plan to pay dividends, rather than the “baseball card effect”. If I invest money in a private company and can never expect any of the profits back and can only recapture my investment by selling my stake to somebody else, aren’t I kind of a sucker? What is it about public companies that suddenly makes this different?

    IE: There’s a fairly reliable relationship between the on-field performance of baseball players and the price of their baseball cards, but it’s based on nothing more than a popularity contest – the relationship isn’t really based on his on-field performance being monetarily valuable to me. Doesn’t matter how well Barry Bonds hits the ball if I can’t find a bigger sucker on which to unload his card. I don’t own a piece of Bonds, but in a sense, if I can’t ever get my money out of Google (with dividends, not by finding a bigger sucker), it’s hard to understand whether I even really own a piece of them rather than a pretty collectible card with their logo on it.

    Nobody’s ever explained this in a way which makes me think they’re not expecting to get bought out by a bigger sucker down the road. I’m sure you know why this makes sense, but it just hasn’t penetrated my skull, and I’m not alone.

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