11-03-2014, 09:07 AM
(11-01-2014, 11:24 AM)Kerim Wrote: This question really gets to the heart of dividend growth investing. While paying out a fixed percentage of earnings makes complete sense for the reasons others have mentioned, if you want a continually growing stream of dividends, it really puts the focus squarely on earnings. Dividends only grow if earnings grow.
Personally, I like a company that is committed to growing the dividend, and so long as earnings are generally growing over time, I don't mind at all that the payout ratio fluctuates so as to keep my dividend stream growing smoothly. That is, if earnings are growing, but in a "bumpy" way, I'd rather get a dividend that grows smoothly (via a fluctuating payout ratio) than a dividend that also bumps up and down with earning (in order to maintain a static payout ratio).
This.
Just as a customer expects value for the price they pay for their goods/services regardless of the financial state of the company or whatever else, so does the investor. As a dividend growth investor, I expect the companies that I own to pay me a consistently rising dividend, not a "whatever they're going to pay me today" dividend.
Don't get me wrong. I'm not demanding that all companies cater to my specific dividend needs to their detriment. It's a practice that makes complete sense and I would completely understand why a company would adopt it. But a truly great business's dividends should grow consistently, not fluctuate. And if the earnings are fluctuating so much that the dividend is going all over the place, then perhaps us dividend growth investors should look elsewhere. Even with a variable dividend, the earnings of a great company should consistently grow (allowing it to consistently grow its dividend).
And I'm with Kerim: Even if a company has a bumpy couple of quarters or a year in regards to earnings, I'd rather the payout ratio fluctuate rather than the actual dividend itself. Most dividend investors have different payout ratios that they are comfortable with, but none of us like a shrinking dividend.