Earlier quoted context omitted.
>> If Intel cuts its dividend the stock will crater Not necessarily. It really makes zero difference to the valuation of a company. Investors really punish companies that can barely cover their dividend (or worse have to borrow). If earnings are bad and revenues are not growing, the dividend is just a hokey shell game that works for about 5 minutes.
Depends on the investor. There is an entire class of investor that is focused on stocks that reliably deliver a dividend. I wasn't aware that Intel had joined old-economy companies like oil, but I also don't fully understand the dividend investor mindset, as I can't figure out a tax situation that makes it appealing...
Before the 1920s stock bubble, buying stock in a company was buying a portion of the company's future free cash flow in return for investment. The value of a stock was fundamentally coupled to running a profitable business. The dividend was the point.
The 1920s saw a major shift of valuation philosophy to a speculative mode, focusing on the price of a stock. Now, occasional crazy things happen where the price of a stock can shift dramatically even without change in the dynamics of the underlying business. Prices should reflect future earnings... but they often don't. Portfolio construction and indexing are protections against this, but the underlying philosophy goes even further in treating stock prices as random walks with underlying market beta, not as real businesses. Indexing punts out of real valuation.
I won't defend "dividend investing" with weird dividend manipulation, but I really do like having an alternative valuation model: the value of an investment is not the result of an increase in price since my purchase of that asset, but instead my recurring cash flow yield from owning that asset. I certainly have money in index funds and speculative assets, but I get a lot from a yield based valuation philosophy instead of price based valuation:
- Prices are heavily manipulated and favor insiders and funds, not individual investors.
- It feels more connected with reality.
- The growth of passive investments probably poses systemic risks (Mike Green's talks and interviews are great) and I don't want to piss in the pool too much. Yield based valuation makes me more comfortable making active investments.
- Easier to value different asset classes against each other, for example buying a house to rent out vs stocks. The valuation is my dollar yield per time per dollar invested.
- Boomers retiring and pulling money out of the system plus decay of globalization will put heavy deflationary forces on markets in the coming years. I don't feel like a price based approach to valuation provides clear guidance on how to navigate investments other than "be smart". A yield based approach lets me walk away with a return even if stocks stay flat or go down.
Pretty much all of the above comes from the book Getting Back to Business by Daniel Peris. Bit dry and dense, but very thought provoking.