In general, ability of the companies to pay dividends depends upon its profitability, cash flows, earnings, prudent money management (think debt!). With the ongoing recession many have started expressing concerns about long term prospects of US economy. Among many issues, one aspect that has been gaining momentum is the strength of dollar and its status as world currency. It is widely discussed (probably rightly so) that the continued infusion of printed dollar will dilute its value. Further the US government’s debt will cause a credibility issue in longer term. All this will reduce the value of the dollar. In one of his recent interviews, even Buffett acknowledged the concern. However, there is not much analysis on how the master investor plans on addressing this issue in BRKs portfolio.
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I am very sure that every dividend investors would have received this question. While dividend investors can ignore responding to folks with trading philosophy, sometimes it does become difficult to argue with value investors. Value investors who in general are looking to invest below book value sometime have an argument that focusing on dividend is not that critical. Business should be applauded for reinvesting profits back into business to grow. In essence, either create additional value or continuously increase value for their shareholder. That is a good argument. However, the key here is “creating value for the shareholders”.
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Lowering Qualification Standards for Dividend Aristocrat Status
The one most critical aspect about dividend aristocrat (that I have been fan of) is increasing the annual dividend consistently for 25 years consecutively. This has been a cornerstone for any company to be known as dividend aristocrat. In last one year or so, the global economic environment is driving most of these aristocrat companies to slash/cut/freeze their dividends. Suffice to say the total number of dividend aristocrats is shrinking. This has resulted in business media and blog-o-sphere debating about the need to change the standard that defines dividend aristocrat index. The S&P index committee has also indicated that it may consider relaxing certain standards required to qualify for aristocrat index. One school of thought says S&P should reduce the number of years of continued dividend increases.
In its recent update, S&P reported that dividends paid by companies in S&P500 index reduced by approximately 15% (for first quarter of this fiscal year). This actually captures the whole gamut of companies that are above average, average, and below average. While I do agree that there has been reduction in dividends payments, I do not believe this is right parameter to demonstrate strain on dividends. One cannot compare a bunch of the good, the bad, and the ugly (index), with the bunch of the exemplary (aristocrat). Division I teams do not play with Division III in the league. League is among equals. continue reading rest of the article….