Book Review: The Ownership Dividend

The Possession Dividend: The Coming Paradigm Shift within the U.S. Inventory Market. 2024. Daniel Peris. Routledge — Taylor & Francis Group.

May the subsequent alternative within the inventory market be with dividend shares? In keeping with Daniel Peris, the reply is “sure,” and after studying his insightful ebook, The Possession Dividend: The Coming Paradigm Shift within the U.S. Inventory Market, readers might discover it onerous to disagree with him. Peris is a senior portfolio supervisor at Federated Hermes, having joined the agency in 2002. His focus has been dividend-paying shares, and he’s thought of one of many main authorities on the topic. Beforehand, Peris authored a number of books on investing, together with two about dividends: The Strategic Dividend Investor (McGraw Hill, 2011) and The Dividend Crucial (McGraw Hill, 2013). Each books stay precious for any funding skilled as a result of they problem one’s assumptions about how properly firms use their money.

In The Possession Dividend, Peris writes that there’s quickly to be a realignment within the inventory market that would create “worthwhile alternatives for individuals who are ready.” The shift will likely be from traders preferring a price-based relationship with their investments over a cash-based one. After 4 many years of an “something goes” atmosphere, the place traders had been depending on the ever-changing worth of a inventory, Peris believes the tide has begun to show. Traders will demand that extra firms share their income by way of dividends. Predicting a realignment within the inventory market is daring and will simply be dismissed; nonetheless, Peris makes a terrific case for why dividends must be given much more consideration than they at the moment obtain.

Peris rigorously explains how the previous 4 many years of declining rates of interest have led traders to concentrate on the value development of shares, fairly than the revenue they supply. His argument is properly crafted, and he challenges the commonly accepted notion that giant, profitable firms don’t have to share their earnings with shareholders by paying dividends. By recounting the position that dividends traditionally performed within the inventory market, Peris takes readers via an account of how dividends inspired funding and the way they’ve been diminished by the misapplication of the work of Franco Modigliani and Merton Miller, whose Dividend Irrelevance Concept has been misused as an argument for firms to not pay a dividend in any respect.

The Dividend Irrelevance Concept states that the dividend coverage of an organization has no impact on its inventory worth or capital construction. The worth of an organization is decided by its earnings and funding selections, not the dividend it pays. Thus, traders are detached as to whether or not they obtain a dividend or a capital achieve. As Peris factors out, nonetheless, this idea is commonly misunderstood. Created in 1961, the speculation assumes that the majority firms could be free money circulate detrimental, as a result of they operated in capital-intensive industries and would want exterior capital to fund their development plans and to pay dividends. Whereas that will have been the case within the Sixties, Peris estimates that this case applies to solely 10% of the shares in at the moment’s S&P 500 Index. The present S&P 500 is made up primarily of service firms which are free money circulate constructive and have ample money circulate to fund their development and in addition pay a dividend.

Peris supplies numerous causes for the position that dividends play as an funding software, however his assessment of inventory buyback applications must be learn by each investor. He’s forward of his time and unafraid to level out that maybe the emperor has no garments. Whereas many on Wall Road applaud inventory buyback applications as a software to spice up earnings per share, Peris exposes the fact that too usually a good portion of what’s “purchased again” is used for worker inventory possibility plans. Traders could be properly served to grasp how inventory buyback applications are sometimes diluted by inventory compensation plans. In fiscal 12 months 2023, Microsoft repurchased $17.6 billion of its frequent inventory and issued $9.6 billion in stock-based compensation. Microsoft is hardly an outlier; the previous 40 years have seen dramatic development not solely in inventory buyback applications but in addition in worker inventory possibility plans.

Over the course of 10 chapters, Peris makes a compelling case for the significance of dividends. His ebook is written for practitioners, not lecturers, which makes the ebook approachable and absent of any pretense. Whereas his audience will not be professors, it will be a helpful ebook for anybody educating a course on investing, which ought to embrace the concept on Wall Road, there’s by no means only one solution to worth an funding. The truth that investing in dividend-paying shares is out of vogue on Wall Road is properly accepted; even Peris acknowledges that truth. However what if Wall Road is getting it unsuitable? What if Peris is correct that dividends will quickly grow to be way more vital?

As Peris sees it, the autumn in reputation of dividend investing may be attributed to a few components: the decline in rates of interest over the previous 4 many years, the change within the securities tax code in 1982 that enabled share buybacks, and the rise of Silicon Valley. These three components triggered the inventory market to shift from a cash-based return system (the place dividends mattered) to at least one that’s pushed by near-term worth actions. Nevertheless, these components have doubtlessly run their course. In keeping with Peris, “The 40-year decline in rates of interest has come to an finish.” Over time, he maintains, the market will revert to the place traders will count on a money return on their investments.

Every issue is completely explored by Peris, however his assessment of the connection between rates of interest and the price of capital is very well timed. As rates of interest fell from their highs within the early Nineteen Eighties, firms had little issue elevating capital. The latest rise in rates of interest might make it harder. It was not way back that traders had been confronted with cash market funds and CDs having detrimental actual charges of return, leaving them few choices by which to speculate for present revenue. Now that charges have risen, traders have extra choices and corporations will now not have the ability to borrow funds as cheaply as earlier than, giving traders extra leverage to demand that firms share their earnings by way of a dividend.

In every chapter, Peris supplies ample proof of the significance of dividends as an funding software. His analysis into the subject is informative and precious to anybody within the idea underlying dividends. Nevertheless, he wrote this ebook for traders, and so after making his case for dividends, he additionally supplies helpful steering on what kind of firms traders might need to take into account to get forward of the upcoming paradigm shift. Whereas a lot of this data will likely be acquainted to funding professionals, Peris’s recent tackle the topic is insightful.

The counterargument to Peris’s view is that Wall Road is anticipating that the rate of interest will increase that had been orchestrated by the Fed will quickly be adopted by a sequence of cuts, as a result of Fed needing to deal with a slowing economic system that is likely to be in a recession. If rates of interest had been to say no to close pre-COVID-19 ranges, it will be unlikely that the market would now not favor worth development, because it has up to now.

Wall Road’s assumption that rates of interest will quickly fall, nonetheless, could also be flawed. With low unemployment and robust housing and shopper spending, the Fed has no incentive to decrease rates of interest to stimulate the economic system. In reality, increased charges give the Fed larger flexibility sooner or later to deal with unexpected financial occasions. The fact is that Wall Road was anticipating rates of interest to be reduce final 12 months. That by no means occurred. Forecasts have now been adjusted to foretell that the Fed might want to reduce charges later this 12 months.

All of this leads again to the purpose that Peris is making: Wall Road typically will get it unsuitable. The scenario over the previous 40 years was the results of particular components that will have run their course. If that’s the case, then the market ought to revert to traders favoring dividends over share development alone. For many who are ready, there will likely be alternatives. In The Possession Dividend, Peris supplies a roadmap of tips on how to reap the benefits of the approaching paradigm shift and, with out query, one of the best argument for why dividends must be a part of any investor’s technique.

If you happen to favored this submit, don’t neglect to subscribe to Enterprising Investor and the CFA Institute Analysis and Coverage Heart.

All posts are the opinion of the creator. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially mirror the views of CFA Institute or the creator’s employer.

Skilled Studying for CFA Institute Members

CFA Institute members are empowered to self-determine and self-report skilled studying (PL) credit earned, together with content material on Enterprising Investor. Members can report credit simply utilizing their on-line PL tracker.