Mundy: Are investors putting too much faith in dividends?

MUNDY'S MOMENT

We are often asked how much weight we give to dividend yield when valuing stocks. After all, it is common knowledge that income has generated a large percentage of total equity market returns over many years.

The attractions of dividends are obvious – they are genuine cash payments and indicate a company management focused on delivering value to shareholders. It is often argued they are used by management to demonstrate, from their privileged vantage point, confidence in a company’s future. Many investors also believe that when a dividend yield reaches a certain level, it offers ‘yield support’ to a share price; implying downside risk is limited, but upside potential remains, thus generating a good risk/reward profile. We, however, believe the allure of dividends can be exaggerated. Firstl...