STREET DOGS

When “bears rule the street, it pays to own things that pay you to own them”, said John Rothchild. “This includes stocks that pay high dividends, preferred stocks, convertible bonds, and balanced mutual funds that own a mixture of the above ... If it takes years for stock prices to rise, you might as well get some return as you wait.”

In 2005 Mathew Emmert, the editor of Motley Fool Income Investor, gave three reasons for placing the emphasis on a company’s dividend payout when making an investment:

Cash doesn’t lie. “I take serious note of where the cash is coming from,” said Emmert. “I especially make sure that the cash inflow from operations is currently covering the dividend because a dividend not being funded from operations is doomed to be cut.”

Proven management team. “A manager must have a gift for the efficient use of capital in order to consistently pay out a sizable portion of profits to shareholders in the form of dividends.”

“It requires a significant amount of focus, experience and dedication.”

A noticeable yield. “I like to see companies that have a strong preference for generating shareholder value,” said Emmert, “particularly in the form of income. And a company with a payout above a token offering is one that has generally made a commitment to maintaining and growing its dividend.”

According to James Montier, “For any equity market, the return achieved can be broken down into four component parts. In the long term, the return is almost exclusively driven by dividends [growth and yield]. Equity owners need to be compensated for providing capital to companies to help fund their long-term investments. That compensation comes from the cash flows the companies generate from their risky investments via earnings and dividends.”