Buffett (1980): The true value is determined by the intrinsic value of the company and not the dividends.

Wednesday, 31 March 2010

Buffett (1980): The true value is determined by the intrinsic value of the company and not the dividends.

https://myinvestingnotes.blogspot.com/2010/03/buffett-true-value-is-determined-by.html

Warren Buffett in his 1980 letter to the shareholders of Berks

hire Hathaway:

"The value to Berkshire Hathaway of retained earnings is not determined by whether we own 100%, 50%, 20% or 1% of the businesses in which they reside. Rather, the value of those retained earnings is determined by the use to which they are put and the subsequent level of earnings produced by that usage."

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Buffett’s thinking from that 1980 letter.

Let’s break down and expand upon the key ideas you’ve highlighted:

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1. Intrinsic Value vs. Dividends in Accounting

Buffett was criticizing the accounting convention that focused on dividends received from partially owned companies as the measure of value for the owning company.
He argued that the real worth to Berkshire wasn’t the dividend payout, but the proportionate share of the underlying business’s intrinsic value — regardless of whether those earnings were paid out or retained.

Your Indian example — valuing M&M based only on dividends from Tech Mahindra, rather than 20% of Tech Mahindra’s intrinsic value — perfectly illustrates the flawed accounting viewpoint.
If Tech Mahindra reinvests its earnings profitably, the retained earnings compound and increase the intrinsic value of M&M’s stake far beyond the dividends received.
Accounting rules at the time (and to a large extent still today) fail to capture this unless ownership exceeds a certain threshold (e.g., consolidation or equity method with impairment tests, but still not intrinsic-value based).

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2. Retained Earnings: Value Depends on Use

Buffett’s core point:

“The value of retained earnings is determined by the use to which they are put and the subsequent level of earnings produced.”

This means it’s not retention itself that creates value, but the return on reinvested capital. If a business can reinvest earnings at high rates of return, retaining earnings adds more value than paying dividends.
If it can’t find good reinvestment opportunities, returning capital to shareholders (via dividends or buybacks) is better.

For partial ownership, even if you don’t control the capital allocation decisions, if the investee company reinvests earnings well, your share of its value grows without you receiving cash dividends.
That’s why Berkshire’s holdings in companies like Coca-Cola or See’s Candies were worth far more than the dividends indicated — because retained earnings were deployed into high-return operations.

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3. Buybacks at a Discount to Intrinsic Value

The second quote contrasts corporate acquisitions (often full-price or overpay in competitive bidding) with stock buybacks in the open market (where shares can sometimes be bought far below intrinsic value).

Key takeaways:

• Acquisition market = auction between corporations → often pays premium to intrinsic value.

• Stock market = sometimes an auction where sellers panic → can buy parts of a business at a discount.

Buffett loves buybacks when:

1. The stock trades below intrinsic value.

2. The company has excess cash and no better investment opportunities.

Buybacks increase per-share intrinsic value by reducing shares outstanding, effectively giving remaining shareholders a larger claim on future earnings at a bargain price.

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4. Relevance Today

These principles remain central to value investing:

• Look-through earnings: When evaluating holdings, include your share of undistributed earnings of subsidiaries/associates if they are reinvested well.

• Capital allocation priority:

  1. Reinvest in high-return projects.

  2. Acquire other businesses at fair prices.

  3. Buy back stock when cheap.

  4. Pay dividends if no better use.

The accounting standards (e.g., IFRS 9, ASC 323) still don’t fully reflect “look-through” intrinsic value for minority holdings — they focus on dividends, fair value changes, or equity-accounted earnings, but not necessarily the full economic value of retained earnings compounding inside the investee.

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5. Buffett’s Broader Philosophy

The 1980 letter segment you’re discussing fits into Buffett’s larger framework:

• Own businesses, not stocks → value comes from underlying business performance.

• Mr. Market offers opportunities to buy/sell pieces of businesses at irrational prices.

• Management’s job is to increase per-share intrinsic value over time, not to cater to short-term stock prices.

By ignoring dividends as the sole measure of value from investments and focusing on the growth in intrinsic value, Buffett built Berkshire’s worth far beyond what dividend-based accounting would suggest.

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SUMMARY

Here is a summary of the article's key points:

Core Argument

Warren Buffett, in his 1980 letter, argues that the true economic value of a company's stake in another business is not determined by the dividends it receives, but by its share of the intrinsic value of the underlying business. Accounting standards that focus on dividend income are misleading.

Main Points

1. Intrinsic Value Over Dividends:

   • If Company A owns 20% of Company B, the stake should be valued as 20% of Company B's intrinsic value, not just 20% of the dividends paid out. This is because retained earnings reinvested into the business can create far more long-term value.

   • Example: Valuing M&M based only on the dividends from its stake in Tech Mahindra would be incorrect; one must value its 20% ownership of Tech Mahindra itself.

2. Value of Retained Earnings:

   • The worth of retained earnings depends entirely on how effectively they are reinvested. If a business can reinvest earnings at a high rate of return, retaining them creates more value than paying them out as dividends.

3. Buybacks vs. Acquisitions:

   • Acquisitions often occur in a competitive auction, forcing acquirers to pay a "full" or inflated price.

   • Stock Buybacks, however, allow a company to buy parts of its own business in the open market, often at a significant discount to intrinsic value, especially during market panics.

   • Buffett strongly advocates for buybacks when a company's stock is trading below its intrinsic value, as it is the most efficient use of capital to increase per-share value for remaining shareholders.

Conclusion

Buffett’s philosophy centers on economic reality over accounting convention. A value investor should focus on the growth of intrinsic value from reinvested earnings and take advantage of market irrationality to buy ownership stakes at a discount.

The best investors have a process. Masters of the Market: featuring Alex Green

0.00  Intro

2.14  What did you learn from your career

6.54  Investing is a long game

9.41  The best investors have a process

12.45 Smart money in hedge funds

14.18 Is Wall Street trustworthy

18,13  How to deal with fear

23.30  How to pick stocks

28.39  How to judge management

30.14  How to build a portfolio

34.02  Do dividends matter

37.05  What are we missing

39.13  Option oriented ETFs

41.40  Trends investors are overlooked

48.15  Small Cap Stocks

51.29  Biggest Mistakes

56.14  My Biggest Mistake

57.54  Top 3 Positions

Checking the safety of dividend payments

Dividends are an important part of total returns from owning a share.  

Dividends are a cash payment and therefore the company needs to have enough cash flow to make these payments.

Compare the FCF with its dividends

By comparing the free cash flow with its dividends, you can see whether a company has sufficient cash to pay dividends.  

Net cash from operation - CAPEX =  Free Cash Flow

You want to see the free cash flow being the bigger number more often than not.

When dividend is the larger number compared to the free cash flow, this may occur when a company is putting cash to good use (capex).  When dividend  is the larger number is fine on occasional years.  Prolonged periods of insufficient free cash flow will often lead to dividends being cut or scrapped eventually.

When analysing a company, it is often a good idea to compare free cash flow with the dividends over a period of ten years.

FCF dividend cover

A quick way to check whether cash flow is sufficient to pay dividends is by using the free cash flow dividend cover ratio.   This is calculated as follows:

Free Cash Flow dividend cover =  Free cash flow / dividends.

When free cash flow exceeds the dividends by a big margin, it can be a sign that the company may be capable of paying a much bigger dividend in the future.

How and Why Do Companies Pay Dividends?

An important part missing in many of these discussions 

• is the purpose of dividends and 
• why they are used by some companies and not by others.  

Let's look at different arguments for and against dividends policies. 

Arguments Against Dividends

1.  First, some financial analysts feel that the consideration of a dividend policy is irrelevant because investors have the ability to create "homemade" dividends. 

These analysts claim that this income is achieved by individuals adjusting their personal portfolios to reflect their own preferences. For example, investors looking for a steady stream of income are more likely to invest in bonds (in which interest payments don't change), rather than a dividend-paying stock (in which value can fluctuate). Because their interest payments won't change, those who own bonds don't care about a particular company's dividend policy.

2.  The second argument claims that little to no dividend payout is more favorable for investors. 

Supporters of this policy point out that taxation on a dividend is higher than on a capital gain. The argument against dividends is based on the belief that a firm that reinvests funds (rather than paying them out as dividends) will increase the value of the firm as a whole and consequently increase the market value of the stock.

According to the proponents of the no dividend policy, a company's alternatives to paying out excess cash as dividends are the following: 

• undertaking more projects, 
• repurchasing the company's own shares, 
• acquiring new companies and 
• profitable assets, and reinvesting in financial assets. 

Arguments For Dividends

In opposition to these two arguments is the idea that a high dividend payout is important for investors because:

1.  dividends provide certainty about the company's financial well-being; 

2.  dividends are also attractive for investors looking to secure current income. 

In addition, there are many examples of how the decrease and increase of a dividend distribution can affect the price of a security.

• Companies that have a long-standing history of stable dividend payouts would be negatively affected by lowering or omitting dividend distributions; these companies would be positively affected by increasing dividend payouts or making additional payouts of the same dividends.
• Furthermore, companies without a dividend history are generally viewed favorably when they declare new dividends. 

Dividend-Paying Methods

Should the company decide to follow either the high or low dividend method, it would use one of three main approaches: 

• residual, 
• stability, or 
• a hybrid compromise between the two.

Residual

Companies using the residual dividend policy choose to rely on internally generated equity to finance any new projects. As a result, dividend payments can come out of the residual or leftover equity only after all project capital requirements are met. These companies usually attempt to maintain balance in their debt/equity ratios before making any dividend distributions, which demonstrates that they decide on dividends only if there is enough money left over after all operating and expansion expenses are met.

For example, let's suppose that a company named CBC has recently earned $1,000 and has a strict policy to maintain a debt/equity ratio of 0.5 (one part debt to every two parts of equity).

• Now, suppose this company has a project with a capital requirement of $900. In order to maintain the debt/equity ratio of 0.5, CBC would have to pay for one-third of this project by using debt ($300) and two-thirds ($600) by using equity. In other words, the company would have to borrow $300 and use $600 of its equity to maintain the 0.5 ratio, leaving a residual amount of $400 ($1,000 - $600) for dividends. 
• On the other hand, if the project had a capital requirement of $1,500, the debt requirement would be $500 and the equity requirement would be $1,000, leaving zero ($1,000 - $1,000) for dividends. If any project required an equity portion that was greater than the company's available levels, the company would issue new stock.

Stability

The fluctuation of dividends created by the residual policy significantly contrasts with the certainty of the dividend stability policy. 

With the stability policy, companies 

• may choose a cyclical policy that sets dividends at a fixed fraction of quarterly earnings, or 
• it may choose a stable policy whereby quarterly dividends are set at a fraction of yearly earnings. 

In either case, the aim of the dividend stability policy is to reduce uncertainty for investors and to provide them with income.

Suppose our imaginary company, CBC, earned the $1,000 for the year (with quarterly earnings of $300, $200, $100, $400). 

• If CBC decided on a stable policy of 10% of yearly earnings ($1,000 x 10%), it would pay $25 ($100/4) to shareholders every quarter. 
• Alternatively, if CBC decided on a cyclical policy, the dividend payments would adjust every quarter to be $30, $20, $10 and $40 respectively. 

In either instance, companies following this policy are always attempting to share earnings with shareholders rather than searching for projects in which to invest excess cash.

Hybrid

The final approach is a combination between the residual and stable dividend policy. Using this approach, companies tend to view the debt/equity ratio as a long-term rather than a short-term goal. In today's markets, this approach is commonly used by companies that pay dividends. 

• As these companies will generally experience business cycle fluctuations, they will generally have one set dividend, which is set as a relatively small portion of yearly income and can be easily maintained. 
• On top of this set dividend, these companies will offer another extra dividend paid only when income exceeds general levels.

Conclusion

If a company decides to pay dividends, it will choose one of three approaches: residual, stability or hybrid policies. Which a company chooses can determine how profitable its dividend payments will be for investors - and how stable the income.


http://investopedia.com/articles/03/011703.asp?partner=basics4bb

Malaysia's richest tycoons and the billions in dividends they earned in the final quarter of 2020

 Bees for the honey

Cows for the milk

And, stocks for the dividends!

KUALA LUMPUR (March 18): Eight of Malaysia's top 10 richest tycoons — based on Forbes' 2020 billionaires list — earned a whopping RM1.99 billion worth of dividends from the recently announced financial results for the quarter ended Dec 31, 2020, based on their known shareholdings in Bursa Malaysia-listed firms.

Among them, Public Bank Bhd founder Tan Sri Dr Teh Hong Piow is expected to receive the biggest dividend payout totalling RM668.18 million from his shareholdings in the bank and insurer LPI Capital Bhd.

Public Bank, the third largest banking group in the country by asset size, declared an interim dividend of 13 sen (payable on March 22) for its fourth quarter of financial year 2020 (4QFY20) ended Dec 31, 2020. Public Bank also undertook a four-for-one bonus share issue to reward shareholders last year, which enlarged the number of Public Bank's outstanding shares to 4.2 billion.

Teh holds a 22.78% stake in Public Bank through his private investment vehicle — Consolidated Teh Holdings Sdn Bhd. He has another direct stake of 0.64%.

LPI Capital, meanwhile, announced a second interim dividend of 44 sen per share for its 4QFY20, which amounted to a payout of RM175.3 million. Based on Teh's 44.15% stake in the company, his share of the dividend payout will be about RM77.39 million.

After Teh is Hong Leong Group's Tan Sri Quek Leng Chan, who is estimated to get RM296.05 million worth of dividends through his holdings in Hong Leong Financial Group Bhd (HLFG) and Hong Leong Bank Bhd (HLB).

HLFG declared an interim dividend of 10.8 sen per share while HLB announced an interim single-tier dividend of 14.78 sen per share. Quek holds a direct interest of 0.47% and an indirect interest of 77.88% in HLFG, while he controls an indirect interest of 64.51% in HLB.

Next is telecommunications tycoon T Ananda Krishnan, who will receive RM276.04 million from his stake in Maxis Bhd and Astro Malaysia Holdings Bhd. Ananda is the largest shareholder in Maxis with an indirectly held 62.34% stake. In Astro, he holds an indirect stake of 41.29%.

Maxis declared a fourth interim dividend of five sen per share in its 4QFY20 ended Dec 31, 2020, while Astro announced a payout of 1.5 sen per share in its 3QFY20 ended Oct 31, 2020.

Ananda also holds a 34.86% stake in Bumi Armada Bhd, Asia's biggest offshore supporting vessel operator. The company, however, did not declare any dividends in 2020.

Robert Kuok's dividend cheque from PPB Group Bhd for the final quarter of last year is estimated to be RM274.65 million — the fourth highest sum among the ultra-rich.

PPB Group announced a dividend of 38 sen, comprising a final dividend of 22 sen and a special payout of 16 sen, in its 4QFY20 ended Dec 31, 2020. Kuok holds a 50.81% stake in the diversified conglomerate through his private investment vehicle, Kuok Brothers Sdn Bhd. He also holds a stake in Shangri-La Hotels (Malaysia) Bhd, though the latter did not declare any dividends for its FY20.

The fifth largest dividend gainer among the top 10 Malaysian billionaires is the founder and chairman of Hartalega Holdings Bhd, Kuan Kam Hon, who received RM162.47 million from the rubber glove maker, which recently announced a record high net profit of RM1 billion, and a second interim dividend of 9.65 sen for its 3QFY21 ended Dec 31, 2020, which was paid in February.

Based on the latest bourse filings, Kuan holds a direct interest of 0.795% in the group and a 48.32% indirect interest via Hartalega Industries Sdn Bhd. The glove manufacturer recently announced a record high net profit of RM1 billion for its 3QFY21 ended Dec 31, 2020 and declared a second interim dividend of 9.65 sen.

Next comes gaming tycoon Tan Sri Lim Kok Thay, who likely earned RM148.73 million in dividends from his shareholdings in the Genting group of companies listed on Bursa, despite the group facing challenges in operating its casino and resorts amid the pandemic.

This is based on the RM146.54 million Genting Bhd paid to Kok Thay's private investment company, Kien Huat Realty Sdn Bhd, and the dividends declared by Genting Plantations Bhd and Genting Malaysia Bhd.

Genting Malaysia declared a dividend payout of 8.5 sen per share for its 4QFY20 ended Dec 31, 2020, while Genting Plantations announced a 15 sen dividend — comprising a final dividend of four sen per share and a special dividend of 11 sen per share.

Kok Thay holds a direct interest of 0.44% in Genting Malaysia and a direct interest of 0.05% in Genting Plantations.

After Kok Thay is Datuk Lee Yeow Chor, who earned RM141.28 million in dividends from his holding in IOI Corp Bhd. Lee holds a direct interest of 0.16% and an indirect interest of 49.94% in the group.

Meanwhile, Press Metal Aluminium Holdings Bhd's Tan Sri Koon Poh Keong garnered RM20.22 million through his holdings in Press Metal and PMB Technology Bhd. Press Metal declared a fourth interim single-tier dividend of 1.25 sen per share in its 4QFY20 ended Dec 31, 2020 while PMB Technology declared a one sen dividend to its shareholders.

Two of the top 10 tycoons, however, did not appear to have gained any dividend payments from their shareholdings in Bursa-listed companies. They are gaming tycoon Tan Sri Chen Lip Keong and Tan Sri Lau Cho Kun, the largest shareholder in Hap Seng Consolidated Bhd.

What the glove maker billionaires take home

Though not on the list of Malaysia's top 10 richest tycoons based on Forbes 2020 list — which was published in March 2020 — Top Glove Corp Bhd's founder and executive chairman Tan Sri Dr Lim Wee Chai earned about RM460.45 million in dividend in end-2020, thanks to the interim dividend of 16.5 sen that the world's largest rubber glove maker declared in its 1QFY21 ended Nov 30, 2020.

The group also announced an interim dividend payment of 25.2 sen per share for its 2QFY21 ended Feb 28, 2021, payable on April 6 this year. Based on the announcement, Wee Chai stands to gain another dividend payout of RM710.12 million before mid-2021.

That means just for the first two quarters of Top Glove's FY21, Wee Chai has accumulated a total of RM1.17 billion in dividends, based on his total shareholdings of 35.22% in Top Glove, comprising a direct stake of 26.56% and an indirectly held stake of 8.65%.

Datuk Seri Stanley Thai of Supermax Corp Bhd, on the other hand, accumulated dividends of RM38.17 million, while Tan Sri Lim Kuang Sia of Kossan Rubber Industries Bhd earned RM132.99 million.

Including Kwan, the billionaires from the big four glove makers on Bursa earned RM794.07 million worth of dividends in end-2020, as their companies' earnings continued to scale new highs following the surge in glove demand amid the Covid-19 outbreak.

 

https://www.theedgemarkets.com/article/malaysias-richest-tycoons-and-billions-dividends-they-earned-final-quarter-2020

What dictates dividend policy?

Management determines if it is going to 

• distribute earnings in the form of a dividend or 
• reinvest all earnings to further the business plan of the company. 

The ratio of dividends paid out to investors versus the amount of earnings retained is called the payout ratio.  

The Dividend Decision

Changes in tax law and investor preference can influence decisions in the corporate boardroom regarding how much profit to retain or to pay out to investors in the form of dividends.  

However, dividend increases often lag behind an increase in earnings because management will want to be certain that a new higher dividend payment will be sustainable going forward.

Change in Dividend Yield has a lot to do with change in Share Price

Looking back over market history, we can see that dividend policy and payouts have remained relatively steady and that any change in dividend yield has had a lot more to do with the change in stock prices than with changes to dividend policy made by corporate directors.  (Note:  You can 'price' your stocks by looking at historical dividend yields.)




A cut in dividends is often perceived negatively

Management is usually very reluctant to reduce dividends because a cut is often perceived as a sign of financial weakness.  

Even during the Great Depression, companies were loath to cut dividends.  

• From 1929 to 1932, dividend yields soared because most companies maintained their dividends as stock prices collapsed in the crash.  
• But, as stock prices rose from 1933 to 1936, dividend yields fell - even though companies were actually increasing the dividends they paid.

This inverse relationship between dividend yield and price was really evident during the huge bull market run from 1982 to 1999.  

• Companies increased dividends steadily over the period, actually increasing dividends paid by almost 400 percent.  
• Yet the dividend yield collapsed to historic lows because stock prices increased by 1,500 per cent.

Some companies do run into trouble and cut or omit their dividend payments, but this is the exception rather than the rule. 



The typical dividend-paying company

The typical dividend-paying company not only maintains the dividend payout it establishes, but follows a policy of steadily increasing its dividend as earnings increase. 

Some companies increase their dividend payments 

• (1) every quarter, 
• (2) some once per year, and 
• (3) others only as profits allow.

Some companies will even pay extra or special dividends if earnings have been quite good for a number of years.


Dividend policy

Many established public companies pay cash dividends and have a dividend policy that is well known to their investors.  

Some of them have been paying cash dividends for a very long time.

What I’ve Learned After Making More Than 5-Figures In Dividends

What I’ve Learned After Making More Than 5-Figures In Dividends

By The Fifth Person on December 28, 2015

As investors, we all love dividends. Other than the thrill of seeing a stock you own rise higher and higher in the stock market, receiving passive dividend income from your investments every year is something we all look forward to.

So if you’re more of an income investor and looking to invest for dividends, your stock portfolio will be markedly different from someone who’s investing for high growth and capital gain. The stocks that will give good, consistent dividends may not necessarily be the kind that will grow by 20-50% a year and vice versa.

So if you investing for dividends, you have to invest accordingly and only pick the best stocks that will give the passive dividend income you want. The question is: How?

Over the years, our investments have received more than 5-figures in dividends. So if you’re slightly lost and looking for some direction, here are 7 quick steps that we personally use to pick the best dividend stocks around: (Hint: You can’t just look at dividend yield alone!)



#1 Look for Mid-Large Cap Stocks

The best dividend stocks are usually large, mature companies with stable revenue, profits and cash flow. These companies have little growth left in them. Because these companies are no longer expanding aggressively, the majority of their earnings can be returned to shareholders as dividends.

On the other hand, a smaller, high-growth company needs more cash and resources to grow and expand its business, leaving less money to pay shareholders dividends (if any).


#2 Dividend Payout Ratio is 50% or More

If a company is large, stable and isn’t seeking to grow aggressively any more, then the majority of the profits it makes should be returned to shareholders. So look for a company with a dividend payout ratio of at least 50% or more. For example, Nestlé (Malaysia) returns over 90% of its earnings to shareholders as dividends.

If a company has a low payout ratio, ask yourself why the company is holding on to the cash. Unless they have a good reason to do so or have a way to generate exceptional returns for shareholders, the majority of profits should be paid out as dividends.



#3 Track Record of Paying Consistent Dividends

The company should have a long and stable track record of paying consistent/growing dividends to shareholders. No point if a company is large and successful and has profits to distribute as dividends, but chooses to pay them out inconsistently.

The best track record is to see a company pay a consistently growing dividend over the last 5-10 years. This shows that as the company grows more and more successful, the management is also willing to share the fruits of its labour with its shareholders.


#4 Company’s Fundamentals Must Be Sustainable

Many dividend investors tend to ignore the overall aspects of a company’s fundamentals and primarily focus on the amount of dividends they can receive from an investment. While dividend yield is obviously important for someone seeking dividends, it is also important to consider the overall health of the company.

A company with deteriorating fundamentals (e.g. falling revenue, profits, cash flow, fading economic moat, etc.) cannot sustain its dividend payout in the long term. The less revenue and profit it makes, the less dividends it can pay.

Furthermore, a company with falling revenues and profits will see its stock price fall in tandem over time as investors start to realize the company is no longer performing as well. This fall in value will eat into any dividend gains you might have had at the start — leaving you back at square one.

So always make sure the dividend company you want to invest in will remain fundamentally strong and robust for many years to come.



#5 Company has Low CAPEX

As a dividend investor, you prefer to invest in a company with low capital expenditure (CAPEX). A company with high CAPEX means that it has to continually reinvest its profits in maintaining its business operations, leaving less to distribute as dividends.

For example, airlines have very high CAPEX as they need to continually maintain their aircraft and upgrade them to newer models after a certain amount of years.

So look for a company that’s able to maintain/grow its business with minimal CAPEX.

If you want help, you can always kick start the idea by downloading our watchlist of dividend paying stocks below:


#6 Company has Stable Free Cash Flow

Ultimately, a company must have real cash (not just profits) to be able to pay dividends to its shareholders. Even if a company is profitable but has negative or inconsistent free cash flow, it will have trouble paying stable dividends.

A smaller company that is seeking to grow might have negative free cash flow as it expands its business. But a large, stable company that dominates its industry should be producing high amounts of free cash flow year after year.



#7 Yield Must Beat Risk-Free Rate

The dividend yield you receive from a stock should beat the risk-free rate of the country you reside in. The risk-free rate is the lowest return you can theoretically get “risk-free”over a period of time.

In the US, if you plan to invest your money for ten years, then the risk-free rate is usually based on the return of the 10-year US Treasury note which is currently around 2.30%. In Malaysia, the risk-free rate is usually based on the guaranteed interest your EPF gives you which is 2.5%. However, since 2000, EPF has been able to give out between 4.25% to 6.75%, which is more than the minimal guaranteed.

If your dividend yield can’t beat your risk-free rate, you might as well put your money with the US Treasury / EPF since you face less risk investing in a US Treasury note / EPF than investing in a stock to generate the same returns.



The Fifth’s Perspective

There you have it! Seven quick steps to help you pick the best dividend stocks to invest in. As you can see, there are lots more items to consider other than just dividend yield!

So remember to check these seven criteria whenever you’re looking to invest for dividends.


https://fifthperson.com/what-ive-learned-after-making-more-than-5-figures-in-dividends/

Capital Structure, Dividends and Share Repurchases

There is usually more to lose than to gain when making a decision in this area.

Managers should manage capital structure with the goal of not destroying value as opposed to trying to create value.

There are three components of a company's financial decisions:

1. how much to invest,
2. how much debt to have, and 
3. how much cash to return to shareholders.

Choices concerning capital structure

Managers have many choices concerning capital structure, for example,

1. using equity,
2. straight debt,
3. convertibles and
4. off-balance-sheet financing.

Managers can create value from using tools other than equity and straight debt under only a few conditions.

Even when using more exotic forms of financing like convertibles and preferred stock, fundamentally it is a choice between debt and equity.




Debt and Equity Financial Choices trade-offs

Managers must recognise the many trade-offs to both the firm and investors when choosing between debt and equity financing.

The firm increases risk but saves on taxes by using debt; however, investing in debt rather than equity probably increases the tax liability to investors.

Debt has been shown to impose a discipline on managers and discourage over investment, but it can also lead to business erosion and bankruptcy.

Higher debt increases the conflicts among the stakeholders.




Credit rating is a useful indicator of capital structure health

Most companies choose a capital structure that gives them a credit rating between BBB- and A+, which indicates these are effective ratings and capital structure does not have a large effect on value in most cases.

The capital structure can make a difference for companies at the far end of the coverage spectrum.

Credit ratings

• are a useful summary indicator of capital structure health and 
• are a means of communicating information to shareholders.

The two main determinants of credit ratings are

• size and 
• interest coverage.

Two important coverage ratios are

• the EBITA to interest ratio and 
• the debt to EBITA ratio.

The former is a short-term measure, and the latter is more useful for long-term planning.




Methods to manage capital structure

Managers must weight the benefits of managing capital structure against

• the costs of the choices and 
• the possible signals the choices send to investors.

Methods to manage capital structure include

• changing the dividends, 
• issuing and buying back equity, and
• issuing and paying off debt

When designing a long-term capital structure, the firm should

• project surpluses and deficits, 
• develop a target capital structure, and 
• decide on tactical measures.  

The tactical, short-term tools include

• changing the dividend,
• repurchasing shares, and 
• paying an extraordinary dividend.

Return Characteristics of Equity Securities

The two main sources of an equity security's total return are:

• Capital gains from price appreciation
• Dividend income

The total return on non-dividend paying stocks only consists of capital gains.

Investors in depository receipts and foreign shares also incur foreign exchange gains (or losses).

Another source of return arises from the compounding effects of reinvested dividends.

Dividend per share

For example;

Total dividends  $2 million
Number of issued shares  10 million
Dividend per share  20 sen.

This is the total dividends for the year divided by the number of shares in issue.

Any preference shares are normally disregarded.

Dividends, Dividend Yield and Bond Yield