Book Review: The Ownership Dividend

The Ownership Dividend: The Coming Paradigm Shift in the U.S. Stock Market. 2024. Daniel Peris. Routledge — Taylor & Francis Group.

Might the subsequent alternative within the inventory market be with dividend shares? Based on Daniel Peris, the reply is “sure,” and after studying his insightful e book, The Ownership Dividend: The Coming Paradigm Shift in the U.S. Stock Market, readers could discover it arduous 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-about 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 Imperative (McGraw Hill, 2013). Each books stay precious for any funding skilled as a result of they problem one’s assumptions about how nicely corporations 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 many who are ready.” The shift shall 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. Buyers will demand that extra corporations share their income through dividends. Predicting a realignment within the inventory market is daring and will simply be dismissed; nonetheless, Peris makes an ideal case for why dividends must be given much more consideration than they at present obtain.

Peris fastidiously explains how the previous 4 many years of declining rates of interest have led traders to concentrate on the worth progress of shares, fairly than the earnings they supply. His argument is nicely crafted, and he challenges the commonly accepted notion that enormous, profitable corporations don’t must share their earnings with shareholders by paying dividends. By recounting the function that dividends traditionally performed within the inventory market, Peris takes readers by 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 Principle has been misused as an argument for corporations to not pay a dividend in any respect.

The Dividend Irrelevance Principle 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 concept is commonly misunderstood. Created in 1961, the idea assumes that the majority corporations can be free money stream destructive, as a result of they operated in capital-intensive industries and would want exterior capital to fund their progress 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 present’s S&P 500 Index. The present S&P 500 is made up primarily of service corporations which can be free money stream optimistic and have enough money stream to fund their progress and in addition pay a dividend.

Peris gives numerous causes for the function that dividends play as an funding software, however his overview 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 truth that too usually a good portion of what’s “purchased again” is used for worker inventory choice plans. Buyers can be nicely served to know 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 progress not solely in inventory buyback applications but in addition in worker inventory choice plans.

Over the course of 10 chapters, Peris makes a compelling case for the significance of dividends. His e book is written for practitioners, not teachers, which makes the e book approachable and absent of any pretense. Whereas his audience might not be professors, it might be a helpful e book for anybody instructing a course on investing, which ought to embody the concept that on Wall Road, there’s by no means only one method to worth an funding. The truth that investing in dividend-paying shares is out of trend on Wall Road is nicely accepted; even Peris acknowledges that reality. However what if Wall Road is getting it incorrect? What if Peris is correct that dividends will quickly change into way more necessary?

As Peris sees it, the autumn in reputation of dividend investing could be attributed to 3 elements: 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 elements brought about 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. Nonetheless, these elements have doubtlessly run their course. Based on 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 totally explored by Peris, however his overview of the connection between rates of interest and the price of capital is particularly well timed. As rates of interest fell from their highs within the early Eighties, corporations had little issue elevating capital. The current rise in rates of interest may make it tougher. It was not way back that traders had been confronted with cash market funds and CDs having destructive actual charges of return, leaving them few choices wherein to speculate for present earnings. Now that charges have risen, traders have extra choices and firms will not be capable of borrow funds as cheaply as earlier than, giving traders extra leverage to demand that corporations share their earnings through a dividend.

In every chapter, Peris gives ample proof of the significance of dividends as an funding software. His analysis into the subject is informative and precious to anybody within the concept underlying dividends. Nonetheless, he wrote this e book for traders, and so after making his case for dividends, he additionally gives helpful steerage on what kind of corporations traders could need to contemplate to get forward of the upcoming paradigm shift. Whereas a lot of this info shall 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 collection of cuts, because of the Fed needing to handle a slowing economic system that is perhaps in a recession. If rates of interest had been to say no to close pre-COVID-19 ranges, it might be unlikely that the market would not favor worth progress, because it has prior 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 truth, greater charges give the Fed larger flexibility sooner or later to handle unexpected financial occasions. The truth is that Wall Road was anticipating rates of interest to be lower final 12 months. That by no means occurred. Forecasts have now been adjusted to foretell that the Fed might want to lower charges later this 12 months.

All of this leads again to the purpose that Peris is making: Wall Road generally will get it incorrect. The state of affairs over the previous 40 years was the results of particular elements that will have run their course. If that’s the case, then the market ought to revert to traders favoring dividends over share progress alone. For many who are ready, there shall be alternatives. In The Possession Dividend, Peris gives a roadmap of how one can 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.

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