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 following alternative within the inventory market be with dividend shares? In line with Daniel Peris, the reply is “sure,” and after studying his insightful ebook, The Ownership Dividend: The Coming Paradigm Shift in the U.S. Stock Market, readers might discover it laborious 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 priceless for any funding skilled as a result of they problem one’s assumptions about how effectively 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 can be from buyers preferring a price-based relationship with their investments over a cash-based one. After 4 a long time of an “something goes” setting, the place buyers had been depending on the ever-changing value of a inventory, Peris believes the tide has begun to show. Buyers will demand that extra corporations share their earnings through dividends. Predicting a realignment within the inventory market is daring and will simply be dismissed; nevertheless, Peris makes an ideal case for why dividends needs to be given much more consideration than they presently obtain.

Peris rigorously explains how the previous 4 a long time of declining rates of interest have led buyers to give attention to the value development of shares, moderately than the revenue they supply. His argument is effectively crafted, and he challenges the widely accepted notion that giant, profitable corporations don’t must 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 Idea has been misused as an argument for corporations to not pay a dividend in any respect.

The Dividend Irrelevance Idea states that the dividend coverage of an organization has no impact on its inventory value or capital construction. The worth of an organization is set by its earnings and funding choices, not the dividend it pays. Thus, buyers are detached as to whether or not they obtain a dividend or a capital achieve. As Peris factors out, nevertheless, this principle is commonly misunderstood. Created in 1961, the idea assumes that almost all corporations could be free money circulate destructive, 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 example 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 circulate constructive and have adequate money circulate to fund their development and likewise pay a dividend.

Peris gives numerous causes for the position that dividends play as an funding instrument, however his evaluation of inventory buyback applications needs to 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 Avenue applaud inventory buyback applications as a instrument to spice up earnings per share, Peris exposes the truth that too typically a good portion of what’s “purchased again” is used for worker inventory possibility plans. Buyers could be effectively served to grasp how inventory buyback applications are sometimes diluted by inventory compensation plans. In fiscal yr 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 is probably not professors, it might be a helpful ebook for anybody instructing a course on investing, which ought to embrace the concept on Wall Avenue, there’s by no means only one approach to worth an funding. The truth that investing in dividend-paying shares is out of style on Wall Avenue is effectively accepted; even Peris acknowledges that reality. However what if Wall Avenue is getting it mistaken? What if Peris is true that dividends will quickly turn out to be far more essential?

As Peris sees it, the autumn in recognition of dividend investing will be attributed to 3 components: the decline in rates of interest over the previous 4 a long time, the change within the securities tax code in 1982 that enabled share buybacks, and the rise of Silicon Valley. These three components brought on 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 value actions. Nevertheless, these components have probably run their course. In line 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 buyers will count on a money return on their investments.

Every issue is totally explored by Peris, however his evaluation 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, corporations had little problem elevating capital. The current rise in rates of interest might make it tougher. It was not way back that buyers had been confronted with cash market funds and CDs having destructive actual charges of return, leaving them few choices through which to speculate for present revenue. Now that charges have risen, buyers have extra choices and corporations will not have the ability to borrow funds as cheaply as earlier than, giving buyers 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 instrument. His analysis into the subject is informative and priceless to anybody within the principle underlying dividends. Nevertheless, he wrote this ebook for buyers, and so after making his case for dividends, he additionally gives helpful steering on what kind of corporations buyers might wish to take into account to get forward of the upcoming paradigm shift. Whereas a lot of this data can be acquainted to funding professionals, Peris’s contemporary tackle the topic is insightful.

The counterargument to Peris’s view is that Wall Avenue 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 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 value development, because it has up to now.

Wall Avenue’s assumption that rates of interest will quickly fall, nevertheless, could also be flawed. With low unemployment and robust housing and client spending, the Fed has no incentive to decrease rates of interest to stimulate the economic system. Actually, greater charges give the Fed higher flexibility sooner or later to deal with unexpected financial occasions. The truth is that Wall Avenue was anticipating rates of interest to be minimize final yr. That by no means occurred. Forecasts have now been adjusted to foretell that the Fed might want to minimize charges later this yr.

All of this leads again to the purpose that Peris is making: Wall Avenue typically will get it mistaken. 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 buyers favoring dividends over share development alone. For many who are ready, there can be alternatives. In The Possession Dividend, Peris gives a roadmap of find out how to benefit from the approaching paradigm shift and, with out query, one of the best argument for why dividends needs to be a part of any investor’s technique.

For those who appreciated this publish, don’t overlook to subscribe to Enterprising Investor and the CFA Institute Research and Policy Center.

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