Your Dividend Thoughts

In last night’s newsletter we discussed a proposal from a pair of Goldman Sachs researchers to directly peg companies’ shareholder returns to their business performance. Payouts would flex with periods of better or worse operating results, and would automatically be higher in good years and lower in bad years. The incentive for companies to take on debt to maintain a sacrosanct dividend would be eliminated, supporting balance-sheet health—but total payouts to shareholders might decrease.

Goldman offered several ways this could work, including rules such as committing to pay out 60% of free cash flow in dividends, and reducing share buybacks when the stock price was above its five-year average.

Many of you had strong feelings about their ideas. Some noted that in a low interest rate and yield-starved world, retirees and many others depend on steady and consistent dividends for their living expenses. Others found the variable-dividends proposal attractive for helping companies save cash in downturns like the one we’re experiencing this year, and securing their long-term sustainability.

A few readers also pointed out that many European dividend-paying companies already tie their their payouts to certain operating metrics, as does Sturm Ruger in the U.S. The firearms maker's quarterly dividend has ranged from 11 cents to 49 cents a share over the past five years, most recently defined as 40% of net income.

Thank you to everyone from across the country and around the world who wrote back last night to share your thoughts. Here are a few highlights from your responses:

"I think it is crazy to think a company is breaking some kind of implied contract by not paying, or lowering, its dividend in hard times.  You want a guaranteed steady payment?  Buy a high-quality bond."
—Carlos B. in San Mateo, Calif.

"So as a retiree already suffering from low bond yields I am supposed to tolerate an unpredictable dividend stream from companies specifically bought as dividend growth companies? How ridiculous!"
—John B. in Naples, Fla.

"I think tying payouts to operating performance is a fantastic idea... At the end of the day, particularly in an environment that is increasingly paying attention to stakeholders, a company’s balance sheet and capacity to survive a downturn is far more important than maximizing payouts. As an investor, I would accept slightly reduced returns if it meant the company was far more resilient in any unforeseen circumstance."
—James W. in San Diego, Calif.

"The maintenance of the dividend provides a strong incentive for management to keep its eye on the cash flow and profit lines. [Tying payouts directly to operating performance] may be more realistic, but not so attractive to a dividend investor. I especially like the idea of scaling back buybacks when the share price rises above the prior year’s average. Indeed, a 'well-managed' company should have a cash reserve to buy back shares when the current price is below the previous years'."
—Peter H. in Asunción, Paraguay

"Any dividend investor worth their salt is already looking for stable performance metrics to convince them of the dividend's safety. Thus, pegging the dividend to free cash flow does not seem like such a big step out of line. Where one would need to be careful is on the reporting side, as explicitly pegging the dividend to a metric would undoubtedly unleash all sorts of accounting shenanigans."
—Mike D. in New York, N.Y.

"I am an investor, 72 years old and retired, who receives about a third of my annual income through equities' dividends. Still, I believe the first order of business for any CEO is to maintain the health of the corporation. If income drops, reduce or if necessary suspend dividends. Just remember we stockholders when times get better."
—David B. in Meadow Valley, Calif.

"Steady and predictable dividends have been the norm for solid companies for over 50 years. And that should be the preferred corporate strategy going forward...Dividend Aristocrats have earned that title."
—Joe Y. in Vero Beach, Fla.

"Investors should accept the obvious and fundamental fact that investing in ordinary shares bears significant risks to both the share price and its dividend yield. If fixed payments are what they want or need maybe investing in ordinary shares is not a good idea in the first place. There are good quality preferred shares or even better quality bonds in the market where one can have the wanted stability in fixed coupon payments, coupled also with a relatively low credit risk."
—Demetrios Z. in Athens, Greece

"The dividend issue is complicated by the fact that many people who want a secure quarterly payment do so because they rely on this to sustain manner of living. These are troubling times for seniors especially as there are few well-paying secure investments...Companies are owned by shareholders. Shareholders deserve to reliably benefit from a consistent source of cash flow themselves."
—Mark R. in Louisville, Ky.

"I think it makes a lot of sense for dividends to reflect free cash flow directly. When the company has a great period, the dividends will increase accordingly. It makes more sense for the shareholders to get paid based on performance than entitlement."
—Taylor M. in Mount Royal, N.J.