Are Dividends an Important Aspect of the Investment Equation?

A diversified financial portfolio refers not only to an appropriate mix of products (stocks, bonds, real estate, art, insurance, etc.), but also diversification within each product category.  In the UBS wealth management and private banking businesses, a significant amount of time and due care is placed on ensuring that UBS clients achieve appropriate levels of diversification for their goals, needs, and risk tolerances.

For personal investors, a question which comes up frequently is: Should I care about dividends?  After all if a dividend is a cash payout from an invested entity to an investor, does the dividend achieve anything?  The investor receives cash, but her shares are now invested in a company with less cash, and thus the shares are themselves worth less.  That, of course, is a gross oversimplification, but the concept is quite real: if a company is paying out cash, then the company is sending a signal that it thinks investors can achieve yield on paid-out cash than they could if the company hung onto the cash and plowed it back into the business.

But, as the article points out, a consistent cash payout in the form of a dividend can also be considered a signal of the organization’s financial strength, and its ability to make such cash payments.  A high flying penny stock will almost never pay a dividend, and while there are good reasons for this (namely, whatever cash they have is being used to build the business), it is also often the reality that there is no cash available to pay out anyway.

— Tim Shields, UBS


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s