Dividends are like a salary, a methafor to a dependable, reliable, predictable income that grows every year, despite of market conditions, because it’s on a portfolio, a collection of individual quality companies, which were acquired at fair valuation, following the same process as if you were to acquire the whole business. Like any investing book explains.CheapScotch wrote: ↑ - Dividends are not salary. A salary is compensation for your labour, and for the most part it is stable and reliable. Dividends are one form of compensation for your capital, but you need to step back and look at the bigger picture - the capital itself. As a shareholder, the compensation for your capital, in the form of dividends and capitals gains is not reliable because business is inherently risky. There are ways to mitigate that risk which you and I are both well aware of, but nobody should ever think of the returns on their investments in the same way they thing about their salary. And, again, you can't know what you future cash flow needs are (or the needs of your descendants). Someday, you or they will have to sell the stock.
Re: your example about CNR - you can cherry pick the past performance of a stock to provide evidence in support of pretty much any theory you have about investments.
Dividends are my salary replacement, without me having to do labour. That’s exactly why dividends are a good idea for the investor that want to live from a perpetual growing income. Being in my 40s, I can achieve financial independence when dividends matches my current net salary. And that will last perpetually, as I will keep following the same principles.
So yeah, it’s like a salary, where you tag along good companies that gives you a raise about 7% every year. When we enter the financial independence or retirement phase of our lives, we can't go to the boss and ask for a raise because the cost of gas, electricity, or food has gone up. There's no more boss. The only boss left is us. As the new boss, it is incumbent upon us to come up with strategies to whip inflation, all by ourselves. Dividends more than provide for that.
Actually, they are way more reliable than salary on the job. Because if you don’t own your business, you are just a number. Look at how many people lost their jobs during the pandemic. But shareholders continued to be rewarded.
In the corporate world of public traded companies, shareholders come first, before staff and clients.
I don’t need to look at capital because that’s the engine to provide these dividends that I’ll live from. Short term capital fluctuations make no difference. But because these are high quality companies, acquired at fair valuation, capital will continue to increase. Dividend investing is not “yield at any cost”.
Dividends ARE reliable when the business continues to present quality metrics and continues to be well managed. They are not random numbers. They do not depend on the year’s performance for their payouts.
Remember Canadian banks in 2008? They all lost Billions. None reduced dividends. That’s the power of reliability.
CNR is not cherry picked. Take any of the 65 companies with a dividend aristocratic status and see how that applies consistently, from a dividend increase perspective. Or any of the 240 companies as a dividend contender status, and see how that applies consistently from a dividend payment perspective, regarding reliability.
A diversified portfolio, made of quality companies, acquired at a fair valuation to maximize margin of safety will always provide superior returns, be it dividend focused or growth focused. Despite if business risks. We are talking here portfolio, overall income reliability. Like I said earlier, some companies I have cut dividends. Some will be sold because they no longer meet my goals. Yet, my portfolio continues to grow, as well as my dividend income.