We Found Bin Laden So Now We're In Search of Yield

The Stock Rabbi writes about the lessons of the Talmud and breakout stocks.  Follow him here.

Oy vey with the Yield Search!  Stop searching so hard, bubbie, it’s right in front of you!

Barron’s did the big In Search of Yield cover story this week.  The learned Rabbi Ritholtz pulled the appropriate paragraph and charts here: In Search of Yield & Dividends

The gist is that while there are plenty of companies paying juicy dividends to investors (what Barron’s calls the Magic 4%), there are a host of companies that are being cheap and stingy.  Your friend the Stock Rabbi knows all about being called “cheap” and “stingy” – my nephew David once washed and detailed my Chevy Tahoe entirely on spec, when I came out of the house he said “Surprise! I washed your car for fifty bucks!”  Some surprise, I paid him not in dollars but in advice – I said only a schnook does a job on spec, know what you’re getting paid or don’t do the labor.

Anyway, we may yet see a dividend yield on shares of Apple this year, with $80 billion (and growing) in the bank, they are as rich as a Midas.  Time to spread that wealth, I believe the rap term is “make it rain”.  Apple needs to get over the concept that paying a dividend to shareholders is tantamount to an admission that the growth days are over.  It took Microsoft and Intel and Cisco forever to make that admission, and Apple’s hesitation is well-founded.  The initiation of a dividend is like the first gray hairs growing at a man’s temples, or the first instance of backache after a neighborhood softball game.

And then the shareholder base begins to turn over.  I remember watching some of the hottest nightclubs in Miami Beach gradually become greasy spoon diners back in the day.  The models stop showing up but Seymour and Ethel can’t get enough of the 3pm Dinner Special.  And before you know it, you’re running the joint for a whole different type of customer.  Many technology companies have a deep-seated fear that this will be the case and so they hem and haw at the idea of making cash payouts.

But they get over it.  They come to accept the fact they’ve grown up and that there’s nothing wrong with having the Seymour and Ethel Value Fund take the place of the Fidelity Aggressive Growth Fund in shareholder ranks.

The Barron’s also article mentions that it probably wouldn’t kill Warren Buffett to start paying a dividend one of these days, he’s got roughly $35 billion in corporate cash after all.  Berkshire Hathaway hasn’t paid a dividend in 50 years – since 1962!  But as an investor in other stocks, Berkshire loves companies that pay high and consistent dividends – investments like these have been one of the big factors of Warren’s success.  His relationship with the idea of cash payouts is a bit complicated, so I’ll cite his own words below, from the Berkshire Hathaway 1984 Letter to Shareholders:

“As long as prospective returns are above the rate required to produce a dollar of market value per dollar retained, we will continue to retain all earnings. Should our estimate of future returns fall below that point, we will distribute all unrestricted earnings that we believe cannot be effectively used. In making that judgment, we will look at both our historical record and our prospects. Because our year-to-year results are inherently volatile, we believe a five-year rolling average to be appropriate for judging the historical record.”

You heard the man.  Yes, he’s got $35 billion in cash – but he’s telling you “don’t hold your breath.”

The message is, just as I told young David not to do a job on spec, I woiuld similarly tell investors not to buy companies with big cash hoards on the speculation that they might pay them out.  Because there is plenty of yield out there already, so knock it off with the searching.

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Tags: $BRK-B $AAPL $MATZOH