Investing Catechism

It's the perfect tool for dollar cost averaging every month and earning a subsidy which will in turn give you a higher chance of retiring with much more income than the average schmo.
 
I recommend investors closely track dividend payout ratios:

Dividend Payout Ratio Above 85%

Alert Definition
During the great bull market of recent years, many investors almost forgot about any return on their stock holdings from dividend payments. Capital gains were the name of the game. But historically, dividends have provided more than 40% of a stock investor’s total portfolio return. (The figure has been about half that over the last 20 years.)

Dividends are one way mature companies share their profits with the investors who hold their stock. But companies usually need to plow some of their profits back into the business, as well, if they hope to modernize their production operations, fund the kind of research and development effort that will guarantee a steady line of improved products, and make other improvements so necessary to the longer-term success of the business. Young companies or even older ones in rapidly changing businesses often pay no dividends on grounds that their investors are much better served by the long-term growth that can come from reinvesting profits.

A company's payout ratio is a measure of how much profit it is returning to shareholders in the form of dividends. Some companies strive mightily to increase their dividends on a regular basis, even when their earnings may actually decrease. That will cause their payout ratio to jump, if only temporarily. But sometimes, an unusually high ratio over a longer period of time may be a danger signal -- a sign that the company will soon have to cut its dividend in order to have the money it needs to reinvest in its business. And a dividend cut usually sends a company's stock tumbling.

Context is all-important here. Utility companies tend to have the fattest payout ratios, for example. But in other industries 70% would be extraordinarily high. An investor is well advised to compare the payout ratio of a company with others in the same industry to better understand if it seems out of line.

Also, high depreciation expense for a given year due, for example, to a new plant, could depres a company's earnings and make its payout ratio appear high. You might also check the company's cash flow to see if that is holding up.
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http://moneycentral.msn.com/investor/alerts/glossary.asp?TermID=41

Yahoo provides this number. For example:

http://finance.yahoo.com/q/ks?s=GE

For those that believe that investing is essentially a dividend capture, as I do, then this article would have to be amended, but it is important to understand how other investors think about this number.
 
Quiz:

BRK-A buys BNI. BNI pays 2.1% Div Yield. BRK-B splits 50:1. It pays no dividend.

Do you then buy BRK-B if you loved BNI?
 
Let's do a little math.

There are 340 million shares outstanding in BNI. There is a $1.60 per share dividend yield. So per quarter, BNI pays $136,000,000 or $544,000,000 per year ( a little less since a small fraction of the float is short).

Now, the tangible book value of BNI before the BRK takeover is about $34.85. So buffet is essentially paying $66 per share for BNI, or $66 * 340 million shares = $22,440,000,000

Since he doesn't have to pay a dividend anymore, he can recoup that $22B in

$22,440,000,000 / $544,000,000 = 41 years

if the company made no money for 41 straight years (a silly assumption, since companies only pay dividends when they make money). In fact, BNI generates about $1.2 billion after capital expenditures a year, so teh term to recoup that investment of $22B is cut in half, again assuming a company whose earnings profile stays indentical to the recent past.

Imo, if you want to guess the next Buffet takeover, look for a company that pays a nice dividend yield that he can wipe out, generates approximately $1 to $2B of cash a year after capital expenditures, is trading approximately 2x tangible book value, has no more than four competitors in it's market, if any, and someone that plays a banjo can understand the business.
 
You also have to assume, that Warren Buffet is buying on growth as well. So not only is his rate of return increased because the dividends the company generates can go to Berk. The amount the company generates goes up.

The companies 5 year EPS growth rates has been 23%

So in 20 years a compounded 23% increase by 4 times will be less than 21 years.

Because if burlington is earning 1.2 Billion or so.

Than 20 years from now it will be earning at least twice that amount maybe even more.

It will take more like 13-15 years for Berk to recoup their initial investment.

But, while Berk is receiving 1.2 Billion a year from Berlington. Berk doesn't just sit on cash. Buffet buys even more cash producing investments which increases the velocity of Berk's money.

They'll either buy more stock, increase their investments in the companies they currently own. Or they will put that 1.2 Billion to work in an investment that will normally generate 8% or more.

8% compounded on 1.2 Billion with an annual addition of 1.2 Billion is how much over a period of 20 years?

*Drum Beat*
$64,900,654,302.98
64Billion in 20 years
That's only if they constantly reinvest 1.2 billion.
Essentially I did not factor the growth of earnings from BNI which would make the cash cow's compound rate even larger.
 
Good analysis.

Quote from alexandercho:

You also have to assume, that Warren Buffet is buying on growth as well. So not only is his rate of return increased because the dividends the company generates can go to Berk. The amount the company generates goes up.

The companies 5 year EPS growth rates has been 23%

So in 20 years a compounded 23% increase by 4 times will be less than 21 years.

Because if burlington is earning 1.2 Billion or so.

Than 20 years from now it will be earning at least twice that amount maybe even more.

It will take more like 13-15 years for Berk to recoup their initial investment.

But, while Berk is receiving 1.2 Billion a year from Berlington. Berk doesn't just sit on cash. Buffet buys even more cash producing investments which increases the velocity of Berk's money.

They'll either buy more stock, increase their investments in the companies they currently own. Or they will put that 1.2 Billion to work in an investment that will normally generate 8% or more.

8% compounded on 1.2 Billion with an annual addition of 1.2 Billion is how much over a period of 20 years?

*Drum Beat*
$64,900,654,302.98
64Billion in 20 years
That's only if they constantly reinvest 1.2 billion.
Essentially I did not factor the growth of earnings from BNI which would make the cash cow's compound rate even larger.
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lol, I guess your right. Yahoo's P/E multiples are at 165.1

A joke, that company isn't worth that much. I wonder how traders can bid up a company so high for being worth so little.

Screw...Yahoo buy Google their P/E ratio is 34.7 something reasonable unlike that crappy company we call Yahoo. The prior Yahoo CEO *Cough* Jerry Yang should be smacked for crappy management and not being able to develop effective means to generate cash flow.

This company will blow :eek:
 
Quote from nitro:

Mature business. $30B in cash. No dividend. What a joke.
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Yes, you'd be poor having invested in them. What a joke! I can't stand it when companies make me money!
 
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