Income Investing


The Case for Greater Dividends

Jeffrey R. Kosnett

A mutual fund manager’s new book argues that corporate America should be more generous in sharing profits with stockholders.



I find most books written by mutual fund (or hedge fund) managers to be turgid, tedious and self-congratulatory. Yet I'm about to salute not one but two titles penned by a manager you have probably never heard of and whose fund you're unlikely to choose. And, no, his books do not detour into sex, drugs, rock-and-roll, baseball or barbecue. They are for serious dividend fans.

See Also: 12 Stocks to Get Dividends Every Month

Before I reveal the mystery author and why his books are essential, I will give a cheer to Peter Lynch, the long-retired lion of Fidelity, for putting his stock-picking heroics in print. One Up on Wall Street -- the 1989 book in which Lynch famously writes that if you like the product, you might consider buying the stock -- may have encouraged a few folks to invest in Apple and Starbucks at an opportune time. I also agree with much of what's contained in the books written by Jack Bogle, the crusty patriarch of the Vanguard Group, in which he lambastes high fees and commissions.

But that's a short list. Time to make it longer. Go to Amazon and search for Daniel Peris, a former scholar of Russian history who now co-manages Federated Strategic Value Dividend Fund (symbol SVAAX). Peris's newest book, to be released in April, is called The Dividend Imperative. That volume and his previous book, The Strategic Dividend Investor, make the strongest cases I've ever seen for relentlessly investing in dividend stocks and funds that own them. Moreover, Peris makes a strong argument that the large, established companies in Standard & Poor's 500-stock index ought to return to paying out more of their profits in the form of dividends. Instead of the current 30% "payout ratio," as the figure is known, he argues that the ratio should beat least 50%, as was common in the 1970s, '80s and '90s (for dividend payers in the S&P 500).

The decline in the payout ratio is a sore spot for Peris, as it is with other dividend-oriented managers, some academics, and rank-and-file shareholders who rely on tax-advantaged income. Some of the shrunken payout ratio reflects the rise of the financial sector in the U.S. economy and the relative decline of manufacturing. Manufacturers are known for reliably paying and raising disbursements; in the meantime, nearly all banks were forced to slash or eliminate dividends five years ago during the financial meltdown, and only a handful have been able to rebuild them much.

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But Peris does more than lament the trend. He's trying to fire up corporate America by saying business and the overall economy would benefit along with shareholders if chief executives and boards of directors would go back to paying dividends the way they used to. This is the theme of The Dividend Imperative. If you're one of the many Kiplinger readers who love dividends and tell us to keep writing about them, you'll get amped up reading this book.

Peris fumes at CEOs whose companies pay pedestrian dividends even though they have bulging cash resources. What frosts Peris is that the executives -- whom he has questioned both in public and in private but does not identify in the book -- often tell him that they have to cater to shareholders whose only interest is to see the stock price rise ASAP and who do not care whether they or anyone else collects any Lincolns and Franklins every quarter.

Why, Peris wonders, should a CEO care as much or more about "sharesellers" who are certain to dump the stock than the shareholders who are committed to keeping it for many years? As Peris said in a conversation with me: "They're putting us, the permanent shareholders, on an equivalent level as hedge fund traders. Well, we are not all the same. Those hedge fund guys are going to be with them for six months or less and don't care about the business."

In his book, Peris also joins the parade of stock-buyback skeptics. Although the concept does make sense -- a company that reduces its share count spreads its earnings across fewer shares, and that increases the earnings-per-share number -- in practice, companies buy their stock when it is expensive and don't dare buy it when it's down. And they don't always reduce the number of shares outstanding because the companies end up issuing more shares in the form of stock options to provide lucrative compensation to the bosses. So, instead of everyone getting some cash, only a few insiders benefit.

Peris names a bunch of companies -- IBM is one, but I won't give away the whole plot -- that could easily pay more in dividends without taking one dollar from salaries, research and development, or, if you insist, executive compensation. He then reasons that if blue-chip stocks on the whole yielded 4% instead of the 2% rate we've seemingly been stuck with for years, the stock market would be steadier, people would have more confidence in stocks, investors wouldn't run to bonds when doing so makes little sense, and everyone would be better off. And if all the billions spent on buybacks were paid as cash dividends, he figures, a 4% market yield wouldn't at all be out of the question.

Peris acknowledges that he may be "tilting at windmills." He says it might take someone with the stature of, say, Warren Buffett (whose Berkshire Hathaway pays no dividends to its shareholders, although it collects plenty from the stocks it owns) to break the ice rather than a young fund manager from Pittsburgh.


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