Dont get me wrong everyone likes a payout fully franked and as a full time investor who lives off my investments it plays a very important part in my strategies.
However as an investor there are stocks where it is good for them to pay me a dividend and ones where its beyond terrible.
My philosophy on this is my mid to large caps dividends are good, because they generally have cheap debt available, they can easily raise capital if needed without much of a discount and with lower costs and they generally have much lower growth prospects then the smaller and micro caps...
But my smaller and growth portfolio, dividends early on are the absolute enemy and wealth destruction. I would go so far as to say they show bad management, impatient investors and i literally "hate" them....
But i will qualify all that venom with a further explanation.... If say im in a smaller company that doesnt require huge capital to grow, like a tech stock with profit and largely fixed costs, then dividends are fine once they dont need the cash to grow. Or a small gold producer that has a proftiable mine with long life and nothing to develop further.
But in the energy and resource sector ESPECIALLY in a stock like SXY where they have HUGE acreage that needs developing, and exploring why take my money and then give it back at a huge cost. Especially when management know with 100% certainty they are going to need as much capital as they can possibly get to bring forward development and accelerate exploration....
My advice is investors should buy companies with the appropriate dividend strategy for them in that section of their investments.
The company should focus on shareholder value only, and paying 3% dividends is a big no no if they then turn around and need to pay a big fee to a broker to secure a share offer at a 5% discount and dilute my percentage ownership. Its an absolute false economy. It lowers intrinsic value and it doesnt maximize the return on the dollars i have given them. If you want dividends you should buy enough BPT or STO or some other stock. And you should allocate the protion of your portfolio you dont need dividends from into capital hungry stocks.
SXY like BPT and like most other companies will turn around and pay dividends far before they should because of pressure to by brokers and investors and because there is a general belief that paying dividends ads value. From a fundamental perspective the lowest payout ratio is the best approach.
The big flaw in this is that some will say dividends attract a whole new bunch of investors which drives value....thats true for a very short time. It does initially, then value drives price....and the best way to get value is to keep all the money and accelerate accelerate accelerate...
SXY needs every single dollar they can get and then some to maximize the value of that vast acreage they have.
Take this example say SXY is worth $800m and they decide to pay a 3% dividend. Thats $24million per annum. Depending on strategy thats approximately 2-5 wells. Lets say 4. In the second year they can drill another 5 minimum...
And if your on the money like SXY is at present these extra few wells can change the direction for the company profoundly for the better if they reinvest and accellerate.
They are presently in a transition from possibly and likely profitable and its a dead set race between revenue acceleration and expense acceleration...the earlier you pay a dividend the more chance you give expenses of winning that race or catching you up...
The final point is if its in your SMSF its CGT free, so simply sell some share when you need the dividend and the growth should far exceed any dividend you might get even after tax.
SXY Price at posting:
79.0¢ Sentiment: LT Buy Disclosure: Held
