What happens to dividends/prices?

[SecondAttempt]

Now that we can get nearly 5% yield on Treasury Bills, what will that do to dividend yields? Any self-respecting dividend stock will need to pay up to compete with risk-free Teasuries. Will the yield go up by price falling or by dividends going up?

I think I know the answer. But I have not seen any actually significant reaction.

I've built a nice divident income portfolio in an IRA but I admit I'm very tempted to sell it all and buy T-bills for a year or so.

Maybe this belongs in teh active investing thread.

[njhowie]

Dividend yield is not a fixed number set in stone. There are a number of factors a company considers in setting its dividend rate, and similarly a number of factors which the market considers in pricing the shares being discussed.

In general company will set its dividend rate based on profitability and outlook. Market will drive share price based on dividend yield based on risk free yield and outlook.

Bottom line, there are no guarantees as to how dividend rate/yield will adjust for any particular company or share issue...it depends.

[pb4uski]

I think a fixation on dividend yield is foolish. There are lots of good low or no dividend stocks out there to choose from. By comparison to high dividend stocks their "dividends" are just implicitly included in the stock price and the investor can control their dividends by simply selling a couple shares here and there.

There is an argument to be made that companies pay dividends at least in part because they can't find enough investment opportunities that will yield more than their cost of capital so that is a bad sign by comparison to no or low dividend payers.

[DrRoy]

Dividends do not move to reflect interest rates. They are the decision of each individual company. The price of a dividend stock may react to rates, though.

[Andre1969]

A dividend yield that looks too good to be true, often is. Sometimes it's simply a result of the stock price dropping quickly, which automatically pushes up the dividend yield. It might look good at a quick glance, but often it's a sign the company is having problems, and just might reduce that dividend in the future, or cut it out entirely.

[marko]

Quote:

Originally Posted by njhowie Dividend yield is not a fixed number set in stone. There are a number of factors a company considers in setting its dividend rate, and similarly a number of factors which the market considers in pricing the shares being discussed. In general company will set its dividend rate based on profitability and outlook. Market will drive share price based on dividend yield based on risk free yield and outlook. Bottom line, there are no guarantees as to how dividend rate/yield will adjust for any particular company or share issue...it depends.

+1. Dividends are not set as a competitive item but rather how much comfort the company has in paying its owners, need for extra cash and other internal factors. No CEO decides to increase the dividend based on external factors.

[SecondAttempt]

Quote:

Originally Posted by njhowie Dividend yield is not a fixed number set in stone. There are a number of factors a company considers in setting its dividend rate, and similarly a number of factors which the market considers in pricing the shares being discussed. In general company will set its dividend rate based on profitability and outlook. Market will drive share price based on dividend yield based on risk free yield and outlook. Bottom line, there are no guarantees as to how dividend rate/yield will adjust for any particular company or share issue...it depends.

Yes, I understand that. I think I should mention that I focus on companies with a long track record of increasing (or at least never cutting) the dividend. I understand this is no guarantee that it will be maintained in the future but it does place a reputational cost on the current Board members.

I get that there is no free lunch and stock prices will likely adjust to keep the dividend rate consistent with interest rates. But so far I have not seen it happening and that is surprising to me.

[SecondAttempt]

Quote:

Originally Posted by marko No CEO decides to increase the dividend based on external factors.

Dividend decisions are generally not made by the CEO. They are made by the Board of Directors who have to stand for re-election by the shareholders every few years. While I have no evidence that cutting the dividend would impact their re-election, I suspect it at least enters their mind when making the decision to cut the dividend.

And I think dividend decisions are entirely based on external factors! If a company can effectively redeploy cash to grow rapidly, that's what they do. If the external factors limit growth and stockholders demand payment when they no longer get it from the stock price going up, that's also an external factor. Perhaps they are not made based on macroeconomic factors.

Still, my intention is not to debate. It is to understand why I am not seeing the behavior I would expect.

[Sunset]

Quote:

Originally Posted by SecondAttempt .... I get that there is no free lunch and stock prices will likely adjust to keep the dividend rate consistent with interest rates. But so far I have not seen it happening and that is surprising to me.

No, the dividend rate is not controlled by interest rates, companies don't care what the interest rate of the Fed is, when they are setting their dividend rate as it has nothing to do with it.

Did you see all companies drop their dividends to 0% when the Fed went to 0% .. I didn't. So why expect the reverse ?

[pb4uski]

+1 changes in interest rates don't directly impact dividend rates...IOW, a Board doesn't include changes in interest rates in making dividend decisions.

[marko]

Quote:

Originally Posted by SecondAttempt Dividend decisions are generally not made by the CEO. They are made by the Board of Directors who have to stand for re-election by the shareholders every few years. .

You're right. I was thinking of my old company where the board always deferred to the CEO.

[Phroig]

Quote:

Originally Posted by marko You're right. I was thinking of my old company where the board always deferred to the CEO.

Most boards defer to their CEOs. The board does set the dividend, but typically based on the management’s recommendation.

[pb4uski]

That and companies try to be sure and steady with dividend policy and avoid abrupt changes so in many cases the starting point is the same as last year and then consider changes based on recent experience.