. 2024. Daniel Peris. Routledge – Taylor & Francis Group.
Could the subsequent opportunity on the stock market lie with dividend stocks? According to Daniel Peris, the reply is yes, and after reading his insightful book, readers may find it hard to disagree with him. Peris is a senior portfolio manager at Federated Hermes and joined the corporate in 2002. His focus has been on dividend stocks and he is taken into account certainly one of the leading experts on this field. Peris has previously authored several books on investing, including two on dividends: (McGraw Hill, 2011) and (McGraw Hill, 2013). Both books remain useful to any investment skilled because they challenge one’s assumptions about how well firms use their money.
In writes Peris that a rebalancing of the stock market is coming soon, which could “create profitable opportunities for those who are prepared.” The change will come as investors prefer a price-based relationship with their investments over a cash-based relationship. After 4 a long time of an “anything goes” environment wherein investors were depending on ever-changing stock prices, Peris believes the tide has begun to show. Investors will demand that more firms share their profits through dividends. Predicting a stock market rebalancing is daring and will easily be dismissed; However, Peris makes case for why dividends ought to be given rather more attention than they currently receive.
Peris rigorously explains how falling rates of interest over the past 4 a long time have led investors to deal with the value growth of stocks fairly than the income they generate. His argument is well developed and he challenges the commonly accepted idea that giant, successful firms wouldn’t have to pass on their profits to their shareholders by paying dividends. Recounting the role that dividends have historically played within the stock market, Peris guides readers through an account of how dividends boosted investment and the way misapplication of dividends’ work diminished it Franco Modigliani And Merton Millerwhose dividend irrelevance theory was used as an argument for firms to not pay dividends in any respect.
The dividend irrelevance theory states that an organization’s dividend policy has no impact on its stock price or capital structure. An organization’s value is decided by its earnings and investment decisions, not by the dividend it pays. Therefore, investors don’t care whether or not they receive a dividend or a capital gain. However, as Peris points out, this theory is usually misunderstood. The theory, developed in 1961, assumes that the majority firms have negative free money flow because they operate in capital-intensive industries and require external capital to finance their growth plans and pay dividends. While this may occasionally have been the case within the Nineteen Sixties, Peris estimates that this example only applies to 10% of stocks in today’s S&P 500 index. The current S&P 500 consists primarily of service firms which have positive free money flow and have enough money flow to fund their growth and in addition pay a dividend.
Peris provides countless reasons for the role that dividends play as an investment tool, but his review of stock repurchase programs ought to be read by every investor. He’s ahead of his time and is not afraid to indicate that the emperor may not have any clothes. While many on Wall Street applaud stock repurchase programs as a tool to extend earnings per share, Peris highlights the fact that every one too often a significant slice of what’s “repurchased” is used for worker stock option plans. It could be good for investors to know how stock repurchase programs are sometimes diluted by stock compensation plans. In fiscal 2023, Microsoft repurchased $17.6 billion of its common stock and issued $9.6 billion in stock-based compensation. Microsoft is hardly an outlier; Over the last 40 years, there was dramatic growth not only in stock repurchase programs, but additionally in worker stock option plans.
Over the course of 10 chapters, Peris makes compelling arguments for the importance of dividends. His book is written for practitioners, not academics, which makes the book accessible and freed from any pretensions. While its target market will not be professors, it might be a useful book for anyone teaching a course on investing, which should incorporate the concept there’s never only one solution to evaluate an investment on Wall Street. The indisputable fact that investing in dividend stocks has fallen out of fashion on Wall Street is widely accepted; even Peris acknowledges this fact. But what if Wall Street makes a mistake? What if Peris was right that dividends would soon grow to be rather more vital?
According to Peris, the decline in popularity of dividend investing could be attributed to a few aspects: the decline in rates of interest over the past 4 a long time, the change in securities tax law in 1982 that allowed stock buybacks, and the rise of Silicon Valley. These three aspects caused the stock market to shift from a cash-based return system (wherein dividends played a job) to at least one driven by short-term price movements. However, these aspects could have run their course. According to Peris, “the 40-year decline in interest rates is over.” Over time, he claims, the market will return to where investors expect a money return on their investments.
Each factor is examined in depth by Peris, but his examination of the connection between rates of interest and the fee of capital is especially timely. As rates of interest fell from their highs within the early Eighties, firms had little difficulty raising capital. The recent rise in rates of interest could make it harder. Not way back, investors were faced with money market funds and CDs that had negative real yields, leaving them with little opportunity to take a position in current income. Now that rates of interest have risen, investors can have more options and firms will now not give you the option to borrow money as cheaply as before, giving investors more leverage to demand that firms share their profits via a dividend .
In each chapter, Peris provides extensive evidence on the importance of dividends as an investment tool. His research on this topic is informative and useful to anyone interested by the speculation underlying dividends. However, he wrote this book for investors. After making the case for dividends, he also offers useful guidance on what variety of firms investors should consider to remain ahead of the upcoming paradigm shift. While much of this information might be familiar to investment professionals, Peris’ fresh tackle the subject is insightful.
The counterargument to Peris’ view is that Wall Street expects the Fed’s orchestrated rate hikes to soon be followed by a series of rate cuts because the Fed must address a slowing economy which may be in recession. If rates of interest were to fall to pre-Covid levels, it might be unlikely that the market would now not support price increases because it has up to now.
However, Wall Street’s assumption that rates of interest will soon fall could also be flawed. With unemployment low and housing and consumer spending strong, the Fed has no incentive to chop rates of interest to stimulate the economy. In fact, higher rates of interest will give the Fed more flexibility in the long run to reply to unexpected economic events. The reality is that Wall Street expected a rate cut last 12 months. That never happened. The forecasts have now been adjusted to predict that the Fed can have to chop rates of interest later this 12 months.
All of this comes back to the purpose Peris makes: Wall Street sometimes gets things flawed. The situation of the last 40 years has been the results of specific aspects which will have taken their course. If that is the case, the market should revert to investors favoring dividends over stock growth alone. There might be opportunities for many who are prepared. In it, Peris provides a roadmap for making the most of the upcoming paradigm shift and, without query, the perfect argument for why dividends ought to be a part of every investor’s strategy.
