when a company chooses to pay dividends, it does so at the
expense of future growth.
I'm here to tell you that myth is absolutely false.
It's possible to get growth and income in one investment. Not
only that, it's more likely that you'll generate a higher total
return from companies that make dividends a priority. It might
seem counter-intuitive - but it's absolutely the case.
I know from experience.
High Yield Wealth
portfolio includes a number of recommendations that have produced
both exceptional income and impressive capital gains for
Textainer Group Holdings (
is one of many examples.
Over the past five years, this shipping container leasing
company has grown revenue at an annual average rate of 14%. In
2012, the company raked in sales of $487 million. Over the same
period, EPS has grown 19% annually to $3.96.
Textainer consistently grows its business, and continues to
pay 40% to 50% of its income to shareholders. Each year the
dividend grew and the yield remained healthy at around 5%.
Of course, total investment return is the most important
measure of investing success. Over the same five-year period,
Textainer shares have delivered 22% average gains.
Not surprisingly, the stock has gained 25% since we
recommended the company to our
High Yield Wealth
subscribers just eight months ago.
My experience with Textainer isn't all that unusual. And this
is why I rarely think in terms of growth versus income. The good
news is there is a wealth of research that supports my
An influential article titled "Surprise Higher Dividends =
Higher Earnings Growth," appeared 10 years ago in the
Financial Analysts Journal
. The article's authors, Robert Arnott and Clifford Asness,
advance a thesis with which I'm somewhat familiar: dividends
focus the mind.
When a company pays dividends, it prevents excess capital from
accumulating. The problem with excess capital is that it's
frequently allocated to ventures that generate diminishing
returns. On the margin, these new ventures are simply less
profitable than previous ventures. And in the worst-case
scenario, these expenditures become loss-leaders, turning cash in
the bank into a continued expense.
Paying a dividend forces the executives to focus on the most
profitable, highest-growth ventures. N contrast, not paying a
dividend frequently leads to inefficient empire building, with
lower returns to investors being the end result.
The notion that dividends - and especially dividend growth -
can foreshadow exceptional earnings growth actually predates
Arnott and Asness. I've read similar accounts expounded by the
great value investor Benjamin Graham.
I'd first crossed paths with Graham's dividend-paying thesis
at the start of my investing career, after reading a series of
published lectures he gave in 1946.
In these talks, Graham mentions that he consistently agitates
for dividends in order to keep management focused on maintaining
high returns on invested capital. Like Arnott and Asness, Graham
knew that unrestrained capital accumulation led to lower future
High Yield Wealth
portfolio has many investments that pass through much of their
earnings to investors.
They can do so because they have a record of business success,
which allows them to tap external debt and equity markets on
Equity and debt markets are tapped, new capital is put to work
in profitably, and the business grows. It's that simple.
That's why the share price of these dividend growers continues
to also rise, right alongside the dividend. It's for this simple
reason that dividend growers are among my favorite income
investments - making them far preferable to just "high yield