Extra Dividends

You know I focus on Cash Flow and dividends from stocks certainly come into play. Robert Arnott, a money manager, and Clifford Asness, who runs a hedge fund, studied the relationship between percentage of earnings paid as dividends-the payout ratio-and subsequent earnings growth. They found higher payout ratios predicted faster earnings growth over the next 10 years by a wide margin.

The authors of the study offered two possible explanations. First, since managers hate cutting dividends-something that invariably causes the stock price to fall-growing payout ratios signify extraordinary confidence in future earnings. Explanation two is that paying so much out in dividends keeps managers from having money to make dumb acquisitions. 🙂

I keep focusing on dividend paying stocks first and leverage those positions to buy an occasional Google. Have a great weekend!

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