#461 - Dividends Fulfill This Core Human Need

Episode of: The "Daily Call" From Option Alpha

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Dec 27, 20184m
#461 - Dividends Fulfill This Core Human Need
Dec 27 '184m
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Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about why dividends fulfill this core human need. I think this is actually kind of interesting because I generally talk a lot with people about what their needs are and what they think about finance. As many of you guys know, I’m insanely interested and I geek out on just the psychology behind finance and what people want to do with wealth generation and what I consistently find is that the need for income fulfills a core human need which is why dividends and dividend paying stocks are really, really popular. In fact, just recently as we were celebrating the holidays and we were sitting around with family, we got on this discussion about dividends and somebody brought up – “Oh, this dividend stock pays this.” And “Oh, well, my dividend stock pays this and my dividend stock pays this.” And what I ultimately ended up learning from just watching and just kind of overseeing this conversation and not participating in it because I don't want to participate in dividend stock conversations at all, but just watching and overseeing this was the need to have certainty and that's a core human need. A core human need that we all have is this need for certainty. That’s why we always look for things that are guaranteed. That’s why we always look for things that are certain. They’re predictable. They’re understandable because it fulfills this need for certainty and dividend paying stocks fulfill a core fundamental human need for certainty. Now, you can look at a high dividend paying stock and make so many arguments for why that stock is a bad investment. In fact, some high dividend paying stocks right now that pay 12% or 15% are probably terrible investments because the risk is adjusted for the fact that the stock is not great or the company’s fundamentals are not great. And so, it’s just a function of math that they end up paying a high dividend related to the stock price, but the company maybe is going to cut the dividend or is going to eliminate the dividend altogether. But it's so fascinating to me that people are so drawn to dividend paying stocks or dividend paying companies because of the need for certainty.

Now, I don’t know who it was, so you can please let me know if you do find this, but I did try to look online. I couldn't find out where this research was originated or I would’ve pointed you, but I know there’s research out there that actually shows that over long periods of time, dividend paying companies actually perform less or actually underperform companies that don't pay dividends over time. And that’s why you see even some of the biggest companies like Berkshire Hathaway still does not pay dividends because of the need to reinvest and recycle capital as opposed to paying it out to shareholders. Now, that doesn’t mean that dividends are a bad thing and companies shouldn’t pay out investment to their shareholders, but there’s probably other ways to do that, maybe stock buybacks, etcetera. But it's really interesting. I think there was a really good research report that I read a long time ago and I couldn’t find it that definitely show that dividend paying stocks actually underperformed non-dividend paying stocks. It's pretty fascinating again, just trying to open up the dialogue here. I think it's interesting that dividends again, fulfill this core human need for certainty, but don't necessarily turn out to be the best investment vehicle long-term in some cases. Hopefully this helps out. As always, if you guys have any questions, let me know and until next time, happy trading.

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