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  • The Risk Premium Puzzle, or Dividend Investing for Math Nerds
    Through 40+ years of bull and bear markets, Berkshire Hathaway has never paid any dividends, and yet markets keep valuing it based on the intrinsic value of the businesses it owns, knowing it will never pay any dividend either. Hedge funds are among the biggest owners of BRK; they're not interested in "the glamor of stock ownership". They expect return on investment, and with Berkshire, they get it aplenty.

    There is no point in trying to force-fit reality into the dividend growth model. The model was a good starting point for financial theory, but reality just isn't that simple.


    On Nov 25 10:55 PM AlexR wrote:

    > I think that's the whole point we all have been missing. In "normal" and
    > low-priced markets, no company would have the "audacity" of offering zero
    > dividends. That only happens during secular mega-bubbles. Once all the
    > glamor of stock ownership is gone, stocks will fall until their dividend yield is
    > meaningful. And without the cheap financing from the credit bubble, no
    > market force will be powerful enough to arbitrage the dividend away.
    Nov 26 06:55 am |Rating: 0 -1 |Link to Comment |View article
  • The Risk Premium Puzzle, or Dividend Investing for Math Nerds
    Indeed, but dividends can just as easily be a disguise for what should properly be called "return of capital".


    On Nov 25 04:45 PM searcher wrote:

    > Retained earnings can prove to be evanescent due to the profligate
    > or desultory husbandry of management. "A bird in the hand...”
    Nov 25 19:00 pm |Rating: 0 -1 |Link to Comment |View article
  • The Risk Premium Puzzle, or Dividend Investing for Math Nerds
    Good article. However, the dividend growth model, popularized in the first half of the previous century, falls apart in the face of successful companies paying little or no dividends. In the 1940s, publicly traded companies paid out most of their earnings in dividends, whereas now the payout ratio is less than one third.

    Apple, Dell and Berkshire are all highly valuable companies, despite the zero value the dividend model implies for them. When you own a business, you own its retained earnings too, not just the dividends it spins off. In fact, retained earning are more valuable than dividends, since they're only taxed once, and at a more favourable rate than dividends are.

    That being said, the article still stands correct if you replace all instances of 'D' (Dividends) with 'E' (Earnings). The formulas are all correct, and the risk premiums are even more compelling.
    Nov 25 12:53 pm |Rating: +1 0 |Link to Comment |View article

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