Saturday, December 6, 2008

dividends, a bird in the hand

The saying 'A Bird in the Hand is Better Than Two in the Bush', really can be used to describe several life choices, as well as financial decisions. For example you might apply this credo to the following decisions:
  • Should I take part in a lottery pool with my co-workers?
  • Should I accept a lower amount for a prepayment for my goods or services than I would for a 'net 30 days' or more type of credit arrangement with an unknown credit risk?
  • Should I accept a position with company X now, even though company Y might hire me for more pay and benefits at a later date?

Dividends, the Ultimate Bird in the Hand

I've explained in the past some of the reasons why I am so focused on dividends as part of my investing strategy. Dividends have a human side and they're something to fuss over. Another reason I like dividends comes back to the 'Bird in the Hand' concept:

Companies like TD Bank (TD) and IGM Financial (IGM) constantly garner fee revenue each day without having to really employ many intensive resources. Inter Pipeline (IPL.UN), Fortis (FTS), and CP Rail (CP) generate consistent revenue as well by various means including the distribution of electricity, energy liquids, and goods. These functions are part of every day life for these companies and if they can keep their costs down the result is pure, consistent profit. The challenge for these company's is growth. The easy part is their consistent, stable, fee-type revenue.

When I make an investment in a company I am looking out several years so that someday I will receive 'two in the bush' in the form of a tidy capital gain. In the meantime though, why can't the company pay me for my trouble? They can pay me out of their stable fee-type revenue in, ideally ever increasing amounts, called 'Dividends'. These dividends will be some fraction of the actual capital that the company requires for it's future growth. I rely on the company to grow and provide my two in the bush someday, but for now I'll take my bird in the hand now as payment for the capital that I am providing the firm.

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