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John Lintner found that management aimed to have a stable payout ratio target but, in fact, it is often the dividend itself that is kept stable and that reverting a dividend hike in the future would be avoided even when a current year's profit would warrant it.

To me, this seems to indicate that management carefully selects a dividend that they think can be maintained or steadily grown in the foreseeable future so the investor could see it as an insider's vantage point for the actual prospects of the company, more so than the typically more volatile net income.

However when I see a chart like this (I'm going to assume it is a reliable source) that it is anything but steady, it would appear, superficially, that management as a whole, has not been doing a stellar job at forecasting.

On the other hand, I have found that there are a number of reasons that explain changes in dividends in the market as a whole: changes in dividend taxation vs capital gains taxation for individual investors, a cultural shift with new companies entering the index that have a different view on returning value to the investor and a greater predilection for stock buybacks.

More specifically, my question arised when I considered an index investor looking at different valuation parameters, if it should be reasonable to see the weighted average of the dividend and buyback yield of the index as a reliable and conservative part of the return they could expect in the long term as it has been estimated, to the best of their abilities, by managerial teams who have a unique insight into their companies or rather, in reality, do they typically shrink and grow with short or medium term profit levels?

I hesitated to include a reference to index investing in the title, as it would make it more confusing.

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The chart you linked does look fairly steady, considering the long time period. The dividend takes decades to change by as much as a factor of 2. Some of the variation may be due to changes in composition of the index rather than dividend changes by individual companies.

Here is a related answer with a link to an updated assessment of Lintner's results.

  • I realized that I had to accept that my question "how much should I rely on the dividend yield as an index investor?" is simply answered by the chart (ie it is what it is). I suppose it would be nice to have a chart that excluded extraordinary dividends (and included regular buybacks? if there is such thing) - compare it with the present moment. As for the significance of the dividend value for a single company, I'll accept your answer. The pdf you link in your other response covers well the subject. – DPM Jan 7 at 0:50
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Dividends are often reduced so there are other fundamentals that are better indicators of the company than the current dividend.

Debt-to-equity ratio can be compared to other companies in the same industry.

Credit ratings of the debt are available.

And of course there is revenue and earnings and even earnings excluding one-time write-offs. There have been some situations of non-cash revenue so consider a cash flow accounting.

It is an odd situation but a company with too much debt but paying a big dividend, at least that company has the ability to reduce its debt by cutting the dividend.

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