Dividend/growth trade-off a 'misconception'
Despite the popular belief that companies with a high dividend payout ratio must sacrifice growth, the historical data demonstrates there is no trade-off between dividends and growth, according to Fidelity head of Australian equities Paul Taylor.
The highest yielding markets have historically delivered the best returns, and they have done it with the lowest volatility, said Taylor. This flies in the face of the academic theory that high dividend payouts will necessarily mean low growth.
"It's a logical argument: it's saying the higher the dividend payout ratio the less money there is available to be reinvested in the company to grow the business," said Taylor.
"The only problem is that the data, the research, and the history tells us the complete opposite. What the data shows us, is that high-dividend-payout companies actually deliver higher growth than low-dividend-payout companies," he said.
Because high-dividend-payout companies have a smaller amount of money to reinvest, they make sure they get the best return on that money possible, he said.
"There's real capital discipline brought to those companies. However, companies with a low-dividend ratio basically squander the money. They make acquisitions, they empire build - effectively, the money burns a hole in their pockets. And that's leading to lower growth," Taylor said.
Another theory is that companies with a high dividend payout ratio are signalling to the market their confidence about future earnings and the future of the company, he added.
"The bottom line is there's actually no trade-off between dividends and growth," Taylor said.
In the current low-growth environment, companies that can deliver both high dividends and high growth will be "rare assets", he added.
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