What does Dividend Payment Signal to an Investor?

I guess most investors will generally focus on earning announcement of a company i.e. how much profit its makes this quarter, how much is the revenue or profit growth etc, 

There is nothing wrong to focus on quarterly earning announcement, earnings are important but it has to be a quality earning, not some accounting earnings that may not translate into real strength of a company. But I opined that more focus could also be devoted to 'follow' a listed company's dividend announcement, especially cash dividends. 

Why so?

At the end of the day, cash dividend payment represent one of the methods for a company to reward its shareholders. Wouldn't it be nice to manage and keep on receiving steady and growing stream of dividend from our invested companies?

When a company pays a dividend, it is not just handing out cash to shareholders. There are other signals from a dividend payment that an income investor could identify:

1) Shareholders' Interest In Mind

Dividend payment implies that the company has shareholders' interest in mind.

2) Evidence of Financial Strength

A company need to pay dividend via cash, it can't pay dividend using profits per se. Financially troubled companies rarely have the sustainable resources to pay dividend. Although a corporate can borrow money to pay dividend, this is not a sustainable method or desirable way to finance the dividends. 

3) Foundation for Stock Valuation

A company that pays consistent dividend, provide investors a mean to calculate the stock value as stock value need to be formed upon a basis.

4) Better Group of Investors

Dividend paying companies may attract better shareholders. Income investors are less likely to overreact to any single movement in the share price unless there is fundamental deterioration in the company. If the share price declines not due to structural or fundamental issue, income investors may scoop up the shares to improve the dividend yield, providing some support to the share prices.

5) Sticky Dividends

Corporate will not simply cut dividends. A company that pays consistent dividends may create expectation among investors to continue to receive the dividends, hence this situation may result in corporate managers to be more discipline in managing the company resources as dividend cut should be the last thing in their mind.

I firmly believe income investors who invest into good quality stocks that pay consistent and growing dividends, would also likely reap the reward of investment success. 

Lastly, a stock that pays constant and growing dividends, likely to experience increase in share price over the long term. 

Just look at Colgate Palmolive, Johnson & Johnson (J&J), Nestle Malaysia share price chart as an example, it is a nice long term uptrend, This  uptrend in share price, couple with rising dividends, would definitely enhance quality of living to income investors!

How to Avoid this Behavioral Pitfall- Confirmation Bias

Have you ever made an equity investment with the belief that you have researched all the information that supports your investment decision, while neglecting information that could contradict your investment decision?

 

Yes, you may have cherry pick to read info that make you comfortable with the said investment, while play down the opposing views or information.

If yes, you might have succumbed to ‘confirmation bias’, which is one of the behavioural pitfalls in investment.

When I invested into Masterskill years ago, I read all the fantastic story of investing into Masterskill of which it enjoys the best of both world, the resiliency of education and healthcare sector. I bought into the share and yes, lost money.
 

I read info that supported my investment decision, and neglected information that could weaken my investment decision such as heavy reliance of Masterskill on PTPTN to fund the students’ course fee and rising number of nurses and inadequate training or work placement. All these are opposing information that will weaken my decision.

After I realised my losses, then only I noticed the reported profit per student of Masterskill is so high compared to other learning institutions, which should raise a yellow flag for a rational investor to analyse further.

I should have researched all of the above before investment but I played it down.

Subsequent to this painful experience, before I make any equity investment. I will always ask the following questions and these questions will be asked on continuous basis so long I hold the shares.
 

1)      What could go wrong?

2)      Have I considered opposing views?

3)      Have I sought out disconfirming evidence that may suggest my investment thesis is flawed?

4)      Talk to fellow investor who avoided the stock?

Before you make any equity investment in the future, do assess if you have fallen into confirmation bias, if yes, hopefully the above questions could minimise this behavioural trap!