The One Word You’d Never Thought to use to Describe Dividends

Friction.

That’s right, some div­i­dends have fric­tion.

Of course, you a prob­a­bly won­der­ing if that’s a good thing or not!

It’s good. Let me tell you why.

You see, we don’t want our div­i­dends to slide away into obliv­ion. We do want them to stick around. Friction keeps our div­i­dends in place, so we can con­tin­ue to enjoy them year after year.

What is div­i­dend fric­tion? Just like move­ment-relat­ed fric­tion pre­vents items from mov­ing, div­i­dend fric­tion pre­vents our div­i­dends from going any­where. So, any­thing that keeps our div­i­dends from being cut gives them fric­tion.

A div­i­dend that’s been increased for many years in a row gives exec­u­tives options. Before cut­ting the div­i­dend, they could skip an increase. Skipping an increase would be a neg­a­tive indi­ca­tor (and from an Elephant’s Paycheck per­spec­tive, prob­a­bly indi­cates that it’s time to sell). However, skip­ping an increase is not the same as a cut div­i­dend, so at least our Elephant’s Paycheck is pre­served.

It would be dif­fer­ent for a com­pa­ny with­out a track record of div­i­dend increas­es to have a “delay­ing tac­tic” like for­go­ing a div­i­dend raise. Since they don’t usu­al­ly increase the div­i­dend, if things went south, the only option man­age­ment has is to cut the div­i­dend.

Remember that hand­held elec­tron­ic foot­ball game from the 80’s. The one with blips on the screen, that when you’d run a run­ning play the blips would move with the run­ner — oppos­ing blips would can­cel each oth­er out. It’s the same thing. You have an extra blip on the screen to throw against an oppos­ing tack­ler before your run­ner is tack­led ((I don’t usu­al­ly make sports ref­er­ences, so hope I’m not embar­rass­ing myself here!)), just like man­age­ment has one extra tool to throw against dis­ap­point­ing results before cut­ting the div­i­dend.

I thought of using the term ‘fric­tion’ with respect to div­i­dends in my guest post on the Retirement Income Blog, you should check it out.