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.