Dividend investors in a stock market normally see an increase in their yield on cost when their portfolio holdings periodically increase their distributions. This year, however, the dividend investor’s cash returns have gotten an extra boost from the AI stock frisson. By pushing down the prices of old-economy, major dividend payers without impairing their income trajectories, AI hysteria has increased the yield of these holdings for dividend reinvestment or new money. That is: income is going up, prices are going down, voila—rising cash returns!
Sadly, such income “sales” cannot go on indefinitely. As dividends increase, the yield will eventually become irresistible and investors will rush in, pushing those share prices up. Alternatively, the valuation differential between the AI stocks and the rest of the market will normalize, with the same result. Either way, over time, share prices follow the dividend. The long-term correlation (and causation) is clear.
This temporary act of generosity from the AI world does beg a bigger question as to what wealth actually is. For dividend investors, farmland holders, rental apartment landlords, private business owners, et al, the answer is clear–the income stream provided by an asset. It is the check in the mail that is the basis of wealth. For Bingley, it was 5,000 a year; for Darcy it was 10,000. For the Bennett family, it was sadly but 2,000.
But what about those stocks that have skyrocketed in 2023? Most have no or de minimis dividends now or in the discountable future. So distributable cash is not the basis for this new-found wealth. Instead, it is just the new high price: the flashing green number on a screen. But an appreciated asset without an income stream represents a peculiar kind of acquired wealth: you have to sell it to realize the value. Unlike all other assets that regularly share in their success with the owner, the dividend-free darlings of the US stock market require that you part company with them to enjoy any of their success. Once you think about it, it’s a strange definition of wealth.
However peculiar, most investors still appear to agree with Miller & Modigliani in 1961 who made as a condition of their landmark study about dividend payout ratios that investors “are indifferent as to whether a given increment to their wealth takes the form of cash payments or an increase in the market value of their holdings of shares.” That’s an Ivory Tower condition that makes all the subsequent financial math work. What would M&M make of the AI frenzy in 2023?