Introduction
In response to my recent article, a question was asked that I believe deserved a good answer. The following excerpt of the comment really reached out to me because this person claims to have been asking this question for 5 years without receiving a good answer. Here is the excerpt:
“Again, someone please explain to me how valuation determines the future direction for dividend growth and total dividend payments for overvalued stocks. Nothing theoretical please — I want to see actual data”.
Consequently, I felt compelled to write this article because this question is highly representative of what I consider my current life’s work. I have been in the investment business since 1970, and over those many decades, I have always followed a strict valuation investment strategy. However, when I was younger I applied valuation to growth stocks because my objective was to build as much wealth as possible. As I have matured, my objective has become more focused on protecting my wealth while simultaneously letting my money that I worked so hard to start working for me. In simple terms, I evolved from a growth investor into a more conservative dividend growth investor.
Examining the Theoretical In Real-World Conditions
The comment cited above asked to see actual data and nothing theoretical. Personally, I think that is a fair request because for theoretical to have any real value, it must apply under real-world circumstances. On the other hand, for a hypothesis (theory) to be proven, it must first be clearly articulated and laid out. Therefore, what follows is the theory, or perhaps more appropriately, the rationale as to why valuation has a material impact on total dividend payments.
The first and most important point about dividends are that they are paid on the number of shares owned. Consequently, regardless of what happens to the share price of the dividend stock once it’s purchased, the dividend amount is calculated based on the number of shares owned. Therefore, even if the stock price falls dramatically, your dividend income will remain the same and vice versa.
