Why The BEST Businesses All Pay Dividends 🚀
MSFT, V, and META All Have This in Common 🔥
The BEST businesses in the world all pay out dividends.
Dividends are paid out of free cash flow, with the alternatives being:
Reinvesting back into the business
Share Buybacks
Paying down debt
M&A
So yes, being paid dividends means they aren't using that capital to reinvest back into the business.
And companies like V, MSFT, AAPL, and META can all get high rates of return when reinvesting back into this business.
So why do the best businesses in the world pay out dividends, instead of reinvesting for growth?
Because at a certain point, you can't reinvest all your capital intelligently, and that is the point at which it makes sense to pay a dividend.
Let’s look at a quick example.
$META is a great example of a stock that should be paying dividends.
The company's balance sheet shows they are drowning in cash, they have high levels of ROIC (return on invested capital), and FCF is growing at double digits.
BUT, they can't currently reinvest all their capital intelligently at the moment.
For example, it’s been estimated that they've burned over $50B investing into the metaverse, with 0 return on that capital.
So in this instance, if META would have used this capital to pay out a dividend, instead of trying to reinvest it back into this business-
It would have actually increased their total return.
And META realized this within the last year, and declared that they would start paying out dividends.
The best businesses in the world pay dividends.
Why?
Because they are drowning in cash.
More than they know what to do with.
This is why it’s so important to not only focus on things like dividend yield or the dividend history-
But to truly focus on the underlying fundamentals of the company.
This is what turns your portfolio into a true compounding machine.
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Dividendology 🚀