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Old 20th Apr 2012, 18:09
  #222 (permalink)  
TIMA9X
 
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The importance of dividends - A bias of Titanic proportions

Where to Now?
OK, not directly related to Q but believe the brand and /or CEO could be inserted in this story in various places. (interesting perspective considering the contents of this thread)

A bias of Titanic proportions


Sunday marked the 100th anniversary of the Titanic's sinking. You probably heard about it.
Every major news organisation covered it. Two cruise ships tossed wreaths into the ocean where the ship sank. Apparently, a New York food group re-created the final meal of the ship's first-class passengers. "Something about it is intriguing," the group's chef said.


The Titanic's sinking, which claimed 1500 lives, was a tragedy. But almost no one ever mentions a word about the 1987 sinking of the ferry boat MV Dona Paz, which killed 4375 people. Or the capsizing of the MV Le Joola, which claimed 1863 lives off the coast of Gambia in 2002.


Using 2010 statistics as a reference, 1500 Americans likely died in traffic accidents in the last two weeks alone. No food club will re-create their last meal 100 years from now.


Some stories capture our attention more than others that are objectively bigger and more important. I don't know if there's a name for that, but it should have one. Let's call it the Titanic bias.


The Titanic bias shows up in the financial world all the time. We spend too much time focusing on some financial stories while ignoring others that are more important.

The importance of dividends
Think about this: One thousand dollars invested in the S&P 500 in 1950 would be worth about $78,000 today if you focus on the index alone. But with dividends reinvested, your $1000 actually grew to $622,000 - eight times higher than the index shows.


Over the long haul, dividends provide the majority of returns. That should be the biggest story investors spend their time and energy on. Yet look what gets almost all the attention in the media: daily market swings of a few points here and there, none of which matter over the long term.


Apple (Nasdaq: AAPL) fell a few percentage points on Monday, bringing shares back to where they were literally a few weeks prior. And the media went wild. By my count, nearly 2000 articles referenced Apple's "plunge" - many as front-page stories.


Meanwhile on Monday, Procter & Gamble (NYSE: PG) raised its dividend for the 56th consecutive year, this time by a lofty 7 per cent. Only a handful of news outlets picked up on the news; most were buried by headlines of Apple's one-day hiccup.


For those looking to build wealth, consistently growing dividends are far more important than daily market wiggles. Yet most of us are captivated by the latter. There's your Titanic bias.

Who's really overpaid?
Then there's the Titanic bias that exists when we talk about CEO compensation. The media have become fascinated with overpaid CEOs. Former Home Depot (NYSE: HD) CEO Bob Nardelli was obsessively criticised for taking a severance package worth nearly $200 million after the company's stock fell 40 per cent during his tenure. His pay was the topic of dozens of front-page news stories.


Nardelli was grossly overpaid and deserved the criticism. In Australia we tend to focus on the multi-million dollar remuneration of Rupert Murdoch, Frank Lowy and our bank bosses. But there are more sinister and widespread examples of corporate overpay that go largely unnoticed.
Consider the compensation of money managers.


According to S&P Capital IQ, Nardelli earned $US254 million at Home Depot from 2000-2006. That's 0.8 per cent of the $US32 billion in profits the company earned under his watch.


Compare that with US mutual fund managers. One analysis by Yoseph West of Vuru concluded that management fees collected on equity mutual funds captured one-third of all investor profits from 2000-2010 - and the vast majority of those funds underperformed a simple index fund.
In 2011, US money market funds distributed $US5.2 billion in dividends, but only after collecting $US4.7 billion in management fees, according to the Investment Company Institute. That's nearly half of all income. And as Reuters explained, many of those funds are run by one (highly paid) manager.
You call that work?


Another study by David Norman, former CEO of Credit Suisse Asset Management, found that UK investors pay 8 billion pounds a year in hidden fees to financial advisors, capturing upward of one-third of all investor returns.
Several years ago I learned that an unsuspecting family friend was being charged 1 per cent a year by a financial advisor to park her money in a product that yielded about 1 per cent a year. The advisor was taking just about everything for himself, in other words. And he called it "work".


Forget Nardelli. Forget the bank CEOs. The real pay scandal is the one Titanic bias shields our attention from, and it's probably affecting you, right now, whether you realise it or not.


It's a terribly complicated world. Whatever you're worried about, frustrated about, or upset about, there's probably a bigger issue out there that deserves your attention. Something about that is intriguing, you might say.

Morgan Housel is a Motley Fool contributor. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691)

Read more: A bias of Titanic proportions
As I see it, the operational side of the business keeps the show on the road... carrying a lot of administrators on it's back... Any CEO who hasn't paid a dividend for a while, would be worried.... the institutional share holders may be becoming a little restless?

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