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Why Don’t More Companies Use a Variable Dividend Model?

By Motley Fool Staff - Apr 21, 2016 at 5:00PM

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A look at the rational and the emotional stakes of dividend stocks, and why percentage-based payouts remain unpopular.

Based purely on the numbers, most -- if not all -- companies should have a variable dividend rate. Of course, the vast majority don't, and the market's reactions to dividend cuts tend to be irate at best. 

In this segment from the Industry Focus: Energy podcast, Taylor Muckerman and Tyler Crowe look at both sides of the dividend debate, and explain why most companies pay a flat rate.

A full transcript follows the video.

This podcast was recorded on April 14, 2016.

Taylor Muckerman: I'm still wondering why more companies -- or any other companies, for that matter -- haven't taken on the Silver Wheaton (WPM 0.21%) dividend model, where it's predictable because it's a certain percentage of the previous four quarters' free cash flow. So, you can model that out, you can see it. The only unpredictable thing is the upcoming quarter that they're going to report. So, you've got those three quarters you can rely on. You can kind of see where the dividend is going. And you know it's floating, so you're not really expecting anything in particular. I think that's a great model for resource companies.

Tyler Crowe: It is. This was an after on-camera discussion that was off the record, so I can't say who it was, but I talked with some CFO at an energy company one time, and asked him about that idea. I said, "You know, you can try to protect your cash flow as much as you can with various methods, but ultimately, this is a commodity business. Why stay with a fixed dividend?" And he said, "I would love nothing more than to have a set floor dividend, where it's like, we'll pay a nominal 2 or 3 cents a share per quarter, and then pay a percentage of profits or percentage of cash flow. I would love to do that."

Muckerman: Like an adjustable rate mortgage, you get the floor rate plus or minus, yeah.

Crowe: "The problem is, we would get killed in the equity markets. Nobody would buy our stock." And it's kind of one of those weird, self-fulfilling prophecies. As somebody who's a fan of dividend investing, I want to see a fixed dividend. As much as I understand the concept of a variable rate where it's more sustainable, I still kind of like the fixed dividend. So I can kind of understand him and sympathize, and why, as much as we see it as analysts and go, "This is the best way to do it," why nobody actually wants to take that step.

Muckerman: Yeah, I guess, maybe if you started that way. Silver Wheaton came right out of the gates with this style of dividend. Maybe to completely adjust your model might ruffle some feathers.

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