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Why Dividends Are Not as Important as What Other People Will Tell You

Dividends provide an important role in investing — no question.

But after reading the following, you might agree that sometimes those dividends can actually be a lot less important than what certain other folks may have you believe.

Take Dollarama (TSX:DOL) for instance.

Dollarama operates more than 1,000 discount retail stores across Canada, and in fiscal 2018 it managed to generate sales of $3.27 billion and EBITDA of $826.1 million from that store base.

That all sounds great.

Yet a quick review of DOL stock would tell you that it’s only yielding the company’s shareholders a 0.43% annual dividend right now. That’s (literally) a rounding error away from being worth absolutely nothing.

So, why would a company that’s earning close to a billion dollars per year be paying its shareholders such a minuscule dividend? Well, in the case of Dollarama, it’s because the company has opted to use an alternative mechanism to return its earnings to shareholders — a mechanism other than paying a traditional dividend, that is.

While it paid out a paltry $49 million in the form of dividends in 2018, the company actually returned another $812 million to its shareholders by way of repurchasing its own stock.

So, while Dollarama’s dividend yield for 2018 was less than 1%, when you take into account the amount of money it paid out by combining its dividends and buybacks, the yield would have been closer 7% based on its current share price.

Now, imagine how many investors out there would have looked at Dollarama, seen its dividend yield, and said to themselves, “no way.” Not to mention all those computer algorithms that institutions are using these days. You know, the ones that are designed to rapidly scan stock information looking for apparently mispriced securities.

All this goes with mentioning another reason why a company’s dividend may not give you a great indication about just how valuable an opportunity its stock may be offering.

Again, take for example a company like Shopify (TSX:SHOP)(NYSE:SHOP).

Shopify quickly emerged as a leader in the e-commerce space.

Shopify currently isn’t paying its shareholders a dividend at all, and if it were, it would probably be making a huge mistake. That’s because a company that’s expanding its business as fast as SHOP is right now is far better off reinvesting in the business rather then returning profits back to its shareholders.

Bottom line

Theory says that a company spending $1 to repurchase its own stock is exactly as valuable as if it were to pay that $1 as a cash dividend. That fact may simply be lost on some investors out there.

Meanwhile, there are growth stocks like Shopify and others that don’t pay a dividend at all. These types of stock will oftentimes be best suited for investors’ TFSA accounts, which don’t obligate Canadians to pay any tax on their realized capital gains.

Fool on.

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Fool contributor Jason Phillips has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Shopify and Shopify. Shopify is a recommendation of Stock Advisor Canada.

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