For a long time investors have said the UK market is cheap and the US is expensive. I’m sure there are many reasons for this, but part of that reasoning I have pondered on for a long time.
It is well known that the UK companies on the whole, pay dividends, while the US companies tend to not pay out as much in dividends.
So, I have thought that the paying of dividends in the UK is part of the reason why the UK companies ARE cheaper. My theory on this is, when a dividend is paid out, the share price on the day its goes Ex. drops by the equivalent amount of the dividend. While in the US, if a dividend is not paid, or a smaller amount is paid compared to the UK then the stock price does not fall on the dividend day. If this goes on for years in the US, the compounding effect will make their PE valuations a lot higher than in the UK. Obviously this is just part of a reason why the US is higher valued.
And how do other nations stock markets compare to the UK with dividend payments?
There are obviously some positives to paying a dividend, but do they out weigh the negatives?
An obvious advantage of not paying high dividends in the US would be the company can reinvest that money and grow further, thus increasing the share price and not decreasing the share price each time it pays a dividend, which ofc is harder to do in the UK, being a much smaller economy and population.
So, does higher dividends hamper growth in the UK?
Does it keep the valuations cheaper?
Are we obsessed in the UK with dividends, thinking it is free money, while the fact of the situation is the stock falls by the amount of the dividend, so really, it is not free money at all.
I have not done any research on the figures, but would be interested in them if anyone knows, or just to hear others thoughts on this.
Have a good weekend everyone.
