Three common mistakes beginner investors make (#1 of 3)

20 Sept 2023 · 2 min

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1:48

David Trainer explains why beginner investors wrongly assume dividend-paying companies stop growing. He shows the math: Microsoft, Costco, Mastercard, and Visa all pay dividends while expanding, using ROIC and reinvestment rates to prove high-quality businesses can do both.

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Some of the common mistakes more beginner investors make are, first of all, there's this idea out there that if a company pays a dividend, it's no longer growing. It's absolutely insane. You know, yes, I understand the math of investing clearly. If a company is generating high returns on invested capital and it has opportunities to reinvest 100% of its earnings back into the business, obviously that's ideal because a company cannot grow faster than its ROIC. That's just math. It cannot grow faster than its ROIC without taking on outside capital, right? So if a company has a return on invested capital of 20%, it cannot grow its operating profit faster than 20%. And to do that, it has to reinvest 100% of its earnings back into the business. That's just ROIC times reinvestment rate equals operating income growth. So yes, I get that if a company is reinvesting everything, it's in high growth mode, but then people take that math and jump to anytime a company pays a dividend, it's no longer a growth company. The fact that a company that pays a dividend that generates so much excess free cash flow that it doesn't have enough reinvestment opportunities, a company that generates more free cash flow than it knows what to do with, Is no longer a growth company. It's insane. Microsoft pays a dividend. Costco pays a dividend. MasterCard, Visa, the list goes on and on, right? I mean, some of these ideas just get pretty perverse. That's mistake number 1.