Growth
Companies typically pay lower dividends than mature ones. At the extremes, a company
with exciting prospects won’t pay any dividends at all. A dying company with no
growth opportunities will pay out all its earnings. The Payout Ratio is the
proportion of Earnings that are distributed as Dividends. This is close to 0%
if the earnings are reinvested, and 100% if the company is a Cash Cow. The
pumping heart of wealth creation is reinvestment. It doesn’t matter that much
if there is a profitable opportunity if it only lasts a day. It is the long-term
compounding where the real magic lies. Most people treat themselves as Cash
Cows. They spend everything they earn rather than reinvesting. They fire their
money as quickly as it comes in, rather than putting it to work. A gap between what
you earn and spend allows you to reinvest, and build towards whatever you are
passionate about.
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