People buy stocks for different reasons. The same criteria that makes a stock an obvious buy for one type of investor may disqualify it from consideration for another type of investor. Equity markets are made up of investors who are looking for and investing in various factors. And investors often weigh these factors differently depending on the outcome and timeframe they are targeting, which is part of the beauty of the market.
As the tools and vehicles for investing have become more sophisticated, so too have the strategies developed. Investors have more information available to them, more access to assets than ever before, but while the breadth of the market has increased, some investors are looking for a more granular approach.
What if an investor wanted to purchase exposure to a growth stock, like Microsoft, but only for the cash flow from the dividend? They’re limited to the stock of the company today. We can assume the vast majority of investors are buying a growth stock for growth, but what if they were able to access just the dividend component? What new strategies might become mainstream investment vehicles? In the same way ETFs revolutionized access to securities, how could direct access to the asset and dividend components of a stock offer new opportunities to investors?
There are countless investment styles out there—ranging from Growth, GARP (Growth at a Reasonable Price), and Value, to Fundamental, Technical, Long-only, Long-short, Quantitative, Multi-strategy, Income, and Factor-based approaches. And that’s just scratching the surface. The takeaway is that every investor brings different priorities to the table, shaped by a mix of goals, strategies, and market perspectives.
Applying Permuto In the Real World
Take growth stocks for example, they often trade at relatively high multiples, low to zero yield, low margin (although not always true), and high revenue growth. Value investors would likely be precluded from purchase due to the high multiples, Fundamental investors would make a per-stock call opting for firms that have sustained growth rates and prove able and defensible margins at scale, and Income Investors would not purchase due to the low yields.
Said simply, if an investor was looking for income, they would not invest in Microsoft as they would only earn ~80bps of income every year. Instead, the income investor would more likely be drawn to a stock like Verizon which yields ~6.2%. Over the last decade, Microsoft’s stock’s average return was 28.84% vs Verizon which had an average annual return of ~1.6%. Notably, Verizon’s stock has not increased in value in any calendar year from 2020 to present. The growth and success of Microsoft has more than offset the nearly 10% average growth of their dividend which has resulted in a decline in their dividend yield, thus, the growth which makes Microsoft interesting to many investors, makes it uninteresting to Income investors. On the other hand, Verizon’s stock has declined over the last decade, while their dividend increased ~25.5% over the same period, making them more attractive to income investors but also proving to not be a source of stock appreciation.
By allowing the dividends of a company to trade separately from their assets, it allows investors to independently value these components of growth potential and dividend security. In this way, income investors will be able to invest in companies they were once prevented from getting exposure in, while growth investors can give up the income they were indifferent to from the beginning, to enhance their exposure to the growth of the underlying company. For those investors who would like a mix of growth and income exposure, they can now customize their position in underlying companies independent of their choice of which company to invest in.
So one can conclude, by allowing for the separate trading of these two components of an underlying company’s stock, we are allowing for one person’s trash to become another’s treasure.