Sometimes it’s easy to forget that a share of stock is a piece of ownership of a business… a business that was created by people who poured their blood, sweat, and tears into it.
Some of these businesses are still run by their family or the person who started the company.
While most executives work hard, it’s tough to find someone who works harder than an entrepreneur. And even though they may now be CEOs of publicly traded companies, these founders are still entrepreneurs.
No one cares more about their business or their shareholders than the founders of companies. After all, the founder and their family are usually large shareholders, so their interests are aligned with those of other stakeholders.
It’s one of the reasons that you’ll often find that companies run by founders or their families pay dividends.
After all, a CEO keeps more of his money if his compensation comes in the form of a dividend versus salary.
If a CEO earns $1 million in salary, the tax rate will be 39.6%.
However, if instead the CEO earns $1 million in dividends, the tax rate will be 23.8%, a difference of nearly 16%. That’s a meaningful amount of cash that the CEO can keep…
As a result, companies run or controlled by founders and their families typically sport a yield more than five times higher than that of the typical dividend payer.
Mercury General (NYSE: MCY) is an example. It yields 4.4%, and its founder, George Joseph, and his family own 18.8 million shares, or 34% of the company.
Those 18.8 million shares translate into nearly $47 million a year in dividend income.
I’m sure Mr. Joseph would like to know if his dividends are safe.
Let’s take a look…
Mercury General has raised its dividend for 30 years in a row. That’s an impressive track record.
If the company did not raise the dividend in any given year, I assume Joseph and his family would not be pleased, and the CEO would be looking for a new job.
The insurance company’s free cash flow has doubled from $133 million in 2012 to $271 million last year. It pays $137 million in dividends, so it has plenty of room to increase the payouts to shareholders like Joseph.
The Joseph family can rest easy that their lifestyle will not be impeded anytime soon. And other shareholders who rely on Mercury General dividends should also feel confident that their income will continue to grow over the coming years.
Dividend Safety Rating: A
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