Dividends and How Wall Street turned sour on SPACs, its sweetest deal-making trend

Recently the writer was watching a podcast and the personal finance advisor was talking about how people spend money on the latest fashion trend when the old styles work just fine. The person said he did not understand why people needed to buy the new. If you think about the fashion industry, it sells the latest trend, similarly on Wall Street they sell the latest trend until there is very little traction left in the product and then something new comes up for sale.

In an article by Anirban Sen and Krystal Hu of Reuters, the latest trend on Wall Street was for wealthy individuals to raise capital into a special purpose acquisition company or SPAC and then buy another company with the money, some investments would be taken public similar to venture capital money. The SPACs lower the cost of a more regulated IPO. According to Dealogic 91 companies in January went public through SPACs versus 27 companies doing IPOs.

When Wall Street likes a trend it goes all in, with 438 SPACs have raised over $130 billion looking for mergers. If they do not find them, money has to be returned to the investors. This has meant some companies which SPACs listed on the exchange are trading for less than the $10 a share which they came out as. University of Florida professor Jay Ritter says 94 SPACs of the 131 that have announced mergers since October, 2020 are trading below their $10 IPO price.

The average redemption ratio for deals completed in July-August stood at 50% up from 24% for the mergers completed in April-June. It is now common for a SPAC IPO that raised $200 million to have only $40 million left in trust after most shareholders redeemed before the merger was complete.

Linking to dividend paying stocks, in the fashion industry some clothes never go out of style and some go out of style in a year. In the stock market there is always the next and best thing because both industries have a sales culture and that means selling merchandise. As a dividend investor more often than not, as long as the company makes a profit and can pay dividends, you do not have to buy anything, just hold for the dividends. What you do with the dividends is up to you but if the stocks can earn profits through whatever cycle there happens to be, you do not have to follow every trend.

There are more questions than answers, till the next time – to raising questions.

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