It seems this is not such a simple question. What do you prefer, a stock that grows, long term, doubling in price every 7 years or so (this is an average 10% annual return) or one that grows more slowly, say at 5% per year, but offers a 5% dividend? I’ve seen arguments on both sides, those who take the dividend as a sign of strength, reflecting steady profits and the company disbursing a share of those profits with its shareholders each year.
I’ve also heard those who say that a dividend is akin to a company saying, “We have no idea how to invest this money. We don’t intend to expand our reach either geographically or by delving into new markets. Instead of keeping it on our books and waiting for the next opportunity, you take it, shareholder.”
Legendary investor Warren Buffet, CEO of Berkshire Hathaway has never issued a dividend and ha not authorized a stock split (now there are B shares which are reasonably priced, not quite a split). The A shares trade at over $110,000 per, with a cash per share of nearly $17,000. No one is pushing Mr. Buffet to declare a dividend, that I know. Yet, Apple, trading at $240 or so with $26/share cash on the books has all kinds of speculation what they will do with this cash. A dividend? A takeover?
What do you think? Should we look more favorably on companies that issue regular dividends or should we just trust them to reinvest the money?
On a similar note, What is a Price to Earnings Ratio? Answered by Tom Drake at The Canadian Finance Blog.