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Do Dividends Matter?

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.

Joe

  • Steve Austin August 27, 2010, 9:49 am

    It depends (of course) on the company. If your due diligence (on a company in which you have invested) indicates that you can trust management to prudently allocate capital, then you can trust them to either deploy internally, or payout to you because you can more efficiently deploy the capital. If you cannot trust management to be efficient allocators of capital (but you still speculated anyway because you calculated a deep margin of safety), then your preference should be for the highest dividend payout possible while not impairing current operations. In that case, you are the more efficient allocator of capital.

  • Roshawn @ Watson Inc August 27, 2010, 3:08 pm

    This depends on your investment philosophy and risk tolerance. What kind of investor are you? The answer to that question determines which side of the fence you sit. Both sides will have their arguments and counterarguments. However I think it all goes back to your investment philosophy .

  • Hank August 28, 2010, 2:52 pm

    We should require these companies to do something. It is the inaction that is culpable. It comes down to a return on investment equation for investors who are the owners of the company, let us not forget. Companies should issue dividends if they do not have better alternatives for the money. Companies such as Apple and Microsoft should be held liable and should be ashamed for holding their owner’s money hostage.

  • Evan August 30, 2010, 3:35 pm

    I think it has to do with your goals and objectives. I am just starting to build a dividend portfolio in an effort to create a passive income stream in the years to come. At the same time I have value stocks in my retirement account. Clearly not the most tax efficient way of doing things, but I want that income stream now not in 30 years.

  • youngandthrifty August 31, 2010, 2:20 am

    Weird, just read a chapter in the intelligent Investor regarding dividends.

    If the company was really good at using the potential dividend payouts to reinvest int he company and make it grow, then sure, that’s a good idea.

    But I think what draws a lot of investors is the dividend payouts, I personally would choose a dividend paying company rather than one that didn’t (esp. for long term stuff).

    For the shorter term swing trades, I usually buy equities that don’t have dividends.

  • John @ Passive Family Income October 5, 2010, 10:44 pm

    Well, I use to invest for the capital gains. Then I realized that I was too focused on short term gains and have now switched to dividend investing. I can tell you that it is so much less stress than what I use to deal with.

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