12-17-2013, 09:55 PM
I’m a big fan of Slate’s Matthew Yglesias, so I read the headline “Dividends Are Evil” for a post of his today with some fear and anxiety. After reading the post, though, I am not really any worse for wear.
He really brings the ire with quotes like these:
His arguments ultimately boil down to things that most dividend growth investors have heard before. The best use of profits is investing to improve the business, after that buybacks are arguably superior to dividends. But then he trots out an old one that has always struck me as a terrible argument against dividends. When GE, for example, pays a dividend, he says,
This is of course technically true, but the argument that dividends reduce the value of the company and hence are nothing more than a transfer from one account to another treat the company as if it is a fixed set of dollars. A company like GE is a dynamic entity constantly generating profits, and the dividends are paid from those profits. So long as the dividends are less than the profits, and are only paid once investment in growing the company is made, then there is no diminution of the company.
And if they did not distribute the excess, it assumes that they can find a productive use for it. If you look at the gigantic piles of cash that many companies are sitting on these days, it is obvious that this is no simple task.
Even if in theory dividends are not the most efficient use of a company’s excess cash, I’ll gladly trade a bit of incremental margin for the “bird in the hand” of cold hard cash hitting my account every quarter.
He really brings the ire with quotes like these:
Quote: The only problem is that dividends are terrible. Bad for the economy, bad for business, and surprisingly unfavorable to investors. A barbarous relic of a less financially sophisticated era, they’re also indelibly coated with misleading rhetoric that perpetuates sloppy thinking about business, profits, and investment.
His arguments ultimately boil down to things that most dividend growth investors have heard before. The best use of profits is investing to improve the business, after that buybacks are arguably superior to dividends. But then he trots out an old one that has always struck me as a terrible argument against dividends. When GE, for example, pays a dividend, he says,
Quote:“the value of the shareholders’ claim on GE’s assets declines. The money in your pocket used to be in GE’s corporate accounts as a GE asset; all that changes when the funds pass from the corporation’s bank account to yours.”
This is of course technically true, but the argument that dividends reduce the value of the company and hence are nothing more than a transfer from one account to another treat the company as if it is a fixed set of dollars. A company like GE is a dynamic entity constantly generating profits, and the dividends are paid from those profits. So long as the dividends are less than the profits, and are only paid once investment in growing the company is made, then there is no diminution of the company.
And if they did not distribute the excess, it assumes that they can find a productive use for it. If you look at the gigantic piles of cash that many companies are sitting on these days, it is obvious that this is no simple task.
Even if in theory dividends are not the most efficient use of a company’s excess cash, I’ll gladly trade a bit of incremental margin for the “bird in the hand” of cold hard cash hitting my account every quarter.