The Dividend Divide: Sense Or Nonsense?

Expect the unexpected, especially when there’s money involved. If markets, prices and outcomes could move only in certain directions, life would have been a lot easier for investors.

Conventional thinking insists that good companies pay out dividends to shareholders, thereby making dividends a good thing. However, examples abound in the business arena of those who went against the tide and made a killing. Therefore, when the wisdom of paying dividends was questioned, Anand Chokkavelu was willing to listen.

In his article in the Motley Fool, Chokkavelu points out that the aim of investing is growth. So it defeats the purpose if a company returns any money to the investor. Moreover, a regular dividend history can be a burden in lean times since lower payouts will be viewed as a sign of weakness. This in turn further weakens a stock’s price.

Chokkavelu also makes a case in favor of dividend payouts without taking conclusive empirical evidence into consideration. When the alternatives are examined, dividends may be the best thing to do after all. Not everybody can sit on cash with the equanimity of an Apple (NASDAQ: AAPL), since Apple leads the pack in innovation. Buying back shares at low prices is a gamble since most managements, including Goldman Sachs’ (NYSE: GS), never timed it right. Acquisitions can also hurt shareholders.

Dividend, on the other hand, instill some amount of managerial discipline since it removes a small portion of capital away from the company. In addition, the shareholder is treated to a steady income stream akin to yields from a bond. Read the full article here.