Stocks that pay dividends are often favored over stocks that don’t pay dividends by investors who desire the extra income. The real issues is that, how the dividend, or the lack of dividend, affects the value of a company and the price of its stock over time.
One strong argument in favor of companies that pay dividends is that companies that don’t pay dividends have a sorry history of blowing the money on a string of stupid diworseifications. The bladder theory of corporate finance is: The more cash that builds up in the treasury, the greater the pressure to piss it away. Another argument in favor of dividends-paying stocks is that the presence of the dividends can keep the stock price from falling as far as it would if there were no dividend.
When a stock sells for $20, a $2 per share dividend results in a 10% yield, but drop the stock price to $10, and suddenly you have got a 20% yield. If the investors are sure that the high yield will hold up, they will the stocks just for that. This will put a floor under the stock price.
Then again, the smaller companies that don’t pay dividends are likely to grow much faster because of it. They’re plowing the money into expansion. The reason that companies issue stock in the first place is so that they can finance their expansion without having to burden themselves with debt from bank.
I will take an aggressive grower over a stodgy old dividend-payer any day.
Electric utilities and telephone utilities are the major dividend-payers. In period of slow growth they don’t need to build plants or expand their equipment and the cash piles up. In period of fast growth the dividends are lures to attract the enormous amounts of capital that plant construction requires.
If you do plan to buy a stock for its dividends, find out if the company is going to be able to pay it during recessions and bad times. If a slow grower omits a dividend, you’re stuck with a difficult situation: a sluggish enterprise that has little going for it.
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