An article in the latest issue of Barron's (log-in required) laments the decline of dividend-paying stocks. A quote form Morgan Stanley's Henry McVey is telling: "A lot of corporations are missing the seismic shift in retail demand for yield" and adds that Americans over 65 have equity portfolios with an average yield of 2.6%, versus 0.8% for those under 65.
I'm sure I'll get some angry feedback from the pro-dividend crowd on what I'm about to say here. I already got some flack for an earlier piece on the problems with dividends, and I frequently wonder why people care about yield. McVey's comment and statistic is telling. I believe that it is further evidence of the old-fashioned nature of dividends and their irrelevance in the current investment landscape.
The chief culprit behind the demise of the dividend is the advent of widespread share buybacks, and with good reason. Buybacks just make more sense, especially from a tax perspective. When you receive a dividend, you must pay taxes on it immediately. The increase in per-share value caused by a buyback is allowed to compound for as long as you own the shares. So buybacks start out ahead in that regard. It seems to me that the only reason you should prefer a dividend over a buyback is that you think that cash in your pocket (taxable) has a better future than additional shares of the company. If that's the case, it begs the question: Why do you own the stock?
Edward von der Linde, the manager of the Lord Abbett Mid-Cap Value fund, disagrees with me. He told Barron's that buybacks "give money to people who want to go away. Why not give the money to all shareholders equitably?"
I think he completely misses the point of a buyback. Yes, buybacks give money to the people who want to go away. But the more important function is that they give investors who want to stay a larger stake in the company. It's a win-win! Dividends strike me as old-fashioned. It's been written that one of the reasons they were considered a must hundreds of years ago was that, before reliable accounting standards, cash in your pocket was proof that the company was earning what it said it was.
So other than the good-feeling that comes from a nice dividend, I really can't see why I would prefer that a company I own pay me cash rather than a larger stake. The second I'd rather have cash than a larger stake in the company, I'll just sell my shares.
Nuclear power is on the comeback trail
Apple backs AT&T in continuing spat with Verizon
Closing Bell: The recession is still over, still... do you feel it?
Reader Comments (Page 1 of 1)
5-23-2007 @ 4:28PM
frank said...
The problem with stock buybacks is that the amount of stock buyback is dependent on the goodwill of the company to actually carry through and buy back their stock as intented. In addition the company does not usually committ to buybacks on a long term basis. However,once the dividend is declared the company somewhat commits to maintaining the dividend or actually increase the dividend to convey to investors that it is a viable investments.