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?

The "Totally Informal Economics Roundtable" (TIER) met this past week -- the esteemed round table achieves a quorum whenever yours truly and my three astute economist friends from graduate school convene to discuss matters economic ... or to celebrate the birthday of one our school-age children, or for another social occasion. This week the topic was the global savings surplus.

Earlier on The FLY and on bloggingstocks.com, the TIER commented on the global savings surplus, or more-broadly, the large and increasing pool of global capital that's spanning the globe in search of return and yield.

It's hard for Americans to think in terms of a "savings surplus" with the U.S. posting a negative savings rate for more than a year, a savings rate well below appropriate levels for an advanced industrial economy, but the world is awash in capital, fed in part by savings. China, Japan, the European Union, and some petro-dollar countries have vast amounts of surplus savings. This fact, combined with a corporate capital base in the U.S. and abroad, has produced a multitude of unexpected consequences -- consequences that have lasted longer than many economists and analysts expected, the TIER agreed.

The first and foremost consequence, the TIER agreed, has been continued low interest rates for long-term bonds, mortgages, and certificates of deposit. Further, although recently released statistics from the Congressional Budget Office indicate the U.S. budget deficit in fiscal 2007 could drop to as low as $150 billion, five consecutive years of plus-$200 billion deficits normally should have led to a crowding-out effect on capital, resulting in higher long-term interest rates. Those high rates did not -- and have not -- materialized, the TIER agreed, due to that foreign savings surplus -- foreigners' willingness to buy U.S. Treasuries while spanning the globe for return and yield.

The "Heard on the Street" column in last Tuesday's Wall Street Journal (registration required) talked about a growing trend of companies borrowing large amounts of money to pay dividends. When I started writing for BloggingStocks several months ago, one of the first pieces I wrote was called A rally of declining yields: Should you care? If you read that piece, you will get a good idea how I feel about dividends.

Let's take a logical look at the idea of borrowing money to pay a dividend: A company borrows money at an interest rate which, however low, will likely be substantially higher than what an investor would earn with a savings account (even if it is a high-yield account such as those offered by EmigrantDirect and ING Direct). So, assuming the investor puts the money in a savings account, he is effectively borrowing money at X% to invest it at X-2%. This is not a good deal.

But let's assume that the investor doesn't put it in a savings. Let's say he decides to put it in his favorite stock that he considers to be undervalued. Let's say he puts it in the stock that paid the dividend. If he does that, he will essentially have been charged a hefty tax to plow the money back into the company. This is also not a good deal.

In cases where a company's management believes the stock is undervalued and the company is financially stable, borrowing money to buy back shares can be a good way to increase shareholder value. But, in my opinion, borrowing money to pay a dividend never makes sense.

Are companies exceedingly confident in the financial outlook for themselves and the industries that they operate in to a level that will initiate some of the largest amounts of share buybacks in recent memory? Example: shareholders of Anheuser-Busch Cos (NYSE:BUD) have requested gobs of share buybacks and the company has been listening and acting on those wishes. But why?

Anheuser-Busch wants to change the cash flow to total debt ratio it has to between 25% and 30%, from the prior target of 30% to 40% -- ah ha (or so it seems). Anheuser-Busch also approved the repurchase of 100 million shares (about 13% of stock outstanding). Total buybacks amounts for 2007? $2.5 billion.

Some companies are actually taking on debt at the same time they are buying back their own shares in droves. These companies appear to want to reward shareholders through buybacks or dividends (whichever is cheaper, trust me). But, as the BusinessWeek article notes, investors may want to consider whether the short-term benefit from share repurchases merits the added risk of more debt being added to the balance sheets of these companies. Where is your comfort level?