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INSTITUTIONAL INVESTOR ARTICLE: THE PROBLEM WITH DIVIDENDS
Serious analysis dictates that dividends are a net drain of a company's enterprise value. Cameron Hight expands on this in an article for Institutional Investor.
I recently wrote a second article for Institutional Investor magazine (http://www.iimagazine.com/) called “The Problem with Dividends.” You can read the full article here.
Here is an excerpt from that article:
To paraphrase Einstein, “matter cannot be created or destroyed,” yet this fundamental tenet seems to be ignored when discussing dividends. Despite the popularity of dividend-paying stocks, serious analysis dictates that dividends are a net drain of company enterprise value. Why are we so confused about dividends? There seems to be a misunderstanding of enterprise value and tax-effect because dividend payments by their very nature have a negative expected return.
If a company has just paid $10 million in dividends then its enterprise value has decreased by a corresponding $10 million dollars. No value has been created in the dividend payment, but investors are quick to praise the merits of a dividend-paying stock. I believe the flawed logic of this problem is ingrained in the dogma of investing…
