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I’ve seen loads of articles in my days about dividend stocks beating non-dividend stocks over the long haul, AND no I won’t repeat those statements. But I would like to clear a few things up. If dividend stocks are better why doesn’t all companies hand out dividends? That’s simple, Good companies tend to hand out dividends and raise its payout over time because they can. A bad company is still a bad company even if it has a dividend yield of 10%+.

For example, company A with a good product and solid managment pays dividend. Company B with a crappy product and a mediocre managment pays no dividend.  Let’s fastforward ten years and we have found company A has beaten the index, why did it beat index? Because of the solid business not the dividend. Let’s assume company B went close to bankrupt, it got where it is because of bad products not the fact that it doesn’t hand out dividends.

Let’s look at it the other way. If Company A was also an small cap would it be better to use the cash for expanding rather than shifting it out to shareholders? In most cases: yes. Warren Buffett has also stated that fundamentally strong companies with alot of room to grow should NOT hand out money  to shareholders, it should rather focus on growth.

I’m writing about this because some people get to carried away to screen for high dividend stocks instead of looking at the fundamental value of the companies. The reason why high dividend stocks on average beat index is because they have fundamental value but they are in most cases stalwarts or really big companies like General Eletric, Pfizer, Merck, Bank of America etc.

It would be interesting to see a study which compares companies with a solid growth past and strong balance sheets and no dividend with high dividend stocks.

Tags: dividend stocks and non dividend stocks, dividend stocks beat index, dividend stocks beat index long term, fundamentally strong companies shareholder wealth, hand out money to shareholders, high dividend stocks on average beat index, market beating dividend stocks

This entry was posted on Thursday, December 4th, 2008 at 9:00 pm and is filed under Value Investments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.