So read a Wall Street Journal headline yesterday – the former dogs are now the darlings. (Jonathan Craig, “Dividend Stocks Become the Heroes,” Wall Street Journal, Dec. 19, 2011, p. C1.) Well, the Barometer had a little book a few years back (co-authored with the late and great strategy professor, Louis Grossman) called: Building a Business Through Good Times and Bad: The Stories of Fifteen Companies, Each with a Century of Dividends. The book did an in-depth look at how these companies were able to come up with the cash, consistently, to pay their shareholders.
Oh, the mockery that ensued with the release of that book (about the time of the dot-com bubble), “Why would I care about being paid a dividend if the stock is increasing in value?†“A dividend is not a measure of performance!†The book ended up at about 1,768,819 on Amazon’s bestseller list. No one was interested.
Professor Grossman and I saw something compelling in the dividend companies. You cannot lie about dividends. You can either pay them or you can’t. Those who were relying on share value were proudly boasting of returns that were only as good as the trustworthiness of the management team putting the numbers together. Cash doesn’t lie; you either have it to pay the dividend or you don’t. Now that we have been through several cycles of mark-to-market accounting and spinning off debt and every imaginable way to get around FASB rules, shareholders are clear on the principle of cash. If the company is paying you, then there are real, live cash earnings. And there is an added bonus to dividends, as it were, the more cash execs dole out to shareholders, the less there is for them to pocket as bonuses. Regular dividends impose discipline on companies because they must face the reality of cash generation.
The so-called “dogs†of the stock market, the shares of companies that pay dividends, are the new go-to investments. Share prices on high-dividend payers exceed those of lower-paying companies by 17%. Get the cash, get the cash, get the cash – the market finally returns to its roots. Oh, that Professor Grossman were here to see it.
