Here, Graham seems to indicate that if a stock that otherwise appears to be a value stock isn’t paying out dividends, something is afoot. If there’s not a very clear and concrete reason for no dividends (and the overly simplistic “we’re investing in the company” isn’t satisfactory), then there’s something afoot.
This is not true for companies that would be considered “growth” investments. Quite often, the absence of a dividend (or the presence of only a small dividend) in a growth company is a sign that the company is actually doing what they claim - investing in the company with the intent of maintaining the impressive rate of growth.
The big difference is in why you invest in these different types of stocks. You invest in growth stocks to enjoy the increase in stock price - dividends aren’t really a part of the equation. You intend to ride that wave of growth until it runs out, then sell the stock somewhere near the peak (when the stock is still selling at a premium because of its “growth” status, but the growth is slowing).
However, the typical reason for owning a value stock is income. You don’t expect that the price of a value stock will jump greatly over time. Instead, you own it for that dividend - it’ll keep putting money in your pocket over the long haul. This isn’t a good enough reason for speculators to own the stock - dividend earnings are a long term thing - so good value stocks tend to be forgotten in the mad rush.
If you see a stock that’s undervalued, it should either
- be paying out a good dividend,
- have a stellar reason for not doing so, or
- it should be avoided.
Commentary on Chapter 19
Zweig offers up one nugget that really caught my attention. From page 506:
Research by money managers Robert Arnott and Clifford Asness found that when current dividends are low, future corporate earnings also turn out to be low. And when current dividends are high, so are future earnings. Over 10-year periods, the average rate of earnings growth was 3.9 points greater when dividends were high than when they were low.
What does that mean? Good, strong companies can afford to pay out dividends. Thus, to an extent, a company paying solid dividends - particularly over a lot of years - is likely a company that’s on very solid footing and sure of their future.
Companies that pay good dividends don’t need to hoard money. They don’t need to invest in themselves. Instead, they’re able to provide direct value to their stockholders.
It’s a pretty good argument for value stocks, I must say.
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