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Comment by ingenium | Hacker News Reader

I fail to see your argument. The owners make money without receiving dividends. It's reflected in the stock price. When a dividend is issued, the stock price goes down by exactly that amount. It's the exact same thing. If you want that money, sell the stock. My argument is that from a tax perspective, it's more beneficial for the owners for the company to NOT pay dividends. If you ignore taxes, they're identical.

Put another way: Company X's stock is $100/share. They issue a 50 cent dividend. The stock price will go down to $99.50/share upon announcement. The investors/owners still have $100 whether the dividend is issued or not, except the investors have to pay taxes on that 50 cent dividend now instead of having it re-invested.

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That's a very one-dimensional view of investing though. The Bogle (the founder of Vanguard) school of investing says that investing in the hopes the price will go up or down is nothing but speculation on the same level as investing in commodities (a barrel of oil does not do anything, it just sits there and is worth what the market says it is worth).

This traditional view holds that companies are fundamentally different than barrels of oil, in that they can produce wealth and provide reasonable returns to their share-holders year after year and that you can take your 7% appreciation at the rate the economy grows (or at least used to).

Timing the market is certainly a valid (if highly risky) strategy, but it's only one view of investing. It's only in this strategy which dividends don't make sense.

In that case, you're selling your ownership in the company in order to make money. Dividends pay their owners without attenuating their voting power. This might now be very useful in the modern marketplace, but from a historical perspective, and from a small business perspective, they are VERY useful.

Stock used to represent ownership of a fraction of the company's assets and the right to that fraction of its profits. The share price converged on the net present value of the expected dividends plus the market value of the assets.

Now that most companies refuse to wind down except in severe distress (you'll only get a sliver of the assets' market value) and don't pay dividends, the connection between profits and the investors is severed. The only reason share prices are vaguely correlated to profits is that investors are speculating on each others' faith in a mystical connection between profits and share prices. It's like a baseball card with the name of your favorite sales team on it.

The economy would function better if it rewarded buy-and-hold investors for good long-term governance of companies. Instead we tax dividends harder than selling out, make the share price all-important, and reward exponential over-expansion (that's largely where profits go, it's psychologically impressive even if it's less profitable) and market-timing speculators' games.

"Put another way: Company X's stock is $100/share. They issue a 50 cent dividend. The stock price will go down to $99.50/share upon announcement. "

That statement is patently incorrect, in theory and in practice.

PRACTICE

The share price of companies that announce dividends every quarter has little immediate correlation to the dividend announced. In the long term, companies that consistently raise dividends year over year actually increase in value. (These are affectionately referenced as "dividend darlings" and are a focus of some investment strategies.)

THEORY

The purpose of a company is to make money. You do this by spending capital to create a product. Once you sell that product, you regain back the capital you invested in earnings. The goal is to eventually make back more money in earnings than what you invested in capital.

If I buy a bar in my neighborhood for, say, $100k, I would expect to make money back on it. If I worked hard to build a clientele and earned something like $30k a year from my customers (a spectacular return, by the way), then the bar would be earning money. I could then afford to pay some of that out to the shareholders - in this case, just me.

What your notion of dividends seems to be is a cannibalization of the equity present in the company. If the company has no product of intrinsic value, then yes, your example might hold true. In the bar example, you would believe that the bar is worth only $100k (the price I paid) and that any money I pay out would be coming out of that $100k. This would be true only if I did not work to get customers and therefore did not make any money over the year.

SUMMARY

For companies that provide value in the form of goods and services, the money you get out of it will be more than the money you put in. This frequently, and oftentimes should, take the form of dividend payments.

ALTERNATIVE

Having said all that, there are very legitimate reasons why tech companies do not pay out dividends, namely that they reinvest the profits in research and development to produce new and better products. I don't think anyone who bought Apple stock seven years ago is complaining about the lack.

I have to agree with ingenium here. I've haven't taken a finance class in my MBA program yet and I'm not in that industry. But I feel that dividends are just a company forcing me to pay taxes early. If tax rates on dividends were lower than capital gains, I would welcome them, otherwise, I'll sell the stock when I need money.

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