Should More Companies Be Raising Dividends?

The S&P 500 (SNPINDEX: ^GSPC  ) dividend payout ratio -- the percentage of earnings paid out to shareholders as dividends -- is at an all-time low:

Sources: Robert Shiller, author's calculations. 

Frankly, this is a tragedy.

Instead of writing checks to shareholders, companies are instead spending incredible amounts on share buybacks and acquisitions, both of which have a dismal history of providing shareholder value. Share buybacks tend to ramp up when shares are most expensive, subsidizing existing shareholders at the expense of loyal shareholders. And acquisitions are often done at irrationally high prices, allowing management to "empire build" but rarely creating lasting value.

There are still some companies -- Altria (NYSE: MO  ) , AT&T (NYSE: T  ) , General Mills (NYSE: GIS  ) -- that pay out solid dividends and have been doing so far years. But they are a dying breed. If this doesn't change, it could affect aggregate market returns going forward. 

Last month, I sat down with Robert Arnott, CEO of Research Affiliates and one of the brightest financial minds of recent history. I asked him whether low dividends are a disservice to investors. Here's what he had to say. (Transcript follows, and the part relating to the fiscal cliff is now dated.)

Morgan Housel: The dividend payout ratio for the S&P 500 has fallen dramatically. It was recently in the last few years near a 50-, 60-year low. Is that a disservice to investors?

Robert Arnott: I think it is. I think dividends are important in a number of ways. For now, unless fiscal cliff boosts the tax rate on dividends to 44%, as seems increasingly likely, it's a tax advantage distribution, taxed pari pasu with long-term cap gains. So I think paying dividends is a tax-advantaged way to reward your shareholders. It's a signal of your confidence in your ability to produce earnings above that dividend, because companies don't pay dividends above a threshold where they have confidence that they can maintain those dividend payouts. Nobody wants to cut a dividend.

It also has a subtle but very important effect in reining in mindless empire building by -- there's an arrogance to the notion that our best internal reinvestment opportunity within our company is better than our shareholders' best reinvestment opportunity in the entire world of investing. And that's what tacitly being said by hanging on to all of the earnings. So I think a lot of it goes to fund empire building, which is a disservice to investors, because often it winds up being used to fund dumb projects.

Secure your future
If you're interested in high yields, The Motley Fool has compiled a special free report outlining our nine top dependable dividend-paying stocks. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost! Just click here to discover the winners we've picked.

Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2193014, ~/Articles/ArticleHandler.aspx, 9/24/2016 7:13:28 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 21 hours ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/23/2016 4:04 PM
GIS $64.65 Down -0.41 -0.63%
General Mills CAPS Rating: ****
MO $63.87 Down -0.25 -0.39%
Altria Group CAPS Rating: ****
T $41.28 Up +0.17 +0.41%
AT and T CAPS Rating: ****