Would you pay $60,000 for a shower curtain ... for someone else?
Sounds crazy, but if you bought Tyco back in the day, you already did. If you bought the likes of WorldCom, Enron, or AdelphiaCommunications, you did a far sight more than that. Ouch.
Here's why I ask ...
My old pal Mathew Emmert buzzes in once every few months and greets me with that ridiculous shower-curtain quip. What did I expect? "Hey man, how's it going?" No chance.
The kid's a dividend kook. So he browbeats me over my castles-in-the-air, small-cap growth portfolio ... how I'm just begging Mr. Market to wipe me out because I stubbornly -- and stupidly -- refuse to get paid to invest.
And you know what? I've heard it all before. Deep down, I even know it's true. If I had listened to this same advice my first time around, I'd be a wealthier man today. Well, at least I would have slept better.
Come, let me tell you the agency lie
We assume that corporate bigwigs know how to spend the cash their businesses generate. That's what former Enron front man Ken Lay argued, after all. And Tyco's Dennis Kozlowski or the Rigas family who allegedly shook down Adelphia.
In fact, this couldn't be further from the truth.
"Agency conflicts" is a snappy way of saying that even honest execs act in their own interests. That's why the more of your cash you let them keep the more likely they waste it on gaudy buildings, useless acquisitions, corporate jets, and, yes, $6,000 shower curtains.
Professor Michael Jensen suggests that managers waste all free cash flow under their discretion. Yikes! Jensen isn't surprised that high stock prices and low dividend payout policies set the stage for the scandals and perp-walks that ended the great bull market. Neither am I.
What can you do to stop the madness?
Insist on dividends. Keep your CEO honest. According to Jensen, "Dividend payments enhance share value by preventing managers from wasting money on negative net-present-value projects."
I recently got this refresher course in agency conflicts over lunch from -- you guessed it -- Mathew Emmert, who pounds the table with this stuff constantly to his Motley Fool Income Investor subscribers. But as I said, I've heard it all before.
You see, I once worked for a cantankerous old millionaire who worshipped dividends. The year or so I spent with that guy was the most miserable of my working life. For context, here are some odd jobs I've worked ...
- Performed data entry
- Graded fifth-grade student essays
- Recorded books on tape
- Taught poetry to prisoners
- Worked as a janitor in a synthetic blood lab
Anyway, this guy churned out these bar charts showing the historical returns of stocks such as Altria
Those charts sure were creepy ...
But I wish I had listened. To rub it in, I ran some numbers using Ibbotson data. According to my calculations, if you had invested $10,000 in Ibbotson's large-cap universe back in 1980, you could sell today for about $130,000. Nice.
Had you reinvested your dividends, you'd be sitting on more than $400,000.
Now, granted, the large-cap universe includes its share of traditional grind-it-out dividend-paying utilities -- the oldAT&T
But here's what may surprise you: Not even the obscene appreciation of such tightfisted tech superstars as Applied Materials
It turns out that dividends really do matter
No matter how you slice it, big stocks have done well since 1980 -- you can see that clearly from our example. But you can also see that it's dividends that make the difference between doing well and amassing a fortune.
As for agency conflicts and the tendency for corporate execs to squander your money, don't take my word for it. Take it from my favorite investor, Peter Lynch, who is ruthless in his classic book, One Up on Wall Street:
Companies that don't pay dividends have a sorry history of blowing the money on a string of stupid diversifications.
Shower curtains ... stupid diversifications? Choose your poison. Or do yourself a favor and play it safe. Get some of that money back.
What to do now
Like me, you may be looking for some balance. More importantly (to me, anyway), I need the perfect dividend stock to put into my IRA. You see, I want the full tax-advantaged benefit of that hideous skyscraper --over the next 30 years. So should you.
Great news: Mathew Emmert is offering a 30-day trial to his Income Investor newsletter service. Which is another reason for my change of heart: I was looking over Mathew's stock scorecard and noticed that he is handily beating the S&P 500 -- with a portfolio of safe, dividend-paying stocks. Go figure.
If there is such a thing as a perfect dividend stock for you, Mathew's got it. Take him up on his offer -- it's free for 30 days, after all. To learn more about how any Fool can beat the market with dividends, click here.
This article was originally published on June 2, 2005. It has been updated.
Fool writer Paul Elliott (the big dummy!) owns none of the stocks mentioned. The Motley Fool is investors writing for investors .
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