When we first launched our Income Majors series three years ago, we noted the peculiarity of buying a share for its dividend. In a very literal sense, it is an unproductive use of company profits that could otherwise be used to grow the business and compound the return on equity. Once a board signs off on a payout, it has forfeited the use of that cash to either expand or invest in cost-cutting, the effects of which can be multiplied in coming years.
The criticism is a valid one – and is one Algy Hall will be revisiting in a few weeks’ time – but it does not explain away the attraction. For many investors, dividends are also a byword for security. Like a salary, they can represent the peace of mind that comes with a regular payment; the compensation and reward for patience and trust in a management team, and a concrete sign that there is cash in the business.
Dividends might not be the most effective way of building wealth, but they are the friend of many who like to plan and budget.