Dividends versus Capital Gains Part 4

Bernstein also gives an unfair example -- unfair because, to make a rational argument, he uses an extreme and emotional example.

In 1974 Consolidated Edison voted to suspend paying dividends, because they were faced with a financial crisis. Many investors were upset, and Bernstein quotes a woman as saying that since her husband died Con Ed had to be her husband and support her.

Now, Bernstein is correct that in this extreme situation the board of Con Ed did the correct thing. A bankrupt company can't pay dividends. I'm not saying that a company should pay dividends that it needs to survive.

But that's not the normal situation. The textbook argument is not that a company pay dividends and go bankrupt or stay in business . . . it's that a company should not pay dividends to expand the business or invest in other, more productive businesses.

Shareholders are co-owners of the business. They should see some return (and I mean REAL, spendable return -- not the kind of "returns" that most financial writers refer to when they call capital gains a 'return' even though NOTHING has been returned to the shareholder by the rise in stock price) on their investment -- or else they'd be better off in bonds.

Let's say you bought a McDonald's franchise. When it's new you'd have to buy equipment, the building, and so on. Once it's established, it should reinvest some profits in maintaining or replacing needed equipment, interior decorating, advertising, and so on -- if the current number of fryers and grills and satisfying the customer demand, it doesn't need to buy new ones in the hope that if it does, more customers will walk into the restaurant.

Given that reality, who would blame the franchise owner for taking some of the profits out of the business? Nobody, except Bernstein.


Given these many issues, I think it's quite rational for investors to think that $1 in their pocket is worth $2 in the retained earnings of a company whose stock they own.

stock dividends
stock dividends