Dividends versus Capital Gains Part 3

And what about investors? Bernstein argues that if they need money, they'd be just as well off selling their shares of the company, which in theory are worth that much more, because the company didn't pay dividends.

He writes that it's irrational for an investor to spend $600 in dividends to buy a TV but not to be willing to sell $600 worth of stock (that didn't pay out dividends) to buy the same TV.

But as I've argued above, the share price in the long run is only a little influenced by retained earnings.

If stock prices always reflected a rational evaluation of the company's balance sheet, and balance sheet improvement (or decline) were always 100% reflected in the stock's price rise (or fall), then this would make sense.

But in the real world, stock prices rise and fall every day purely on the give and take of supply and demand, between the bulls and the bears, mostly due to factors beyond the individual companies.

Today's $600 capital gain could easily become tomorrow's $600 -- or more -- loss.

Stock price rises are not permanent.

A dividend check cannot be taken back. The shareholder may waste it, but at least it was theirs to spend, reinvest or lose.

A capital gain is here today, gone next year.

Maybe for a lot of years.

As Bernstein well knows, dividends were the only reason to own stock from the October 1929 crash to 1954, and from 1966 to 1981. Is he saying that if companies had only refused to pay dividends that their stock prices would have gone up despite the Great Depression and World War 2. Despite the social turmoil of the 1960s, the Vietnam War, Watergate, the 1973 oil embargo and the tremendous rise in commodity prices during the 1970s, and the tremendous spike in interest rates?

Does he really want to say that companies could have raised their stock prices during all those problem periods, if only they'd refused to pay out dividends but reinvested the dividends instead?

Given the uncertain and fluctuating nature of capital gains, it's hardly a surprise that investors want to hang on to the shares of stock they own and collect the dividends. When they keep the shares, they can continue to collect the dividends, or even collect capital gains in the future if they so choose.


stock dividends

stock dividends