Stock dividends and economic morality

Last week, James Early wrote this nugget in a piece that’s published on The Motley Fool website:

Paying dividends to shareholders also forces companies to exercise fiscal discipline. That’s great, because being flush with cash tempts managers — let’s face it, they tend to have big egos — to bungle their loads. And even if they don’t slip up, they tend to hoard that cash away from shareholders without putting it to any use. That’s why Microsoft’s long-anticipated one-time $3-per-share dividend payout meant so much to shareholders, and why cash hoarders such as Google¬† are underserving their owners. (I love the search engine, but it’s time to share the wealth, guys.)

In a way, dividends encourage responsibility — something that strikes a personal nerve with me.

I couldn’t agree more. Dividends also make it much, much easier to hold your stock at a time when you’d have to take significant losses if you sold it (i.e., now).

Here are the individual stocks I currently hold in my IRA (the majority of which is in VTI, Vanguard’s total market ETF):

Cal-Maine Foods (current dividend yield: 6.9%)
ConocoPhillips (5%)
Diageo PLC (3.4%)
GE (14.6% even with the recent dividend cut)
Johnson & Johnson (3.7%)
National Grid PLC (4.3%)
Olin Corp. (7.7%)
AT&T (6.9%)
Terra Nitrogen (9.8%)
Unilever (6%).

Now, in normal times, any dividend over about 5% should pop up a red flag and warrant careful research. And in these times, the dividends of some of these companies are likely to be slashed in upcoming months. But here is a portfolio of well-established companies (mostly industry leaders) whose stocks feature low price-to-earnings ratios even now and pay great dividends. Since these stocks are in my IRA, I won’t have to pay taxes on the dividends right now, either.

It’s a good time remember that, now more than ever, money you put into stocks is an honest-go-God investment. If you’re investing (as opposed to trading, which I think is always for suckers in the end), you’re looking for well-run, reasonably priced companies that treat their owners (that would be you, as a stockholder) with the respect they deserve.

That’s what dividends are all about. They represent respect translated into money, and I think they correlate strongly with good corporate ethics.

Randy

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