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.


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