Security Analysis – dividend policy

This is an excerpt from the book, “Security Analysis” by Benjamin Graham and David Dodd. Here they discuss dividend policy.

If it should become the standard policy to disburse the major portion of each year’s earnings, then the rate of dividend will vary with business conditions. This would apparently introduce an added factor of instability into stock values. But the objection to the present practise is that it fails to produce the stable dividend rate which is its avowed purpose and the justification for the sacrifice it imposes. Hence instead of a dependable dividend which mitigates the uncertainty of earnings we have a frequently arbitrary and unaccountable dividend policy which aggravates the earnings hazard. The sensible remedy would be to transfer to the stockholder the task of averaging out his own annual income return. Since the common-stock investor must form some fairly satisfactory opinion of average earning power, which transcends the annual fluctuations, he may as readily accustom himself to forming a similar idea of average income. As in fact the two ideas are substantially identical, dividend fluctuation of this kind would not make matters more difficult for the common-stock investor. In the end such fluctuations will work out more to his advantage than the present method of attempting, usually unsuccessfully, to stabilize the dividend by large additions to the surplus account.

I think they have done a wonderful job in blasting the current dividend policy which is prevalent in the markets and university finance courses. Remember that the same practise has been ongoing since 1930, and it seems to be inherently unfavourable for the stock holders as they rarely see any of their investment back in their hands.

Something to think about.


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