{"id":16174,"date":"2025-06-04T08:27:03","date_gmt":"2025-06-04T08:27:03","guid":{"rendered":"https:\/\/finderica.com\/?p=16174"},"modified":"2025-06-04T08:27:03","modified_gmt":"2025-06-04T08:27:03","slug":"dividend-stocks-beat-the-pants-off-the-market","status":"publish","type":"post","link":"https:\/\/finderica.com\/?p=16174","title":{"rendered":"Dividend Stocks Beat the Pants Off the Market"},"content":{"rendered":"
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The most common argument I hear from investors who aren\u2019t interested in dividends is that a company should be able to find something better to do with its cash than give it back to shareholders.<\/p>\n

They say that the funds should be used to grow the business \u2013 either by investing in the business itself or by acquiring new ones.<\/p>\n

As former President Joe Biden says, \u201cThat\u2019s a bunch of malarkey!\u201d<\/p>\n

Let\u2019s look at why that argument doesn\u2019t hold water.<\/p>\n

Obviously, I\u2019m not opposed to a management team investing in its business for growth or even buying other companies, so long as it will add to long-term profitability and cash flow.<\/p>\n

But often, executives spend shareholders\u2019 capital on ill-fated acquisitions simply because the money is there.<\/p>\n

In my book Get Rich with Dividends<\/a><\/em>, I mentioned a discussion I had with Scott Kingsley, the then-chief financial officer of Community Bank System<\/strong> (NYSE: CBU). He explained to me why the company has a policy of consistently returning capital back to shareholders in the form of dividends.<\/p>\n

He said, \u201cWe are very \u2018capital efficiency\u2019 conscious. We believe \u2018hoarding\u2019 capital to potentially reinvest via an acquisition or some other use can lead to less-than-desirable habits.\u201d<\/p>\n

He went on to say that because of the company\u2019s dividend policy, when management wants to make an acquisition, it usually must go to the capital markets for financing, which forces it to closely examine whether the transaction really makes sense.<\/p>\n

Let\u2019s Make a (Bad) Deal<\/strong><\/h2>\n

How many horrible acquisitions can you name?<\/p>\n

Chances are management made them because it had the cash on hand, so what the heck? Got to spend it on something, right?<\/p>\n

In 1994, Quaker Oats (now part of Pepsi) bought Snapple for $1.7 billion. Just three years later, the company sold Snapple for $300 million, losing 82% of its investment. That means $25 per share of Quaker Oats shareholders\u2019 money went out the door and into the pockets of Snapple\u2019s owners. Would Quaker Oats\u2019 shareholders have preferred a dividend instead? I\u2019m not a mind reader, but I\u2019m going to guess yes.<\/p>\n

Similarly, in 2007, Clorox<\/strong> (NYSE: CLX), which does have a solid track record of returning cash to shareholders, paid $925 million to acquire Burt\u2019s Bees. Four years later, it took an impairment charge on the acquisition of $250 million, or $2 per share.<\/p>\n

Would Clorox\u2019s shareholders have appreciated a $2 per share dividend? I\u2019m sure they would have.<\/p>\n

Now, that doesn\u2019t mean Clorox would have issued a $2 dividend had it paid the right price for Burt\u2019s Bees, but you can see that companies can be easily tempted to spend shareholders\u2019 money, no matter the price, in order to land a prized acquisition.<\/p>\n

Dividends = Stronger Earnings<\/strong><\/h2>\n

Studies have shown that companies that pay dividends have more reliable earnings than those that don\u2019t.<\/p>\n

Douglas J. Skinner and Eugene F. Soltes, professors at the University of Chicago and Harvard University, respectively, concluded\u2026<\/p>\n

We find that the reported earnings of dividend-paying firms are more persistent than those of other firms and that this relationship is remarkably stable over time. We also find that dividend payers are less likely to report losses and those losses that they do report tend to be transitory losses driven by special items.<\/em><\/p>\n

So non-dividend-paying companies may use their cash to acquire growth, but dividend-paying companies have stronger and more consistent earnings. And a vital rule of investing is that stock prices follow earnings.<\/p>\n

If earnings are better and more reliable for dividend-paying companies, that should mean dividend-paying companies\u2019 stocks perform better.<\/p>\n

And we know that they do. Companies that grew or initiated dividends outperformed the general market by 170.6% over a 45-year time frame, while the companies that did not pay dividends barely budged over the same time period.<\/p>\n

Dividend stocks beat the pants off those that don\u2019t pay dividends, and shareholders receive income while their stocks are in the process of issuing said beating.<\/p>\n

So the next time a friend says a company should have better things to do with its cash than pay dividends, wish them luck with their investing \u2013 and just know that you\u2019ll likely be picking up the tab for lunch in a few years, because you\u2019ll be the one who can afford it.<\/a><\/p>\n<\/p><\/div>\n