Why Dividends and Growth Go Together

Florida summers are hot and humid, so we take a lot of family trips to our community’s pool. It’s a nice way to cool off, relax, and chat with our neighbors.

I’ve met all kinds of interesting people over there, and had plenty of great conversations. But one particular exchange is permanently seared into my brain. And I think it holds a great lesson for investors. So today, I want to tell you the story.

It all started when my neighbor said …

“The Only Reason Companies Pay Dividends
Is Because They Are No Longer Growing!”

Given my line of work, I expect financial debates. In fact, I welcome them. But I would have never expected to find one in a hot tub.

It was a Friday night, and Disha and I decided to head over to the community pool for a little relaxation. Glass of wine in hand, I slipped into the hot tub’s rolling boil hoping for ten minutes of peace.

Unfortunately, it wasn’t meant to be. In the soup were two other men. For a while I listened quietly as the younger guy asked the older gentleman questions like, “So, Doctor, where do you think Florida real estate is headed next?”

As my wife will tell you, it’s hard for me to stay silent for long, especially when such questions are in the air. So I dove in. And the conversation quickly twisted and turned from our decision to rent rather than buy … to my position at Weiss Research … to my love for dividends.

As it turned out, the good doctor wasn’t a surgeon or a dentist … he was an economist with a Ph.D. and a penchant for being right. In a French accent, he declared, “Companies that pay dividends cannot have good growth. If they had good prospects, they would reinvest all that money into their businesses.”

IBM has been paying dividends since its days making meat slicers and punch card machines.

His tirade continued for some time, and it was peppered with the highlights of his life — the books he’d written, the lectures he’d delivered, and the importance of his academic work. I tried to fight back with reason. I pointed out that IBM was paying dividends when it was still selling meat and cheese slicers back in the early 1900s.

Certainly he considered IBM one of the great growth stories of the 20th Century, no? And the company must have still invested an awful lot in R&D while managing to reward its shareholders with dividend checks, right?

His reply: “I don’t believe it. I’d have to see the information for myself.”

I offered to go home and grab an annual report, but he just frowned and declined. Obviously, we were at an impasse (and my wine glass was empty).

That’s when my wife ever-so-gently indicated that it was getting late and she was tired.

I still see that guy from time to time over at the pool and I’m always tempted to bring the subject back up. In fact, I have another great example I’d like to show him …

Wal-Mart: Proof That Dividends
And Growth Go Together!

I don’t know anyone who would dispute Wal-Mart’s position as one of the biggest growth stories of the 20th Century.

In the span of a few decades, the company went from an unknown small-town store to the poster child for big business. Take a look at some highlights from the company’s history …

• Sam Walton opened the first Wal-Mart in 1962.

• The company went public in 1970.

• In 1974, it paid its first dividend.

• In 1975, Wal-Mart had 125 stores in operation with sales of $340.3 million.

• By 2005, it was the world’s largest retailer (and its largest private employer!) with annual sales reaching $312.4 billion.

As you can see, Wal-Mart began paying a dividend just four years after it went public and that didn’t hurt the company’s growth one iota!

What’s more, Wal-Mart has not only continued to pay dividends to this day, but it has steadily increased those payments along with its rising revenues and profits.

See, the economist in the hot tub was missing something that us dividend investors have known all along …

In the theoretical world of academia, a perfect growth company may very well reinvest every penny back into its business.

But in the real world, entrepreneurs, executives and shareholders want to reap some of the profits while the growth is happening!

As my IBM and Wal-Mart examples demonstrate, when a company is firing on all cylinders … and bringing in cash by the boatload … it’s more than capable of rewarding shareholders and totally dominating its industry.

The good doctor may never believe it, but long-time dividend investors know it’s true!

Best wishes,

Nilus

P.S. If you want to learn about my favorite dividend growth stories, subscribe to my monthly newsletter Dividend Superstars. The cost is just $39 a year … click here for the details.

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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Christina Kern, Mathias Korzan, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.

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