Value Investing and Dividends

While most financial sources today only track cash dividends, Warren Buffett's mentor — Benjamin Graham — actually recommended stock dividends over cash payouts.

Benjamin Graham

It's quite well known today that Benjamin Graham, Warren Buffett's mentor, had a preference for dividend-paying stocks.

What's not so well known though, is that Graham actually recommended stock dividends over cash ones; saying that stock dividends had both psychological and taxation benefits.

“We have long been a strong advocate of a systematic and clearly enunciated policy with respect to the payment of cash and stock dividends. Under such a policy, stock dividends are paid periodically to capitalize all or a stated portion of the earnings reinvested in the business... Stock dividends of all types seem to be disapproved of by most academic writers on the subject... On our side we consider this a completely doctrinaire view, which fails to take into account the practical and psychological realities of investment... The aggregate amount of income tax that could be saved by substituting stock dividends for the present [sic] stock-dividends-plus-subscription-rights combination is enormous.”

Total Cash Dividends Paid

Total Cash Dividends Paid, a figure that includes all dividends, can be found in the cash-flow statement. This is a figure that includes cash, stock and preferred dividends.

Tracking such a figure could yield more Graham-compliant stocks; and it could also be argued that such a classification is more Graham-compliant than one that only tracks cash dividends.

However, most public financial sources today only track cash dividends; and so GrahamValue too follows the same standard.

Note: The Advanced Graham Screener on GrahamValue can be used to exclude the dividend criteria from Graham's framework, and the qualifying stocks can thereafter be checked for stock dividends individually if required.

Warren Buffett

Warren Buffett too — like his mentor — believes in owning stocks that pay dividends. Buffett just doesn't like paying dividends out himself, as he believes he can reinvest them internally in a more tax efficient manner.

At the 2008 Berkshire Hathaway annual meeting, when asked "Why do you not believe in dividends when Benjamin Graham believed in them?", he responded:

"I do believe in dividends, including dividends at companies where we own stock. The test on dividends is, ‘can you create more than one dollar of value with the one you retain?’ It would be a mistake for See’s to retain money because they have no ability to use the cash they make to generate a high return internally. We hope to move the capital to a place where it will be worth $1.20. If we do that, taxable or not, they are better off if we retain money. But when the time comes that we don’t think we can use money effectively, we will pay it out. But because we have the ability to redistribute money in a tax-efficient way within the company, we have more reason to retain earnings in the company. We like companies where we have investments to pay to us the money they can’t use effectively."

Monetizing Stock Dividends

Good stocks represent fractional ownership of income-generating businesses, and are backed by inflation-hedged assets.

Common stock holders have first rights to business profits, surplus liquidation proceeds etc. They own the company's assets and income, regardless of cash dividends and voting rights (Par Value comes from bonds, and is simply a negligible regulatory figure for stocks).

John Bogle once correctly said:

"The stock market is a giant distraction to the business of investing"​

But the stock market provides liquidity for monetizing business profits, especially for stock dividends and non-dividend-paying stocks.

Watch Video