WPC - The Dividends Don't Matter Except They Do
2024-07-18 12:57:51 ET
Summary
- Dividends matter in practice, despite academic theories suggesting otherwise.
- Dividends align incentives between management and shareholders, optimizing free cash flow growth and reducing agency costs.
- Dividend investing eliminates sequence risk and provides a reliable source of income without selling principal assets.
Written by Sam Kovacs.
Introduction
Dividends shouldn't matter.
And under a set of assumptions designed by academics, they really don't. Except those assumptions don't reflect the world we actually live in, and as we'll discuss in this article, dividends do matter.
It is a case which can be best understood by one of my all-time favorite Yogi Berra quotes:
In theory there is no difference between theory and practice. In practice there is.
The idea that dividends are not essential is not new. Modigliani & Miller, two university professors who were employed at the Carnegie Mellon University in the 1950s, came up in 1961 with what became known as the “ dividend irrelevance theorem. ”...
The Dividends Don't Matter, Except They Do