Continuing with my investment posts, I hope I'm not being too repetitive. Today I want to talk about dividends. There's always a lot of debate surrounding dividends, from those who consider them essential and won't invest in a company that doesn't pay them, to those who see them as a drag on a company's growth. The truth is, both sides have a point because dividends aren't an isolated parameter, separate from the rest of the company.
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While it's true that if a company has more profitable ways to invest its money, it doesn't make sense to distribute dividends because that would reduce its growth, I personally am in favor of dividends. Why? Because I believe it's a way to maintain management discipline with a clear objective: the shareholders. Otherwise, management might think they have perpetual growth ahead of them, and that's not possible. Sooner or later, they'll make mistakes in their bets and then lose both current and past results. Furthermore, if he's so convinced that his investments are more profitable than distributing dividends, then he should replace his salary with stock options, since that way there wouldn't be any cash outflow.
But we all have to eat, and shareholders do too, so that's another reason to distribute dividends: the need for cash.
Disclaimer.
This is not a purchase recommendation. I am not a regulated financial analyst. Under no circumstances should this information be construed as a recommendation to buy, sell, or hold a position.
You should be aware of the risks involved in investing and conduct your due research.
The information described here may not be accurate or may change at any time, so you should always check it.