by Melanie
At The Intelligent Investor we simply adore dividends. They may not be very sexy, but in a corporate world littered with half-truths and empty promises—and that’s the good bits—dividends do at least provide a bit of black and white. A company can either put money in our bank accounts or it can’t, and we much prefer the ones that can.

The word ‘can’ here is important, though, because a dividend may not be the best use of a company’s cash—there may be projects to fund that offer a higher return on capital than shareholders could make for themselves. But it’s a great sign if a company is making enough cash to have to worry about this—and the option of paying a dividend does draw a line in the sand when management comes to consider such projects (or at least it should).

So the idea is that company boards should make decisions about their use of cash based purely on whether the company or its shareholders could make the best use of it. The sad reality, though, is that managements frequently feather their own nests and concentrate on building up their empires.

Temptation

And, as if there wasn’t already enough temptation for companies to hold on to cash, it used to be the case that money paid out as dividends was taxed twice— once when the company paid tax on its profits and once when the individual recipients paid tax on their dividend income. Quite apart from being unfair, this biased the system in favour of companies retaining—and, often, squandering—their profits.

Visit The Intelligent Investor for the rest of this article on dividends and to find out more about share advice.

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