A Re-Focus On Dividends

U.S. corporate earnings and the stock market, in general, have become divorced from reality, with corporations increasingly ignoring stockholders in favor of a politically correct “woke” agenda. This is dangerous for society and it is not capitalism. The solution is for stockholders, investment analysts, and designers of tax codes to focus laser-like on dividends. Actual cash payments to shareholders, generated through earnings, are the best way to keep the system honest and functional.

Traditionally, all investment decisions were based on dividends. Changes in stock prices were treated as random fluctuations, to be ignored as far as possible. Speculative bubbles were recognized for what they were, and sensible investors were advised to avoid them to the extent possible. With money maintaining its value through a Gold Standard, there was really no reason to focus on share trading profits rather than income; a history of steadily rising dividends was a sign that a company’s business was growing and prospering.

With the abandonment of the Gold Standard during World War I and the burst of inflation that followed, investors’ focus changed. Benjamin Graham and Maynard Keynes both invested on a leveraged basis during the 1929 bubble, looking for capital gain opportunities. Naturally, both lost money in the crash, Graham being almost wiped out. Their response to a disaster was similar. Keynes “ceased using his economic understanding for investment purposes” (given Keynes’ bizarre economic beliefs, he would have lost money doing this anyway) and started to search for value stocks with good fundamentals. Benjamin Graham came to the same conclusion, wrote a book about it, and inspired Warren Buffett to become the richest man on earth.

Keynes and the tax system had nevertheless undermined traditional sound investment practice. With Keynesian inflation paramount, looking for a solid dividend was no longer enough, because inflation could erode the value of both your investment and your dividend. With corporate tax being levied on top of individual tax, dividends became the highest taxed form of income on earth, since they suffered both corporate tax and personal tax before the money finally landed in the investor’s pocket. Consequently, the principles of sound investing went out of the window, and investors began searching frantically for capital gains, as Keynes and Graham had done to their cost in the 1920s.

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(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of "sell" recommendations put ...

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