Are Dividends Irrelevant, Or Even Harmful? (Part II)

Some say that paying a dividend is neutral to negative, since it removes potential opportunity from a company in the event that a suitable growth opportunity appears that requires cash in addition to taxation issues (See Why Dividend Paying Stocks Are a Mistake as one example). Thus, future earnings growth could be limited. The counter argument follows this line of reasoning as discussed in Part One: Dividend stocks are more closely linked to the price to earnings ratio as dividend yield is essentially a function of the P/E ratio with the inclusion of payout ratio. In fact, the lower the P/E ratio, the better this is for the dividend yield – provided the company does not have sliding fundamentals. Dividends lowers the P/E ratio in the opposite way buybacks do (buybacks try to boost EPS for better ratios instead of lowering price with same EPS). The removal of equity from.... Read more