Do companies that pay dividends tend to perform better – share price wise - than companies that don’t? 
by Phillip McGann, 10/08/2006

I recently went to a seminar presented by an international quantitative manager discussing the performance of large listed US companies over the past 100 years. 

One slide he presented particularly caught my eye. It showed how companies share prices performed in relation to the amount of earnings they paid out as dividends. It revealed that over the past 100 years the best performing companies tended to be the ones that paid out the most in dividends.

Conventional wisdom has it that a company with growth opportunities internally will pay out little of its retained earnings to share holders as dividends. This is because the company feels the opportunities available to invest those funds back into the operations of the company will provide a better return to shareholders than giving them dividends. 

Now this sounds fair, but it presupposes that management of the firm have an insatiable array of investments internally to plough the profits of the company into - and that all those opportunities are well thought out worthwhile investments.

The opinion offered at the seminar was that the profits “thrown off” by the operations of the growing company will be far more than the worthwhile opportunities to be spent on, and so you get to the situation whereby the management is investing in anything and everything and building empires etc.

Also a company with a higher payout ratio will be one where management needs to be more disciplined about what they invest in as they have less available funds. If they want more they need to go to the capital markets and plead their case to a more demanding audience than their shareholders.  None of this can be proven as such but it makes for an interesting thought process and one to keep in mind when you are looking at the next big “growth stock”.