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I recently wrote an article on the subject of dividends that I now can only describe as "misunderstood" by most or "entirely taken out of context" at best. It seems that I have offended quite a few readers by suggesting that the growing popularity of dividends was misguided.

Divided Over Dividends

First, I need to clarify a few things and I hope this adds a pause to the volume of hate mail that I have received since the article's publication. Fundamentally, from the standpoint of the investor, a dividend is a great thing. It offers the investor numerous opportunities and options that non-issuing companies are unable to present. On the flipside, from the standpoint of the issuer itself, it caps that company's ability to grow and seek new markets. The fact of the matter is (for me), quite frankly, since I am not yet of retirement age, the idea of a dividend from my once proud growth company, brings me disappointment to learn that it (for all intents and purposes) has announced its retirement by opting to issue a dividend. This is where I have become "divided over dividends."

The perfect example is with a growth company such as Apple (NASDAQ:AAPL), which now has amassed more cash than the U.S. treasury. This fact offends a lot of people, even some of its shareholders who continue to implore the company for a dividend or a repurchase of shares. But the reasons presented for this request often do not support why it makes sense for the company to oblige. It is not something that is likely to occur any time soon and a stance on which I continue to agree with the company. Having said that, it makes perfect sense for a company such as Microsoft (NASDAQ:MSFT) or Wal-Mart (NYSE:WMT) that have clearly reached (arguably) not only their growth potential, but also their economic moat to share its cash with shareholders. For a relatively young company such as Sirius XM (NASDAQ:SIRI) which is now in a clear growth mode yet twice has hinted the idea of a dividend, it makes absolutely no sense whatsoever.

As far as Apple is concerned, to consider a dividend, as a shareholder I think it would be admitting to me that it has run out of neat ideas. It has put the "i" in "iDea" - the very reason that I became an investor several years ago. But for some current investors, it is remarkable how its cash is now perceived as some type of failure in execution. I get that sharing cash will make investors happy. The question is, how does that help the company long term - to the extent that it can compete and do what it does in seeking new markets to plant its flag.

The Pressure of Value - Inherent or Implied

This past weekend, my family and I went to a museum where we took pride in seeing some historical exhibits - several of which still resonate even today and have some very significant social relevance. In all, it took us nearly two hours to tour the entire facility. As we exited, there was one final exhibit that I thought was equally important. It was the list of donors and public contributions that had made that experience possible. On the wall, from highest donor to lowest were names of people and corporations that made monetary contributions to the museum - the bigger the donation, the bigger the plaque.

To some extent, it reminded me of the issue of dividends. As with anything else, issuing companies establish a certain status - one that says, we have arrived, and here's the proof. Our managerial excellence has allowed us to share our cash as opposed to being in constant need. Now mind you, I have already conceded that for investors, this is a great thing and it is absolutely beneficial. For the company, it has essentially retired and is now looking for plaid pants and golf courses. But what it also implies is that the company is now more valuable even with its indirect admission of lack of strategic growth.

Summary

Ultimately it comes down to the individual investor and what his or her tolerance is for risk as well as investment horizon. Not everyone has the same objectives in mind and for this reason various stocks and strategies exist. The reality is dividends (over time) do indeed play a crucial role in generating significant value for investors. High paying companies such as AT&T (NYSE:T), Verizon (NYSE:VZ) and even drug giant Merck (NYSE:MRK) that issue yields above 5% proves this point every year.

Investors have every right to look more favorably to these companies, especially considering that the longer the holding period, the more likely dividends, along with capital appreciation, will produce returns that significantly exceed inflation. But having said that, it is unrealistic to think every investor should feel the same way.

Source: Divided Over Dividends: The Separation Between Income And Growth