Dividend policy

On principle, I'm a big fan of dividends.

The value of a stock should logically be the value of what a buyer thinks will be the stream of dividends it will generate into the indefinite future, discounted to present value.

Simple example: suppose I buy $100 of stock. I had other choices. I could have just put that money into an interest-bearing bank account. At (let us say) a 5% annual rate of interest. In that case, I might have received an income stream from this investment of $5 a year forever.

Why would I take money out of such an account to buy a share of stock unless I expected it to be at least as valuable as the same money was within the account? If there is no good reason, then presumably we're on firm ground in using that measure of value: the income stream I expect the stock to produce analogous to that safe $5 a year from the bank, IS its value.

That brings us back to the stream of dividends. Now, if a stock is increasing rapidly in value (some people will tell you) it isn't an "income stock" but a growth stock, and you as an investor shouldn't necessarily expect dividends.

This, to me, does not compute. If I own the stock only for its resale value, I'm betting that it will be worth a lot to the fellow after me. But what would it be worth to him, except its expected dividend stream? Somewhere we have to get a dividend stream, or else the value of a stock is just the arbitrary result of a "greater fool" theory.

If I was foolish enough last year to buy a pet rock, I can make it worthwhile if I find a greater fool than I, next year, and sell it to him for more. Growth stocks are either stalled income stocks (hoping to get to the dividend creation in the future) or they're pet rocks sold to ever greater fools.

Which is it?