Understanding Dividends: What If Dividends Didn't Exist?
Jared Cummans Dec 11, 2014
Charlie Munger has a great saying that is a very helpful mental tool – invert, always invert. At Dividend.com, we’re firm believers in the power of dividend investing, of course. However, rather than simply exposing all the benefits of a sound dividend investment strategy, we thought it would be helpful, and frankly fun, to invert the concept of “why dividends are great” to “what if there were no dividends?”
By no means can we actually envision a world where stocks are not “allowed” to pay dividends, but it’s interesting to explore just how different investing would be if dividends did not exist.
1. Investors would need to find new sources of income. Say hello to bonds and real estate.
2. Buybacks would be all the rage.
3. Warren Buffett’s Berkshire (BRK-B ) portfolio would miss out on $2.1 billion in income every year.
4. The term DRIP would only apply to liquids.
5. Mitt Romney would have $4.9 million less in taxable income to explain.
6. Apple (AAPL ) would accumulate an additional $11.1 billion each year.
7. The 80 S&P 500 stocks with no dividend payout would no longer feel so lonely.
9. A share of GOOG would still be worth about $530.
10. The 1991 Episode of “Blossom,” Papa’s Little Dividend, would have been COMPLETELY different.
11. Green Bay Packers shareholders would … be no different.
12. Preferred stocks would lose almost all of their appeal.
13. Warren Buffett would be taxed far more than his secretary.
14. The line to write covered calls would be down the block and around the corner.
15. Our society would innovate by leaps and bounds as major corporations invest heavily into R&D, powering the next Renaissance.
16. Buy-and-hold pundits would need to rethink their entire strategy. Time to buy and sell?
17. Those relying on a “dividend harvest” strategy would be left famished.
18. AT&T (T ) would have $9.70 billion extra cash on its balance sheet.
19. Blue chips would be all but useless to investors, due to lack of growth prospects.
20. Investors would throw away dividend calendars.
21. The 80 Dividend ETFs with $100 billion in assets would need a new objective.
22. Myron Gordon and Myron Scholes would need new economic models to differentiate their first names.
23. Shareholders would have one less policy to complain about.
24. Total investor return since 1930 would be lower by approximately 40%.
25. REIT + MLP = RIP.
26. M&A bankers would work 168 hour weeks.
27. Brokerage houses would become the next cash cows … with no way to reward shareholders.
28. April 15th would be even more of a headache.
29. Risky securities would no longer come with a “safety cushion.”
30. The line between “growth” and “value” stocks would be blurred.
31. The Modigliani-Miller Capital Irrelevance Model would be, well, irrelevant.
32. There would be no such thing as a “leveraged recapitalization.”
33. Retained earnings would be an unnecessary accounting line item.
34. John D. Rockefeller’s ghost would be “displeased.”
35. Say goodbye to dividend reinvesting and compounding returns.
The Bottom Line
While we don’t imagine dividends ever going away, this exercise certainly shed light on the importance and benefits of dividend investing, highlighting why so many choose to invest in dividend stocks. For more insights, be sure to check out our Unofficial Dividend.com Guide to Being an Investor.
Disclosure: No positions at time of writing.
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