Dividend Policy and Stocks

Investing The premise of Modigliani and Miller, that dividend policy is basically irrelevant in that if a firm is growing then an internal dividend is created and the investor may sell shares to capture this dividend, is based on the idea that in today's market fundamentals matter. They do not. Today's market is driven by central bank policy.

Quantitative Easing (QE) has so altered the market and eradicated true price discovery that a simple comparison of charts -- one of a global economy that is collapsing and one of a U.S. stock market at all-time highs -- is enough to persuade any rational person that an examination of central bank balance sheets is warranted. Such an examination would uncover trillions in exposure. The Bank of Japan for instance was a top 10 holder of 90% of the Nikkei in April and has only increased its stake since then (Durden).

The ECB is following suit: it began buying government bonds, then corporate bonds, and soon it may be buying stocks directly -- the final prop before Ben Bernanke's "helicopter money" is dropped in order to "save" the markets. Dividend policy is not irrelevant -- but central banks have made it so for now; in fact, they have made any policy whatsoever irrelevant. Traders no longer look at micro or macro: they simply front-run the Fed. A speech by Yellen causes market turmoil.

If she is perceived to be too hawkish or too dovish, markets react. Discussions of a rate hike of a mere 25 basis points causes yield seekers to tremble. There is no proportionality -- the market is severely dislocated. Had dividend policy been allowed to serve as the basis for how investors invest, we could be seeing an altogether different story. It would be a story of companies rising and falling -- instead of simply rising -- no matter whether they are showing growth or not.

TSLA is burning cash at an obscene rate -- yet it is bought up by the market as though it were a "growth" stock. AMZN loses money on every transaction in its ecommerce (it makes money in its cloud services -- but this is not its core business) -- yet it has a P/E ration over 100. AAPL borrows money to boost its dividend -- suggesting that even in this dislocated market, dividends matter.

Apple, in other words, prefers to attract the bird-in-the-hand investors who appreciate the dividend preference theory (Brigham and Ehrhardt, 2011, p. 591). Stocks that simply "go up" because the market is now one giant pump-and-dump (that many large fund managers such as Icahn, Soros, Druckenmiller and more are anticipating will soon be dumping) are not sound or stocks that a careful investor should own. Their rise in value has not been predicated on fundamentals of the company.

They are predicated on hype, headlines, algorithms designed to capitalize on market movements, and the need of yield chasers (pension funds, mutual funds, sovereign wealth funds) to beat the index. The difference it might make to an investor if the dividend is either in cash or in shares of stock can be assessed by quickly looking at the height of the dotcom bubble.

If one had been paid in shares of stock of one of the ridiculously overvalued dotcoms at that time, it may have seemed like an enriching experience -- but if that same.