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Understanding Dividends – Michael Mouboussin Edition

As many who read my articles know, I am a big fan of Michael Mouboussin and not a big fan of dividends (more specifically, industry dogma surrounding dividends). So it was nice to read an article by Mr. Mouboussin which coherently makes the case that our industry looks at dividends through distorted lenses. From Mr. Mauboussin’s recent article, “The Real Role of Dividends in Building Wealth“:

“If you listen to the press or read missives from investment firms, you might conclude that dividends play a prime role in capital accumulation. In fact, well-known strategists have pointed out that dividends have accounted for 90 percent of equity returns over the past century. This statistic is potentially very misleading and warrants further examination. Here’s the ending without the plot: price appreciation is the only source of investment returns that increases accumulated capital over time.

The cause of the confusion is that analysts do not distinguish between the equity rate of return and the capital accumulation rate. Depending on the choices of the shareholder, the rates can be very different. Understanding the distinction is essential for assessing past results and for thinking about satisfying future financial obligations.”

My contention has always been simple, “dividends do not create value.” It was my belief that for non-taxable accounts, dividends are fairly neutral, but Mr. Mauboussin makes a compelling case that dividends may even be a drag in non-taxable accounts because most of us do not actually reinvest the full dividend back into the equity. His analysis is thought provoking and definitely worth a read, The Real Role of Dividends in Building Wealth as are most of his writings which can be found on the Legg Mason website.

About Cameron Hight

Cameron Hight, CFA, is an investment industry veteran with experience from both buy and sell-side firms, including CIBC, DLJ, Lehman Brothers and Afton Capital. He is currently the Founder and President of Alpha Theoryâ„¢, a Portfolio Management Platform designed to give fundamental money managers the ability to create their own repeatable discipline to organize the complex process of portfolio management.
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