Give Us Our Dividends

  • For investors, cash is no longer trash--it's toxic. With short-term yields at 1.4% and inflation around 1.6%, the real return on cash is a putrid -0.2%. Holding cash has suddenly become a sure way to lose money. Why, then, has Oracle hoarded $5 billion in cash? How come Cisco--which last week raised its earnings projections--has $7.5 billion stuffed under its mattress? And why has Microsoft piled up a mountain of cash $38.2 billion high? Just how rainy a day is Bill Gates expecting, anyway?

    Merrill Lynch tech analyst Steven Milunovich recently suggested that cash-rich firms like Microsoft should begin paying dividends to shareholders. Then consumer advocate Ralph Nader wrote an open letter badgering Microsoft chairman Gates to do just that.

    404 Not Found

    404 Not Found


    nginx/1.14.0 (Ubuntu)

    When Ralph Nader sees eye-to-eye with Merrill Lynch, something mighty weird is going on. For centuries, investors demanded cash dividends as current compensation for the risk of a future loss. But then, in the heat of the 1990s bull market, many managements, especially at tech firms, tried a new line: Don't ask us to pay cash dividends, because we can maximize your returns by reinvesting every penny in our growing businesses. And if you wait to take your profits as long-term capital gains, argued these managements, you'll pay less in taxes than you would on dividends. With many tech stocks up more than 100% in 1999, investors fell for that pitch.

    But "it's just not true," says Robert Arnott, who manages $15 billion for institutional investors at First Quadrant L.P. in Pasadena, Calif. "The more money that companies retain to invest in the future, the worse their future turns out to be." Consider that Priceline wrote off $67 million in 2000, partly from its goofy venture into groceries and gasoline, while Amazon incinerated $233 million by "investing" in dotbombs like Webvan and Ashford.com . Last year, jds Uniphase booked the biggest loss ever recorded--$56 billion--as it wrote off the costs of its overpriced acquisitions.

    No wonder Michael Shanahan, chairman of Capital Research & Management Co., the nation's third largest mutual-fund manager, thinks of dividends as a defense mechanism. "Dividends act as a check on corporate hubris," he explains. "Giving some money back to shareholders gives the shareholders the ability to decide what to do with it." Ralph Nader complains to TIME that Microsoft is "piling up $50 million a day. It tells shareholders that the only way they can benefit from Microsoft shares is to sell. That isn't good enough. Shareholders own the company--it's their money."

    Nader isn't entirely right, of course. Some lackluster managements jack up dividends just to placate big shareholders. And you can benefit from Microsoft shares just by holding on--as long as they continue their long rise. Spokeswoman Katy Fonner says the firm has no plans to pay a dividend; it would rather use its cash for marketing, product development and "strategic investments."

    But new research bolsters the case for cash payouts. Doron Nissim and Amir Ziv, business professors at Columbia, have found that when a company raises its dividend, profits go up for the next four years. On average, says Nissim, "when you see companies increasing their dividends, you should expect higher returns in the future." So when a firm cuts its dividend, as Daimler-Chrysler did last week, it can raise a warning flag.

    I expect stocks to be sluggish for a while, so now is an especially good time to incorporate dividends into your portfolio. Three solid mutual funds that specialize in cash-paying stocks are Fidelity Dividend Growth, T. Rowe Price Dividend Growth and (if you invest through a broker) Capital Income Builder from the American Funds group. You might also send a message to billg@microsoft.com: Show me the money, Bill.

    Jason Zweig is a senior writer for MONEY magazine. You can e-mail him at fundamentalist@moneymail.com