I’ve encountered the phrase “dividend hater” a few times now, and it got me wondering whether dividend haters actually exist. I’d have to say I’ve never met any but, like beauty, it’s all in the eye of the beholder.
My investing philosophy is simple enough. I value each after-tax dollar equally, whether it comes from dividends, capital gains, or interest. I know a great many people who think the same way. To be a dividend hater, I’d say that an investor would have to value after-tax dividend dollars below dollars from other sources. I’ve never heard of people like this, but I suppose they might exist.
However, I have heard of several people who value after-tax dividend dollars more than after-tax dollars from capital gains or interest. Perhaps these people should be called capital gains haters or interest haters.
I encountered the phrase “dividend hater” most recently in some tortured logic saying that it is a myth that stock prices drop by the amount of a paid dividend. I won’t bother to explain the obvious fact that the value of a company drops after it pays a dividend other than to point to Investopedia’s clear explanation.
One amusing part of the attempt to dispel this “myth” about dividends lowering a company’s value is the following scenario: “A company earns $1/share and sells for $10/share. Now, if that company distributed a $10 special cash dividend, it will not trade at $0.”
Under what conditions would a company trade for only $10/share if it has $10/share in the bank and earns $1/share each year? If investors expect the $1/share earnings to continue, then the stock price would be much higher than $10.
I suppose that investors might believe that conditions will change and the company’s future profits will be zero. If the company also has nothing to sell in a breakup, then it would indeed sell for $0 after paying the $10/share dividend.
Another possibility is that the company did not have $10/share in cash and went into debt to pay the dividend. If we assume the company was valued properly at $10/share before the dividend, then the lender that provided the cash for the dividend was a fool who won’t get all of his money back and has essentially made a gift to shareholders. The amount of the gift would be whatever share price the company has after paying the dividend.
I’ve still yet to encounter a true dividend hater, but no doubt the label will continue to be used. I’m content to value all my after-tax return dollars equally.