For the Bull Market to Keep Going, Dividends Must Accelerate

Public-company managers hate cutting shareholder dividends because such moves signal multiple failures. It means they overestimated the company’s long-term earnings power, inadequately planned for cyclical dips, or mismanaged the company’s debt load. Board members often -- and correctly -- see a dividend reduction as the right time to cut management teams.

That harsh reality makes dividend policy a very useful tool for investors when it comes to understanding managements’ true perspective on future earnings and cash flow. Far more than upbeat near-term projections, payouts reflect corporate managers’ honest views of sustainable, cash flow-based earnings potential. Share buybacks, although they are tax-efficient, simply don’t carry the same informational content. Managements can cancel or curtail those, but as the old Wall Street saying goes, “You can’t restate a dividend.”