Companies Shun Dividends at Their Own Peril

Some investment rules are so powerful they can't be rebutted with a straight face. That companies with higher dividends tend to outperform those with lower dividends is one of them. One thousand dollars invested in the S&P 500 in 1957 was worth $176,000 in 2006. The same $1,000 invested in the top 10 S&P companies with the highest dividend yields was worth $1.3 million. Countless academic studies show that dividends are typically the best way companies can reward shareholders. None that I know of argue the opposite.

But you'd never know this by looking at the behavior of corporations. For half a century, they've been distancing themselves from dividends with a passion. The dividend payout ratio -- the percentage of earnings companies pay out as dividends -- for the S&P 500 is now at the lowest level in recorded history, less than half its historic average. Since 1990, S&P 500 earnings have grown more than fivefold, yet dividends have merely doubled.

Source: Motley Fool

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