Are solid, dividend-paying investments always a good thing? Ben Graham, in his landmark book Security Analysis (first published in the 1930s) agonised for a chapter about how dividends should be used to value shares.
Clearly, at times such as the current phase in the market, dividends assume increasing importance for the additional security they offer. But Graham recognised that there was a conflict between the demands of growth companies for finance through maximising their retained profits and what he describes (writing in the wake of a major setback in the market, widespread bank failures and a market poised for a hesitant recovery) as the "historic primacy of dividends".
In this respect, he observes: "For the vast majority of stocks, the dividend record and prospects have always been the most important factor controlling investment quality and value. The success of the typical concern has been measured by its ability to pay liberal and steadily increasing dividends on its capital." He also observes that dividend yields and growth in the value of the shares are interlinked, so that dividends, in Graham's words "could be held responsible for nearly all of the gains ultimately realised by investors".
It's also worth recalling that the cult of the equity, or the phenomenon of investing in growth stocks, is a relatively recent event. Many investors, including retirees and others dependent on investment income, do not want risky low-yielding growth stocks. With shorter and medium-dated gilts on relatively low yields, investing in relatively secure, higher yielding equities is definitely flavour of the moment.
