What Should Investors Do When A Cash Rich Company Refuses to Pay Handsome Dividends?

When a cash rich company refuses to pay handsome dividends, nor does it undertake share buyback, then there could be two possible reasons:

1. The company’s management may be accumulating cash for a major acquisition or an internal expansion plan.
2. The management is downright ignorant and lethargic, though the probability for this is extremely low and remote - such a management will not be able to generate so much cash in the first place.

Even when the company is planning a major acquisition or expansion, it is not justified in not paying handsome dividends to the shareholders. For after all ‘Dividends are the Wages of Investors’ and, the investors should relentlessly pester the management to pay more dividends. This is what Warren Buffett does. He attends the annual general body meetings of the companies in which he has investments and exerts pressure to pay more dividends.

The argument that the company is holding on to cash for a major acquisition or expansion also does not hold any water for history shows that many such acquisitions/ expansions were designed more to pamper the egos of the Chairman or CEO and destroyed precious capital; in a few rare instances top managements had undertaken acquisitions in downright self interest, as their pay is invariably linked to the turnover (top-line) of the company rather than to net profit (bottom-line). In such situation, investors / shareholders are the ultimate sufferers.

In conclusion, not paying handsome dividends in the face of continuous surplus cash generation, for whatsoever reasons, is totally unjustified. The shareholders have to be always vigilant and ensure that ill-conceived acquisition plans are shelved. They should always keep the directors on their toes and constantly pester them to pay more dividends.

What Is The Difference Between Dividend and Growth Fund. Which Is Better?

A very useful question. Before going to the question of which of the two is better, let us first understand both briefly.

Dividend Funds:

They pay regular dividends to subscribers. Dividend is the reward paid by a company to its shareholders for investing with the company. Mutual funds borrowed this concept and have started paying the unit holders dividends at regular intervals. The dividends are supposed to be paid out of profits, however in the absence of adequate profits, many of the mutual funds follow the undesirable and obnoxious practice of paying dividends out of capital invested, thereby diminishing the actual money invested.

Growth Funds:

Growth funds on the other hand do not pay any dividends. They plow back the profits for purchasing more shares and thereby increase the price or market value of the units. Since the market value of the units are supposed to grow more. Because of reinvesting the profits instead of paying them as dividends, such funds are called growth funds.

Coming back to your question which kind of SIP is better, I will recommend the Growth SIP Fund for two reasons, as follows:

1. In long term investing, all incomes earned must necessarily be reinvested. Though the investor has the choice of reinvesting the dividends received herself, she may be tempted to spend the income, instead. It is better for the fund itself to reinvest the profits on behalf of retail investors.
2. In the light of the highly undesirable practice of paying dividends out of capital, it is advisable to invest in the growth fund where the question of paying dividends does not arise at all.

I hope I have answered your question adequately, Happy Investing!

Note: This is a reproduction of the question I had answered on the website ‘Quora’, which I thought could be useful to the visitors to this blog site also and therefore posted here.