The American Spectator

p> DIVIDEND AND RULE br> Re: Michael Craig’s The Groucho Marx Theory of Dividends : /p>

Michael Craig is wrong on his theory of dividends. They are not an inefficient use of capital but part of the cost of capital. Double taxation of dividends only increases that cost of capital. Every graduate with a degree in finance, accounting, economics knows that. Because dividends are taxed twice, they make the cost of equity sources of capital more expensive than debt. The only way to reward cash to stockholders in a tax-advantaged way is to buy back stock — something that many companies do and is considered a good sign by many investment experts.

To say that paying dividends is a management failure is wrong. Often the most economically efficient use of capital is for a firm to return some of that capital to stockholders who can better invest that money elsewhere. Taxing dividends unfairly causes companies to over-invest in unwise projects and borrow too heavily. Corporate history is full of tragic episodes of companies withholding dividends, borrowing more and going on a binge of unwise acquisitions.

p>Evidence from some studies suggest that the stocks of large companies that pay higher dividends perform better. Growth companies with super high growth rates should reinvest their earnings into their business. But large successful companies that cannot maintain super high growth rates because of their large size and market shares should send some earnings to their owners and allow them to diversify their portfolios on their own. Lowering taxes on dividends will make this easier. br> — Jim Moroney br> Cumming, GA /p>

Regarding Michael Craig’s rant against dividends, where has he been for the past ten years? If ever there were a time to reconsider the heads-I-win, tails-you-lose attitudes of corporate management, this is it.

Leaving America’s management teams with too much cash is like giving a sailor shore leave, a pack of Trojans, and a case with Jack Daniel’s. Something good might come out of it, but what are the odds? If he loves Bill Gates, how does he feel about Dennis Kozlowski? Or Kenneth Lay? Or Bernie Ebbers? Or the United Airlines team? Or the SwissAir management team? Or the geniuses at Global Crossing? Or the bright boys at Federal Mogal?