Until recently, 29 of the 30 Dow Jones Industrial Average companies paid regular cash dividends to shareholders. Cisco Systems was the lone holdout, having never paid a dividend in its 21-year life as a public company.
Cisco hired its first employee in 1986, held its first staff picnic in 1989 and sold shares to the public for the first time in 1990. Today, the firm has more than 70,000 employees and more than $40 billion in annual revenue. In 2011, the company announced its first cash dividend. Although this news received little attention, we think it is worthy of reflection, even now.
The investor who purchased $1,800 worth of Cisco shares at the initial offering in 1990 received no cash return from the enterprise over the next 20 years. But the six-cent initial dividend will provide that same shareholder with a cash return of $1,700 per quarter or a projected $6,900 per year. Relative to the initial investment of $1,800, the annual cash return for the initial Cisco investor is 384%. An original 100 shares (now 28,800 shares after nine stock splits) have a current market value of more than $500,000.
Suppose we limited our eligible investment universe over the past 20 years only to firms paying cash dividends. We would have included dividend payers such as Eastman Kodak, Kmart and auto parts maker Dana Corp. We might have drawn comfort knowing that all three had paid dividends since the early 1900s. They were singled out for special praise by the authors of a widely read management book, In Search of Excellence. However, a successful past offers no assurance of a prosperous future: Kmart and Dana subsequently filed for bankruptcy, while Kodak shareholders have seen their cash dividends eliminated, and the share price shrivel more than 90% since year-end 1990.
The moral of the story? When we exclude firms from our portfolio that pay no dividends today, we may deprive ourselves of the returns associated with the biggest dividend generators of tomorrow. A broadly diversified strategy that includes both dividend and non-dividend payers will ensure we enjoy the potential rewards of both.
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