Q: Dividend rates - stock seem to be popular when they have a high dividend rates . A stock paying 4% making a payout (will say quarterly), pays the 4% then the stock drops 4%, so what you get on one hand is taken away on the other. Basically, a growth stock would be a better play than a dividend stock. Please give me your opinion.
5i Research Answer:
It really depends on the company. Dividends are paid with after-tax dollars, so there is a big debate on whether pre-tax money should stay in the company and compound at a faster rate. But, also, dividend stocks can get a higher valuation at times, and so a company's cost of equity capital can be lower. The topic is far too big to discuss here, but we do not 'mind' dividends at all. But if a company is growing very fast, and is expected to continue to do so, then we would prefer no dividends. But of course some companies are mature and have low growth. This article discusses dividends vs buybacks, but the theme is similar in terms of comparisons.