Get Rich with Dividends: A Proven System for Earning Double-Digit Returns

Management Speaks

I posed this question to several executives: Why does a company adopt a policy that commits it to an ever-increasing outlay of cash in the form of dividends?

I received some interesting replies.

Scott Kingsley, the CFO of Community Bank System, Inc. (NYSE: CBU), an upstate New York bank that as of January 1, 2012, paid a dividend yield of 3.8% and had raised its dividend every year since 1992, said he believes the dividend keeps existing shareholders happy but also attracts new shareholders.

Regarding the idea that a company can retain capital for other uses rather than paying a dividend, he stated:

We are very “capital efficiency” conscious. We believe “hoarding” capital to potentially reinvest via an acquisition or some other use can lead to less than desirable habits. We prefer to raise incremental capital in the market when needed—and we have a track record of doing that. Having excess capital on the balance sheet when assessing a potential use can lead to bad decisions—because at that point almost everything results in improvement to ROE [return on equity]. The case in point in our industry are the overcapitalized, converted thrifts. Their ROEs are usually so low, any transaction looks like it improves that metric, but it may not add franchise value longer term.

So, according to Kingsley, not having a stash of cash forces management to be more responsible stewards of the company’s assets. When a company has lots of cash on hand and makes an acquisition, it ...