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all types seem to be disapproved of by most academic writers on the subject. They insist that they are nothing but pieces of paper, that they give the shareholders nothing they did not have before, and that they entail needless expense and inconvenience.† On our side we consider this a completely doctrinaire view, which fails to take into account the practical and psychological realities of investment. True, a periodic stock dividend—say of 5%—changes only the “form” of the owners’ investment. He has 105 shares in place of 100; but without the stock dividend the original 100 shares would have represented the same ownership interest now embodied in his 105 shares. Nonetheless, the change of form is actually one of real importance and value to him. If he wishes to cash in his share of the reinvested profits he can do so by selling the new certificate sent him, instead of having to break up his original certificate. He can count on receiving the same cash-dividend rate on 105 shares as formerly on his 100 shares; a 5% rise in the cash-dividend rate without the stock dividend would not be nearly as probable.*

The advantages of a periodic stock-dividend policy are most evident when it is compared with the usual practice of the public-utility companies of paying liberal cash dividends and then taking back a good part of this money from the shareholders by selling them additional stock (through subscription rights).† As we mentioned above, the shareholders would find themselves in exactly the same position if they received stock dividends in lieu of the popular combination of cash dividends followed by stock subscriptions—except that they would save the income tax otherwise paid on the cash dividends. Those who need or wish the maximum annual cash income, with no additional stock, can get this result by selling their stock dividends, in the same way as they sell their subscription rights under present practice.

The aggregate amount of income tax that could be saved by substituting stock dividends for the present stock-dividends-plus-subscription-rights combination is enormous. We urge that this change be made by the public utilities, despite its adverse effect on the U.S. Treasury, because we are convinced that it is completely inequitable to impose a second (personal) income tax on earnings which are not really received by the shareholders, since the companies take the same money back through sales of stock.*

Efficient corporations continuously modernize their facilities, their products, their bookkeeping, their management-training programs, their employee relations. It is high time they thought about modernizing their major financial practices, not the least important of which is their dividend policy.

Commentary on Chapter 19

The most dangerous untruths are truths slightly distorted.

—G. C. Lichtenberg

Why Did Graham Throw in the Towel?

Perhaps no other part of The Intelligent Investor was more drastically changed by Graham than this. In the first edition, this chapter was one of a pair that together ran nearly 34 pages. That original section (“The Investor as Business Owner”) dealt with shareholders’ voting rights, ways of judging the quality of corporate management, and techniques for detecting conflicts of interest between insiders and outside investors. By his last revised edition, however, Graham had pared the whole discussion back to less than eight terse pages about dividends.

Why did Graham cut away more than three-quarters of his original argument? After decades of exhortation, he evidently had given up hope that investors would ever take any interest in monitoring the behavior of corporate managers.

But the latest epidemic of scandal—allegations of managerial misbehavior, shady accounting, or tax maneuvers at major firms like AOL, Enron, Global Crossing, Sprint, Tyco, and WorldCom—is a stark reminder that Graham’s earlier warnings about the need for eternal vigilance are more vital than ever. Let’s bring them back and discuss them in light of today’s events.

Theory Versus Practice

Graham begins