It was a big, big change in worldview.
And if the author is right there might be another big change looming.
From American Affairs Journal:
The history of the U.S. stock market is often explained with colorful anecdotes. There is the gathering of the NYSE founders by a buttonwood tree in lower Manhattan in 1792, Jay Gould cornering stocks in the nineteenth century, shoeshine boys handing out tips in 1929, and Jerry Garcia’s deathbed reaction to the Netscape IPO. Those tales can be important as well as amusing. But other equally significant changes in the stock market happen behind the scenes, without a clever anecdote to illustrate them. The emergence of Modern Portfolio Theory in the 1950s and 1960s is one example. The creation of a practical index fund in 1975 is another. The same is true with the 1982 change in SEC rules that permitted the now ubiquitous share buyback programs. These shifts may not have fit the model of “how to make a million in the next twelve months,” but they ended up involving not millions but trillions of dollars over subsequent decades. This article is about another gradual change in the stock market over the past several decades that has profoundly altered the investment equation for tens of millions of individual as well as institutional investors. For most of its history, the stock market was based on a presumed, and usually an actual, cash relationship between companies and their owners, particularly for larger, more successful businesses. That is, those enterprises paid dividends to their shareholders. In that regard, the relationship was consistent with what someone with an ownership stake in any successful ongoing business might expect from their holding: their share of the profits after all the operating expenses and capital needs of the venture were met. Despite that history—and contrary to what I consider an axiom of business ownership—dividend-focused stock investing has been receding in popularity for more than three decades. The rise and crash of the fleeting dot-com stocks at the turn of the millennium is not the issue here. In the two decades since, a crop of very successful, highly profitable, abundantly cash-generative, and now mature companies have come to dominate the investment landscape. (Today, there are neo-dot-coms, in the form of SPACs and other profitless shooting stars, but they are a sideshow.) That these companies still do not regularly pay the very people who own them is the heart of the matter. Investors may accept this state of affairs, but they should know that it is historically and financially anomalous.This unusual arrangement is worth highlighting now because we are almost certainly at a period of transition in regard to the stock market. The forty-year decline in interest rates has come to an end. Interest rates may or may not increase from current levels, but the prospect of continued inflation, upcoming quantitative tightening, and the general end of “easy money” invites a reconsideration of investment frameworks built on decades of declining interest rates. Many market participants are now asking what the stock market (and the broader global economic order) will or ought to look like in this new era. Against the backdrop of these discussions, it is worth reviewing how the market functioned, at least in one very important respect, prior to the current arrangement.
Raising Capital, Earning Profits, Paying DividendsIn the beginning . . . there was the Vereenigde Oost Indische Compagnie or VOC. That’s not actually true. There were earlier joint stock companies, but as a practical matter, the Dutch East India Company was the first recognizable stock traded on the purpose-designed Amsterdam exchange. From that exchange’s launch in 1602 until the mid-twentieth century, investment in a stock like VOC was—in most instances and for most people—all about the dividend that investors could expect to receive. That is not to suggest that money was not made and lost on pure price speculations, frauds, bubbles, struggling enterprises, and all sorts of non-dividend investment decisions and holding experiences. Those non-dividend moments are unavoidable when stocks trade daily and dividend payments or changes are made quarterly or annually. But those headline-dominating moments pale in comparison to the much quieter but vastly greater experience of everyday coupon clipping. From that perspective, it is clear that the dividend paid was the ultimate measure of a stock’s long-term success. If the dividend was paid, that was good. If it was increased, that was better. Over the long term, share prices reflected the trajectory of the dividend, plus or minus sentiment factors that influenced the cash yield that was acceptable to investors. Real returns—those adjusted for inflation—show that the cash dividend received in any given period accounted for much, if not all, of the real return for that period, because inflation and dividend growth would largely offset one another. In addition, for almost all of this period until well into the twentieth century, the dividend was also usually the only public information (beyond the share price) that one might be able to get about a traded company. Income statements and balance sheet information were spotty at best.For the U.S. market, it is not particularly hard to see the relevance of dividends to stock investing for most of the past two centuries. Make your way to your local library. Review its copy of Moody’s Manual of Corporation Securities, the subsequent Moody’s Analysis of Investments, the long-running Commercial and Financial Chronicle (CFC), and others of their ilk from the late nineteenth and early twentieth centuries, and you will observe the same thing. That’s not to mention the more obviously named Moody’s Dividend Record, a publication started in 1930 that continues to this day as the Mergent Annual Dividend Record. Apparently stock dividends were important enough to investors to have their own publications.
During most of modern market history, for companies that were publicly traded, the dividend was sine qua non unless the company was in trouble or very small. Most importantly, from our perspective, is that while all major publicly traded corporations not in distress paid dividends, those cash payments differed from what we are used to seeing. Preferred shares were far more frequently encountered then than they are now, often representing 50 percent or more of a company’s capital stack. As the name suggests, dividends on preferred shares came first, ahead of those paid on common equity. And many companies had both types, preferred equity and common stock, outstanding. They would pay on the preferred and might or might not pay on the common. And they could pay at one rate on the former and a different rate on the latter. This capital structure reflected the boom-and-bust contours of the nineteenth-century business and investment cycle. By the end of the century, investors wanted a de jure guarantee before putting up more capital to companies, especially railroads....
....MUCH MORE
Previously:
Longread: "The Five Eras of Financial Markets"
"The Real Role of Dividends in Building Wealth" (Clearing Up Muddled Thinking about Dividends)
The Hard Math of Discounted Income Streams or What Will Normal Interest Rates Do To Stocks?
Valuation: "What Driving the S&P 500?" (SPX; SPY)
....Also from that post, the first dividends were not paid for seven years but once they started...
...Shareholders could collect their first dividend in April 1610: 75% of the nominal value of their share in mace.39 In November of that same year, another 50% in pepper was distributed, together with 7.5% in cash – the latter distribution was only for those shareholders who had also collected the pepper. In March 1612, a distribution of 30% in nutmeg followed.40 Shareholders who had collected all dividends in kind had received a total of 162.5% of the nominal value of their shares, but the market value of the spices proved to be significantly lower. Shareholders complained that the distributed dividends had a market value of only 125%41; the sudden abundance of spices on the market had brought the prices down....
These guys were not believers in the Modigliani-Miller Dividend Irrelevance Theorem...
[or the DDM]
Which see:
Shipping: "ABB Says Large Ships Powered By Fuel Cells Are On The Horizon"
Huh.
...One etymology of the word speculation:
c.1374, "contemplation, consideration," from O.Fr. speculation, from L.L. speculationem (nom. speculatio) "contemplation, observation," from L. speculatus, pp. of speculari "observe," from specere "to look at, view" (see scope (1)). Disparaging sense of "mere conjecture" is recorded from 1575. Meaning "buying and selling in search of profit from rise and fall of market value" is recorded from 1774; short form spec is attested from 1794. Speculator in the financial sense is first recorded 1778. Speculate is a 1599 back-formation.That is not the etymology grandmother taught me. Hers had to do with Italian merchants keeping watchtowers manned to spot sails over the horizon, enabling those who could see furthest to sell off inventory before goods-ladened ships made harbor and crashed the market. More like this etymology at Wictionary:
From Latin speculātus, past participle of speculor (“‘look out’”), from specula (“‘watchtower’”), from specio (“‘look at’”)
