There is a lively discussion going on in Seeking Alpha and Random Roger’s Big Picture on the merits of investing in dividend-paying stocks. Seeking Alpha’s David Jackson argues that dividends are inefficient in the sense that investors give up the compounding effect of earnings. I remember reading somewhere that Warren Buffet dislikes dividends for this reason.
David argues that stock buybacks are a much more efficient way of returning capital. This may not always be true. When stocks are overpriced with respect to earnings, stock buybacks are also an inefficient way of allocating capital.
For example, consider the stock buyback history of Intel Corp. currently trading around $22.30. The average price of buybacks has ranged from $20.96 in 1998 to $54.43 in 2000. It is hard to argue that buybacks have benefited shareholders in this particular instance.
Personally, I like mature companies to allocate capital by buy-backs as well as dividends. I hold almost all dividend-paying stocks in my retirement accounts for tax efficiency and reinvest the dividends.