While I love dividend-growth investing and follow the strategy in our retirement accounts, I prefer non-dividend payers in our taxable accounts (discussed in an earlier post). The main reason behind the idea is a preference for businesses that can reinvest earnings and earn a better return than is possible on my own. A secondary reason is to avoid losing a portion of dividends to taxes every year.

Mark Hulbert writes in The New York Times that new studies show that lower dividend payout ratios were associated with lower earnings growth going forward. The study’s authors point out that management does a poor job, on average, of investing retained earnings. They also point out that managements hate to cut existing dividends and are thus unlikely to increase them unless they are confident of future prospects.

As the column point out, the study is a reminder that if a business decides not to pay a portion of its profits in dividends, investors should keep a close eye on the company to see if it is able to achieve a high rate of return on reinvested profits.