The importance of dividends

The first book about investing that I've read was the one from Stephen Jarislowsky. I really liked that book, but as time goes, I can see how it was just an average book.

One of the quotes that had the more resonance for me was the line where Jarislowsky says that he choses to buy stock of companies that offer a dividend because every employee of the company gets a salary. Shareholders should have a salary too. In fact, they're the ones that take all the risk, it's obvious that they should be paid!

That idea became essential for me. How could I choose a company that wouldn't bring me any appreciation and no dividend?

You buy companies that don't offer a dividend? You haven't understand how investment works!

Me, I understand. So, I choose to invest in excellent dividend companies like Yellow Pages.

Eventually, I read a lot of things written or said by great investors. Like that famous Warren Buffett's quote where he says that if a company can reinvest 1$ in a way that produces more than 1$ of profit for the company, that company shouldn't pay a dividend. In other words, a company that invests in itself with great results shouldn't give away it's money.

The words of Jarislowsky were so much printed in my brain that I wasn't sure that Buffett gave such a good advice.

But now, with more experience, I can see that the words of Buffett were right. Dividends are good, but not in every circumstances. 

Constellation Software is a notable exception, but except for that, my best performers pay either a small dividend or no dividend at all. Here's a small list of good growth companies, in Canada and USA. You'll see that most of them don't give away a lot of their money. In other words, they surely can manage their money better than you will do if you recieve a dividend from them.

Couche-Tard (small payout ratio)
Stella Jones (small payout ratio)
Concordia Healthcare (small payout ratio)
Dollarama (small payout ratio)
Gilead (small payout ratio)
TJX (small payout ratio)
Ross Stores (small payout ratio)
CGI Group
Berkshire Hathaway
Dollar Tree
Portfolio Recovery and associates
Valeant
Allergan
Celgene
Jazz Pharma

The list could go on and on. I know that there's a lot of exceptions that people could bring. But, in general, a good grower will continue to grow better without giving any of it's money.

So, if you compare a big bank (for example: Royal Bank) and a middle cap pharma (Concordia Healthcare), you have the choice:

10% annual appreciation with a 3-4% dividend (RY.TO)
or
50% appreciation without a dividend (CXR.TO)

Final words: Once upon a time, dividends were on my checklist before buying anything. They're not there anymore.