Are high-dividend stocks better?

I attended several Finance classes as an elective in college but it was not my major and that was almost two decades ago. I recall being introduced to Miller & Modigliani's theory that dividend policy doesn't matter, because if a company keeps the money and reinvests it in its own operations instead of paying dividends to investors, this would translate into higher firm value and stock price, i.e. capital gains to the investors. But if this were true, why do investors still prefer high-dividend stocks? If a company that has a high growth rate (and assuming high stock price appreciation) pays out dividends, isn't it less likely that investors will be able to find alternative investments that provide a comparable return? What's the latest thinking on this issue?

You ask a good question. I'll try to answer the questions in order.

1. Investors do not tend to prefer high-dividend stocks. The market applies expecations to all cash flows in order to determine how risky the cash flows are and if the expected returns warrants the risk. Many high-growth companies do not issue dividends and investors look for capital gains rather than current-period income.

2. Remember that the price of a stock is the sum of the present value of the dividends and cap gains. Therefore, in high growth companies or non-dividend paying companies, you are buying only the cap gains. On a risk-adjusted basis, they must compensate you for foregoing current period income.

3. There's a lot of literature on the subject. One of they major theroies right now is investor preference. As we age, our investment horizon decreases, placing more emphasis on current income, rather than long term growth. Utility stocks, which almost always pay dividends, provide aging investors with current income as well as a potential for capital gains. This satisfies their requirement for short-term cash flows and provides them with an up-side if the company continues to do well. One great example of this in Entergy Corp.

If the company cannot earn more with the money internally than the investor could with the money it should be paid in dividends. Taxes distort the comparison.

Dividends are rarely the reason enough for investing in a stcok. remember the dividend is always declared on the face value of the stock and not on the market value. A Rs.100 SDhare of reliance is today nearly rs.2000/- Even if reliance declares 100% dividend, it will be only Rs.100/- which will be hardly 5 % of the market value at which you have bought the share.

It is alwasy the capital appreciation which is more important than the dividend, second important factor is issuance of splits or Bonus shares to existing shareholders.

Dividends are obviously an income for stockholders,
and they have to be included in stock valuations.

Here is the little practical tool I use to do it:
http://perso.orange.fr/pgreenfinch/epric...
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Boy, does that bring back memories! I majored in Corp. Finance back in Grad School and that was required reading. However, the key word is "tend" to not matter, because savvy investors will always go with the firm that reinvests all its profits for growth. This tendency is still somewhat true, but only for "savvy" investors, one of the flaws in the model. The other 2 flaws are that all investors are intelligent (they are not) and that they are all high risk takers, they are not. The low to moderate risk takers want a constant flow of returned capital to reduce their risk exposure, hence they seek the dividend and are willing to compromise the yield element on the cap gain side. Nothing wrong with this, its called value investing and is a conservative form of investing. On the other hand, the dumb people who seek out companies and follow the credo of the model usually pick undercapitalized stocks, which must supplant their earnings with debt and whose business model leaves something to be desired and sales and earnings growth are elusive?
So, which is better? If I am a truly a savvy investor and understand the market and its underlying stocks I go with M&M. If I'm not certain, I go with value because the risk is less and the stability is more assured.

Simply stated: All investing has " risk" involved...when you are collecting dividends, it's like being paid to take that risk...( or just " reducing" the risk).
You will never make the high- flying returns of a successful growth stock like UnderArmor, but for every "big winner" there are probably three " dogs" out there ,too. So, some people play the old " slow but steady wins the race" game.
The dividend paying companies usually are NOT growing and expanding anymore...they're just making profits... so instead of using the money to build another store, another plant, research some new software, etc. they just give the money to shareholders. The shareholders can re-invest (and get a bigger div next time...over and over ) or they can use the divs as they see fit..( maybe buy some growth stock...maybe use it for living expenses...nice to know there's more coming next quarter or next month)