How does he view the role of dividends in stock valuation?

How Benjamin Graham Viewed Dividends: A Golden Hen Laying Eggs

For Graham, discussing the value of stocks without accounting for dividends was like raising a chicken solely for how much it could be sold for, while ignoring whether it could lay substantial eggs every day.

His perspective is pragmatic, even somewhat "old-school," but brimming with wisdom. Consider the following angles:

1. Dividends as the "Litmus Test" for Real Value

Earnings can be "manufactured," but cash dividends are hard to fake.

Think of it this way: a company’s reported "net profit" on financial statements can be inflated. Accountants may boost earnings artificially through tactics like adjusting depreciation or inventory valuations. But dividends require actual cash pulled from the company’s bank account, paid to every shareholder. A company willing and able to sustain dividends—especially through economic downturns—provides the strongest proof of its financial health.

Graham was like a no-nonsense merchant wary of empty promises. He trusted only cash in hand. For him, dividends were the "hard currency" to gauge whether a company genuinely earned its profits.

2. Dividends as the "Ballast" for Investment Returns

Stock prices fluctuate, but dividends offer stable cash flow.

Graham’s famous "Mr. Market" analogy illustrates this: Mr. Market is volatile—ecstatic one day (offering high prices), despondent the next (willing to buy shares cheap). Obsessing over stock prices ties your emotions to his mood swings.

But dividends are different. With steady operations, this money reliably and periodically enters your pocket. Such returns are certain, unshackled from Mr. Market’s whims. For the prudent "Intelligent Investor," dividends act as ballast, stabilizing your portfolio amid market volatility.

3. Dividends as a "Straitjacket" on Management

Forcing accountability and preventing reckless spending.

Without dividends, management retains all profits and decides their use—potentially funding dubious acquisitions or low-return projects.

A consistent dividend policy, however, imposes a straitjacket on management. Knowing they must set aside enough cash for shareholders forces discipline. Before any major investment, management must ensure higher returns than distributing those dividends. This mechanism inherently protects minority shareholders.

4. Dividends as a "Crucial Anchor" for Valuation

A company’s intrinsic value lies in actual cash delivered to shareholders.

Graham directly or indirectly factored dividends into valuations. While his exact formulas may seem outdated, the logic remains sound: long-term stock value derives from its ability to generate and distribute cash to shareholders.

A company with a track record of growing dividends makes its rising intrinsic value visible, offering a concrete benchmark for assessing whether its stock is over- or undervalued.

Summary: The Chicken-and-Egg Analogy

Imagine your stock as a hen laying golden eggs.

Stock Price: What others will pay for the hen—shifting daily.
Dividends: The tangible golden eggs the hen lays.

Graham’s advice? Ignore fleeting bids for the hen (stock price). Focus on its health and ability to lay eggs steadily (dividends). Paying chicken prices for a golden-egg-laying hen makes for a brilliant investment.

Of course, Graham didn’t dismiss all non-dividend companies. He recognized growth firms reinvesting profits into high-return projects. But for most "defensive investors", a long-term, stable, unbroken dividend record remains an essential, non-negotiable rule for identifying quality stocks.