dividends in the US (ii): the 1970s

Two significant inflationary forces marked the 1970s in the US:

–the two oil crises, one during 1973-74, the other during 1978-80, which drove the price of crude from under $2 a barrel at the start of the decade to over $35 at its end, and

–the start of runaway inflation in the US, only partly due to oil, that had prices rising by 8% yearly, with economists’ projections of +11% for the early 1980s.

Both had profound–and negative–effects on investor attitudes toward dividends.


Typical dividend stocks are of companies in mature, slow-but-steadily growing businesses that generate substantial free cash flow.  Think: consumer staples.  These firms usually have very little power to raise their prices.  In the best case, they can do so in line with historical inflation.  Even then, they run the risk of having customers switch to lower-cost substitutes.  Many times, though, prices are in a steady real decline.

In a world where inflation is  currently 5% and where price rises are accelerating to 8%+ per year, a stock now yielding 4%, with a dividend that can grow at best 5%, is unattractive.  Its yield is already negative in real terms and prospects are that it can only fall further behind.


Before the oil crises–and again today–the big international oils were regarded as quasi-bonds, attractive mostly for their dividend yields.  In a (mistaken) attempt to shield consumers from an increasing oil price, the US passed price control laws in the mid-1970s that set a cap on the selling price of US-produced crude from wells drilled before the oil shocks began.  This made US-based firms that had large oil reserves relatively unattractive investments.

Interest shifted instead to smaller, non-dividend-paying exploration firms that had the potential to make large finds relative to their size.

conventional wisdom

In business school I learned the conventional wisdom of the time.  It was that paying a large, growing, dividend was a sign of weakness in a firm.  It supposedly meant that the management lacked creativity.  The best they could come up with was to return excess funds to shareholders.  Therefore, dividend stocks should be shunned.

How times have changed!

Tomorrow, reversal in the 1980s.


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