Businesses exist to make money for their owners. So why is it great news that Apple, the most valuable company in the world right now, has announced plans to resume paying dividends, and how could Apple get away with not paying dividends for the previous 15 years?

The short answer is that dividends have been scorned by corporate managers and shareholders alike for the past quarter century. There were many economic and fiscal reasons for this, but the bottom line is that everyone was looking at stock prices. Top executives were paid to keep the price as high as possible. If they failed, shareholders suffered. If they were successful long enough to convert their incentive packages into stock or cash, shareholders suffered. If stocks rose and fell with the market tides, shareholders suffered, as market indices have yet to recapture the highs they set more than a decade ago.

The only shareholders who did not suffer were those who sold their shares when prices were high. Investing for long-term capital growth is fine and often wise, but it misses the original purpose for which most businesses are started. The idea is, or at least it used to be, to generate a steady stream of income for owners, not force them to hold their shares for an indefinite period and then sell them to reap the accrued benefits of a company’s success.

My colleagues and I have taught clients to focus on expected total return (dividend income plus capital growth) because this is what matters most, especially in a world where dividends are a second-tier consideration for corporate managers. . This is still good advice, but retirement planning would be a lot easier if companies shared more of their profits with their owners. Greater and more consistent cash flow from investments would help everyone stop obsessing over short-term stock price movements, which are irrelevant to long-term financial planning.

There are signs that the pendulum is finally swinging back. Apple’s dividend, which will take advantage of a portion of the $100 billion in cash the company has amassed, is one such sign. Apple joins a growing list of tech companies, which also includes Microsoft and Cisco, that have instituted dividends despite the stereotype that tech companies should invest their money in the business in pursuit of ever-rising stock prices. tall. That cash, in reality, was accumulating mainly in corporate treasuries, where it was a target for regulators and other litigants and a temptation to engage in acquisitions and business initiatives with flexible budgets.

Apple’s dividend equates to an annual rate of about 1.8 percent, based on its recent share price. That’s below the average for dividend-paying S&P 500 companies, which is about 2.5 percent. (The overall S&P average, including companies that don’t pay dividends, is just over 2 percent.) In the 1980s and 1990s, investors would have ignored such returns, who could have earned more simply by putting their cash in the money. Market Funds Today, however, corporate stocks have become one of the few places where an investor can receive a fair current rate of return without taking undue risk. Money market funds pay out almost nothing and are virtually guaranteed losers after taxes and inflation.

Recent dividend increases in the financial sector are pushing the dividend yield of the S&P 500 closer to 3 percent. Many stocks in the index, such as Pfizer and Waste Management Inc., already pay more than 4 percent. In general, about four-fifths of the companies in the S&P 500 pay dividends right now.

Returning excess cash to shareholders is one reason companies are instituting or increasing dividends. Another is current US tax law, where most dividends from public companies are taxed at the long-term capital gains rate of 15 percent. Although this still represents a double tax when added to corporate income tax, it at least makes paying dividends a reasonable option. If the Bush-era tax legislation expires at the end of 2012 as planned, dividends paid to top earners will be taxed at more than 43 percent federally (thanks to a recently expanded Medicare tax), and more 50 percent overall for shareholders residing in some states. At those levels, shareholders will not want companies to pay dividends, and the payout trend may be nipped in the bud.

That would be a wasted opportunity for our aging society. One of the biggest financial dangers we face is the cost of supporting an increasing number of seniors, who will live many years after they stop bringing home a paycheck. Many private pension plans are underfunded; public pension plans are often in worse shape; and Social Security has nothing at all except notes issued by the US Treasury, which is already $15 trillion in debt. This huge federal debt puts intense pressure on central bankers to keep interest rates as low as possible for as long as possible so that savers cannot get a fair return on their capital from banks or borrowers from the government. government.

Corporate dividends could step into the gap. If future retirees have substantial, well-diversified portfolios of dividend-paying stocks, they’ll be in a better position to ride out market downturns without panicking or having to sell off stocks at clearance prices to cover living expenses. While having stock retirement accounts sounds risky to many people (and is risky unless those accounts are diversified), it’s actually much safer than gambling on bank CDs or government bonds to provide a reasonable and certain income stream. defense against inflation. .

Former President George W. Bush was on the right track when he suggested keeping the current structure of Social Security for Americans nearing or past retirement age, while allowing younger workers to accumulate shares in what his critics call “privatized” accounts. Governments at all levels will eventually have to renege on their unfunded promises, and the best way to prepare for that is to give citizens the opportunity and means to support themselves.

Wise tax policy would allow corporations to deduct dividend payments for income tax purposes, just as they now deduct interest. The government would not lose much money, if any, since individual dividend recipients would pay taxes on what they received, and there would no longer be a reason to offer dividends at a preferential tax rate. Businesses would also have no reason to favor debt over equity as a source of capital; this would reduce corporate exposure to bankruptcy during business downturns. Any reduction in government revenue would ultimately be offset by a reduction in the need to fund future retiree benefits.

A return to higher dividends would also restore a healthier balance between corporate goals of producing long-term growth alongside current income for business owners. Stock prices will always matter, but people will be less obsessed with the daily fluctuations in their portfolios if they know their companies will continue to turn a profit and distribute cash. This should reduce stock price volatility, which would be a welcome relief after the wild swings of the 21st century so far.

When I was much younger, a client who was a senior corporate executive told me that you can always substitute capital for labor. That simple lesson has stayed with me. As we get older, we lose our ability to generate income from our work, but a lifetime of savings can make up for it by giving us capital to replace it. A wise society will take advantage of this, encouraging its citizens to save and invest for their own future and pass capital on to their heirs. It is the best way to create an income stream that can support us through an ever-longer life.