Short post
The Oracle of Omaha has beautifully summarised how to adopt a dividend distribution policy through his shareholder letters
Unrestricted earnings that can generate incremental earnings equal above generally available to investors should be retained or else they should be distributed back to shareholders.
This model forces the management to be capital efficient and creates long term wealth for shareholders. Buffett also advised to do a quick dollar retention test to identify if management’s decision played out well over long term or not. Read post on ITC to understand how to run this test.
One problem with this model like all other look-back models is that one has to wait for 4-5 years before realising if the management’s capital allocation decision played out or not. The only option with investors is to rely on past track record and expect that management will continue to make smart decisions.
In an ideal world a company would pay out everything and leave the decision with shareholder (owner) whether to reinvest or not every year
but above is idealist but not a practical solution.
What do you prefer drop ? in comments