Editor’s note: Before we get into Porter’s Journal for today, we want to share his new Ignition Point broadcast. In the newly released video, he reveals how several separate technological forces are fusing to create what Porter calls “the next Mag7.” Watch it here.

Yesterday I wrote to you about “secret” dividends.

These are the huge sums of corporate profits that end up being allocated to things besides cash dividends. Finance bros call these decisions “capital allocation,” and they frequently make all of the difference between a winning investment and a losing one. After all, only about 35% of corporate earnings come back to you directly in dividends. Most of the cash ends up in other places.

One thing a good management team will do with these funds is pay the second kind… a secret dividend. This is a way of returning capital to you – but it’s a dividend that never shows up in your brokerage account. There isn’t a record date. There isn’t an ex-dividend date. There is no particular time limit to benefit from these dividends and they’re not announced – you can’t know exactly when they will be paid. You just have to keep track of them by watching the company’s share count. If they’re paying a lot of these kinds of secret dividends, then the share count will fall. And, as a result, your ownership interest will grow over time.

That can make you extremely rich. But these kinds of secret dividends can also ruin you. The difference comes down to one question to ask:

When a company sends out 90% of its cash as a normal dividend, there is less room for management to hurt you. You get the money. You decide what to do with it. But when a company keeps the cash… borrows more money… and buys back stock… you are handing your checkbook to the people in the boardroom. You are trusting them to know what the business is worth. You are trusting them to tell the truth about the cash. You are trusting them not to borrow too much. You are trusting them not to buy stock just because it makes the next quarter look better.

That is why the second secret dividend – share buybacks – is so powerful. And that is why it is so dangerous.

When it goes wrong, it can destroy even the biggest and strongest business in the world.

Look at General Electric (GE). By the year 2000, under Jack Welch, GE was the most valuable public company in the world. But just eight years later, GE had taken on so much debt that it was one of the biggest borrowers on Earth – it owed more than $700 billion, making it the 10^th largest sovereign borrower in the world! Think about that. GE is not a country!

These enormous debts meant shareholders were not merely trusting GE’s managers to run their industrial business. They were trusting them to allocate around one of the biggest piles of borrowed money in the world. They were trusting them to decide how much to borrow. When to buy another business. When to buy back shares of GE.

But… GE wasn’t even telling the truth about its own earnings!

In 2009, the Securities and Exchange Commission charged GE with civil fraud. The government said GE had used improper accounting to make earnings look better than they really were. Among other things, GE was accused of pulling more than $370 million of locomotive revenue into earlier periods and using accounting changes that added $585 million to 2002 profits.

GE paid $50 million to settle the case.

That should have told investors everything they needed to know. You cannot trust a management team with $700 billion in borrowed money when it lies about its own earnings. A disaster was only a matter of time. (And yes, I knew it at the time – I told investors in 2010 that GE would soon collapse in an accounting disaster.)