In my investing spreadsheet, I have hidden all rows except my dividend income that is updated each month. It is the only thing I look at. My dividends cover my bills, grow at close to 10% each year and I don't know or care what the market is doing. Sleeping well at night is far from pointless.
Exactly. The guys who consider dividends pointless are rich people with many different income streams, any one of which would be enough to live on comfortably. For them, a stock is something they buy, wait a long time for it to appreciate significantly, then sell it for the money to buy something big like a yacht or their fifth home. For most of us, stocks are a way to slowly build up an income stream during good times to live off of during bad times or simply retirement. In a way, it's a method to slowly buy a business while doing our nine-to-five job. A business that will eventually allow us to quite that nine-to-five job. There is a huuuuge difference between how the rich view stocks and how the rest of us view stocks. A huge difference between, "I'll buy this stock, wait ten years, then sell it and buy a yacht" and "my job pays well, but I hate it, so I'll DCA into this dividend stock for 25 years and then retire or at least switch to some relaxing part time job while the dividends pay most of my bills."
@@scottcampbell7944 If a company buys back 4% of its shares a year (like Berkshire Hathaway that does not pay a dividend, or AAPL that does pay a dividend), it is dividend by proxy You just need to sell some shares. Total returns matter.
@@purplerain7376 Yes and no. Dividends go to you. Stock buybacks go to sellers. Everyone else gets paper gains. Paper gains can be ephemeral in a business reversal. Given the average tenure in the SP500 is down to 17-18 years, chances are pretty good that the large majority of your holdings will have failed in 35 years, diversified or not. Profit should be realized eventually, and while deferred gratification can be a great thing, one cannot defer forever. Today is also a very good day for yield. Some dividends ensure that is the case.
I started investing in the stock market because of dividends. What matters, in my opinion, is that if you invest and earn more money in addition to dividends, you will be able to live off of dividends without selling. It implies that you can pass that on to your children, giving them a head start in life. I've invested over $600k in dividend stocks over the years; I continue to buy more today and will continue to do so until the price lowers even further.
It's always inspiring to hear from a veteran investor who has weathered the storm and come out on top. When your portfolio turns from green to red, it might be unsettling, but if you have invested in great companies, you should just keep adding to them and stick with your plan.
I wholeheartedly concur, which is why I appreciate giving an investment coach the power of decision-making. Given their specialized expertise and education, as well as the fact that each and every one of their skills is centered on harnessing risk for its asymmetrical potential and controlling it as a buffer against certain unfavorable developments, it is practically impossible for them to underperform. I have made over 1.5 million dollars working with an investment coach for more than two years.
@James Cooper There are many financial coaches who excel in their profession, but for the time being, I employ Ruth Loralann Brennan because I adore her methods. You can make research and find out more.
I used to get excited when I heard the anti-dividend narratives. Now I reach for my investment journal, look at the new high I've achieved in projected annual dividends and go for a bike ride. Thanks to dividends, I'm retired now.
I saw a video that convinced me into stock trading and investments as profitable alternative sources of income. Unfortunately, I have been down ever since. Next time, I will spend my money on myself first before considering whether I will invest or not.
This was a good overview of dividend investing. I’m a huge fan of dividend growth investing but retiring on dividends alone is a very high bar to set because of cash flow -- I retired much earlier than on dividends alone by putting half my money into rental units and individual growth stocks.
Yes, I agree with you; so long risks are calculated and the right strategies are put in place, you’d rake it in. My portfolio was underperforming for a long while, I was on and off the market severally after a huge loss until I touched base with an investment-adviser who was recommended my my colleague, she devised an investment structure that matched my goals and financial structure, it’s been 3years investing through her guidance and I’ve gained over $850K+ net profit.
The Fin. Advisor guiding me through the crazy market is Jane Irene Sawyer, feel free to look her up. her requisite deets are very much Accessible to the public.
Thank you for the video, I agree with your points but it did completely miss the original question and ultimately argued for the irrelevance of dividends. The comment you addressed argued that dividends aren’t an efficient way of returning capital to investors because they aren’t necessarily tax efficient (wherever the commenter is from) or, at least, argues that dividends take away the from the investor’s ability to efficiently recognize taxable income. Yes, a business is only valuable if it can return cash to the investor and yes, a company is destroying shareholder value if it can’t earn more than it’s cost of capital. You perfectly explained why a bad dividend policy is an issue but not whether a dividend verse a buyback is better (the original question from my understanding of it). The implication of the original question is that a dividend by itself doesn’t tell you where a company is in the roic/roe chart you drew so by your own example, why is a dividend relevant? Why would the act of paying a dividend mean a company is managing its capital efficiently? The only local conclusion is that dividends are irrelevant, although you have another great video explaining the emotional value to investors of dividends.
I agree with you to some extent. I believe the real money in investment will have to be made as most of it has been in the past, not out of buying and selling but of owning and holding securities, receiving interest and dividends and increases in value. It’s that easy…..
All I can say is I loved my dividends these last two years so I could reinvest them in their discounted shares. In the end, I have a mix of both, and I don't think either one is right or wrong.
Thats right. Your choice. Doesn’t matter your strategy. Truth is, the stock doesn’t care about your strategy. Buy good companies at the right price. Don’t limit yourself.
Interestingly, using the scenario in his video: if your stock did go to zero, you'd have lost the principal and reinvested dividends, but still paid CG tax on the dividends. Imagine an asset going to zero and still paying taxes on "gains."
@@kslay5665 Over the last 25 years, this has never happened to me. But I did watch thousands of people lose millions in Bitcoin and Meme stocks over (edit to the correct word) the last year.
@@52soccerstar Hard to explain, but the research I do is extensive, but at a minimum the stock needs to have a moat and dividend growth (I hold these forever). For trading, good financials and quantitative (hold for at least a week). For most people ETF or index funds are better. Those that do bad in the market don't research, try to time the market, and aren't patient. Just because you can buy a stock doesn't mean you should.
Thanks for the video and the great food for thought! Up to now all of my investments have been in the company 401k which basically has a risk slider, and as I am young(ish) I've just maxxed out the risk bar, which still seems pretty conservative by my standing. Then in my Roth it is the same idea where until I hit a specific dollar amount, it is just a robo advisor with a risk slider, and as those funds have an even longer runway we just max the slider there too. But now I've finally started a nonretirement account and... Oh man... The options are literally overwhelming! lol. Longer term, the best opportunity is probably going into growth stocks. But the purpose of the fund is something that can be drawn on and converted to cash flow if needed at a moments notice. So in that case if I was invested in growth stocks, I would have to sell and convert to dividend stocks which would be a taxable event, and then pay taxes on the income stream. No taxes until the conversion, but considering I would want to do a conversion because of a bad time, it would be the worst time to owe a large tax bill. So for that reason I'm going all in on divided stock investing for the account. Let it drip into itself and take the yearly income tax hit. And if/when that bad day comes, convert from drip to cash flow without any drama or penalty. And if that bad day never comes (ha! Fat chance!) then it is still going to reinvest and grow at a decent rate, and hopefully less volitility than nondividend stocks would. It's my first time realizing at a deeper level why investing advice is so dangerous. The correct answer for my personal situation and goals isn't the same as the right answer for the public at large. Even the goals for my nonretirement funds that I may need to pull from in 5 years is different from funds in my HSA which may have a similar time horizon but with a different tax structure, and that is different from my 401k that will be tapped in 25-30 years, and different from my Roth funds which may not be touched for 40 years. Different goals for different vehicles. Different vehicles for different goals. If I had a huge income and few life risks, my goals would be different. Having a more medium income and major health risks in the family means less raw optomization and more requirements for flexibility. It's been fascinating to learn about!
I don't want to depend only on my salary any more when others are making profits investing in crypto and stocks. I'm thinking about investing any suggestions....?
She is also my personal trader, crypto analyst and account manager. With an initial invested capital of $7000,it yielded returns of over $35000 within two weeks of trading. I was really impressed.
Great explanation and something to look at when analysing stocks. Dividends and investment differ depending on life-stage. If you are young, high ROE and opportunity to invest would be the way but when you get older I think individual cashflow ie dividends become more important.
Thanks - I appreciate your effort at maintaining the integrity of the channel as well as the meaningful content. I'm in such a low tax bracket that tax on dividends is a non-issue. For me, dividends from my SWAN investments are the same as having my cake and eating it, too. I'm 66, the income from 80% of my portfolio is for living/reinvesting, safe, some growth, long term. The rest growth, more risk, more active trading. I don't like to sell my income positions unless it's built in to sell enough eventually to cover the original cost. It's not a one or the other issue - it's a blend depending on investing goals and the company.
Dividends are like a rental property. Once the dividends payoff the property it is 100% passive income no matter what the stock price does as long as the rental income continues to flow into the bank account
Really enjoyed this video. Thank you for all the content you provide. I follow closely, and it helps me think through my investing decisions. Keep up the good work. Two questions: Do shareholders have any claim to assets of a business that has stock price go to zero? How do stock shareholders claims to the business differ from a bond holders claim to the business?
A dividend is important because it shows a companies responsibility to its shareholders. It’s the same reason people stay at employers who consistently give raises and year end bonuses, they’re allowing you to grow with them and incentive to continue investing in them. It also likely means they’re not being too risky or foolish with their future business plans or with the revenue they re-invest back into operations because they need to post consistent profits while accounting for paying out the dividend that shareholders expect. I’d argue people who don’t care about dividends aren’t value investing but looking to turn profits and grow quickly, which is okay. But that gain is only recognized when you sell off your shares in that stock, instead of being allowed to keep it growing and still getting paid year over year.
This was Buffett & Munger 101. Thank you! :) Dividends only matter if the company can't redeploy earnings at a rate of return greater than the generally available market rate. It's the FCF + growing retained earnings that matter.
here in Australia we have whats known as " dividend imputation" . What this means is there is no double taxation on dividends , PLUS if your marginal tax rate is less than company tax ( 30%) then you get a refund for the difference . That means many retirees get cash back from the govt as their tax rate is low. So in the USA a generous div rate might be say 3% but here we are talking 6% and above . So here, many people love their dividends !
I try to think: Invest in an idea that give me return of (cashflow) capital, while waiting for return on (market value) capital. Those businesses are often in a lifespan where oppurtunity is not yet saturated and can both pay a small but growing dividend, and still invest back into the business to grow. Get rich slow and steady and use time as the key element. Thank you for some well thought out, and simple to understand content. Have a great weekend.
I‘m usually a very careful person, taking huge risk with investments is not my style. I love dividends cause every dividend payment is very rewarding and it makes me accept market drops cause I‘m buying more of my favorite businesses. At some point I don‘t have to think about which stock to sell, I can collect dividends and enjoy :)
A company going down to 0 at some point as a given is huge assumption to make. Bell Telephone Company being a counter example for that assumption for a multiple lifetimes lasting business. Shareholder returns in forms of Buybacks is the equivalent return strategy that was totally ignored.
Which is interesting because you have all the top, sage worthy investors from Buffett to Lynch and Bogle all arguing the opposite. While dividends are not the end all, be all, they are of value... Building wealth is sometimes a slow, yet worth it journey..
Crazy this video was suggested as I just watched Ben Felix’s video arguing that dividends don’t matter. Thanks for your insights! Still buying dividend stocks. But not totally convinced how much the matter..
I was the same way dividends is the slow steady go not the get rich quick. 10,000 will bring in 300-500 a year in dividends not much but it’s the time and money in the market that helps. Like a really good savings account. I like my dividends now. And then most stocks will go up 5% a year in value so not to bad.
@@Jackofalltradesmastersofnone Yea I don't even look at dividends as a way of getting rich, I think it's just a nice way to supplement income/retirement in the future.
Stumbled upon this channel recently and it is one of the best if not the best on yt regarding investing. Shame it doesnt have more views and subscribers since the quality and the approach is top notch.
Excellent Video Nathan! This is one of the best explanations I've seen. As investors, we have the opportunity to invest in whatever risk/reward tolerance we want; some more than others. Understanding where companies sit on their matrix takes away a lot of frustration from investors. An investor's expectations are more in line with reality as you become an owner in a company. Keep up the great work.
Fantastic take on this subject Nathan! And I completely agree with you My question do you think the new tax law on the share buybacks will make companies pay more dividends?
Been using the same MacBook Pro for 12 years. Still going strong but can't update the OS any more, so I'm running on fumes, but I will ride it to the last day it works.
Perhaps in 10 years but possibly extremely useful now. I'm still using a 4th gen Intel cpu and I wouldn't exactly say my pc is 'worthless' (or you wouldn't be reading this).
I'm new to the idea of investing and this video is eye opening. With the information I had until now, I believed that dividend is the best way to go, but you have shown me that there is more to investing than just payouts. Thank you very much
A good example of dividends.. . I retired early and only invest in dividend growth ETFs. Thru all the ups and downs in the market this year, my portfolio has gone down less than half of the total market etf. However, I get monthly cashflow which pays all my expenses. I don't worry about market gyrations as I plan to hold my investments forever and add more if their is money left over.
Good for you! I am a dividend investor as well, also hoping for early retirement. I don't really plan on selling my investments, so the rise or loss of the share price doesn't really matter. What matters is the income stream those shares generate. Could I win the lottery by investing early in the next Amazon? Maybe but I doubt it, I'm not that clever. But it doesn't take too much smarts to invest in VIG or something similiar, and then go about my day without worrying.
Agreed, it really comes down to capital allocation. Dividends and share repurchases are great but only under the right conditions otherwise they can potentially hurt shareholder value by hurting the balance sheet or failing to adequately invest in the core business.
Suppose we could grow food on Mars. We can send robots there, they can plant the food, tend to it, and grow the fields. We expect this growth to continue, but we know that the area on Mars is finite, so it will eventually max out. If we never planned to harvest the fields, we might start doing stupid things like trying to figure out how to make elevated or orbiting fields to increase the area and optimizing angles to sunlight etc - things that will not really have any ROI, we might start frittering away our profits on desperate attempts to continue growth. This is how I view dividends. Early on in a venture, it may be the case that there is a lot of room in the market for growth, and so it makes sense to keep reinvesting to grow the venture. But that growth can not realistically go on without bound in most cases (a small handful of conglomerates are the exception). There comes a point where the market becomes saturated, and companies start frittering profits away trying to keep things growing unrealistically. That's when they *should* instead be paying dividends, and yes, always keep looking for improvements in efficiency. Stocks have no intrinsic value if they are just unharvestable fields on Mars.
Is selling shares during a market downturn (let's say you have to as that's how you fund your life) the same as receiving a dividend during a market downturn?
It certainly depends on your local tax laws, which is something to keep in mind when most financial videos are based in the US and you as the viewer is not.
I like to think divided is like a good savings account. Get 3% interest and hope the value of the company goes up over the years(don’t buy crappy companies or sell if they turn south in the long haul). Trading is like going to work. You put money in on Monday you pull it out on Friday and get a pay check. Over simplified but it sorta works for me. I do both but not as much trading for lack of time.
I think it is an element of trust. Would I be able to trust a manager or CEO to re-invest earnings in the business in a wise or prudent manner? Or would I prefer the dividend? After looking at the history of Enron, Worldcom, Bernie Madoff, etc.., I would prefer the dividend.
a refreshing take, too many times have i heard someone try to explain how dividends ONLY just lower the value of the stock. to which my response is always, you are assuming all the money that company made was properly reinvested and made a good rate of return and not just flushed down the preverbal toilet. it's also often the case that a stock can be valued more because it pays consistent dividends, and if it were to suddenly stop for whatever reason, the price would probably fall as investors would sell stock. Stock price is what people are willing to pay. and if a stock pays No dividends, you are counting on someone else int eh future willing to pay more for the stock, not necessarily that the balance sheet just happens to look good..
This is all from the perspective of the company. I think the question is more for the investor. Will I get more returns in the long run if I buy and hold dividend or not. The answer will be no since you don't have the compound interest. But yes, it's nice to get some cash each month to cover some expenses. But this effectively taking money out of your portfolio.
I love this channel. Great work, Nathan! I'm learning a lot. 0:44 Are some dividends harmful? Bad management is harmful. Decisions by management to pay out unsupportable dividends over the long term are harmful. On the other hand, management that chooses to try to maintain a sustainable and _consistent_ dividend despite the market's ups and downs, or the share price's ups and downs, is demonstrating a financial philosophy that includes prioritizing income (an interest of some investors) and focusing on long term stability. That's not the only right way to manage a company. But there's also nothing wrong with it. Selling shares to generate income means an investor is at the mercy of the short term movements of the market. Dividends provide a certain degree of stability to counterbalance that. Also, a lot of random and even irrational factors affect the daily share price fluctuations. So it's simplistic to say that having no dividend and putting that money back into the business is necessarily reflected 100% in the share price. Also when valuing two businesses to determine good share prices, if business 1 pays no dividend then the good price may be higher compared to business 2 which pays a dividend. But that's because the person evaluating the two businesses is also factoring in the dividend income from the second business, and if being thorough about it, considering the tax implications as well.
Thanks a lot! I’m glad you’re finding it helpful. The responsibility of the managers, imho, is to maximize the long-term value to shareholders. They should do the best they can towards that, so if they have some 30% ROI projects, then I’d much rather they not pay a dividend and reinvest that. If it’s 10%, then yeah, maybe the consideration should be more towards investor preference because we can reinvest the dividends ourselves and make something like 10%. Re: the selling into down markets, I definitely see your point. I’d have to think more about whether the dividend was truly protective in a bear market or not vs. a responsibly allocated non-dividend payer (not many of those!) I think you would technically be “selling” a bit anyways with the dividend since it does come out of share price (makes sense, the company is transferring money out of their checking account so the balance sheet is worth less post dividend). So while your share count was unchanged, the value of the shares was transferred to you. So, on the day of transfer, I think you would still have net zero impact. Actually, I got it. As I wrote this, I realized that what changed in a down market is the return you could get by reinvesting dividends. Rather than earning 10%, you could earn 15% or maybe close to 20% by buying in a bear market. So, yes, that means companies should pay out more dividends and not reinvest in projects that have a 10-20% ROI because you, as the investor, could earn more. Thanks for helping me think through that! I’ve never made that connection before, but I think you’re right about dividends!
@@NathanWinklepleckCFA Thanks for the thoughtful reply! I'm glad to see I'm on the right track because I definitely don't have your experience. A lot of factors affect share prices on a daily basis, beyond just a rational valuation of a company's condition. Some of the factors aren't entirely rational and some are random. So while over the long term, "on average", share prices may reflect a company's value, in the short term they will diverge from it. If a company is being managed for sustainable growth, a consistent dividend can dampen some of that volatility. That's how it appears to me. I'm probably not using the financial jargon entirely correctly but hopefully the concept is clear. I'm not retired yet but I will be in a few years. So I've still got all dividends being reinvested. But when I'm ready to retire the consistent dividends will be important, and not having to sell shares to generate income, and thus being subject to the daily vagaries of share prices , is an appealing prospect. I'll just add I'm definitely in agreement with your 30% ROI idea. That makes total sense.
Another great educative video. “You should buy great business” as Mr. Buffett said many times. By great business is meant great Cash Flow and high Returns on Invested capital. Thank you!
This is well positioned and clear thinking. Obviously total return over the investment horizon is what matters and that's some combination of allocating the business capital in the wisest possible ways over the long term and as the business it eviction l economic environment changes that allocation strategy can adjust. Dividends and consistent and sustainable dividend growth compounding is absolutely a beneficial strategy for investors and while I want some companies to allocate on my behalf and generate outsized returns with that capital, I also want some of my portfolio to generate capital that then I can decide where to allocate best for my goals.
Excellent Video! I think I understand what you are saying, and your explanation makes sense, especially in the later part of the video with the four quadrants. So, it comes down to individual businesses and their finances and opportunities. There is not a "one size fits all" answer. Thank You for the very last part of your video where you tell people to be civil and that you are not afraid to kick them off the channel. PERFECT!!! More channels should do the same. We can all have discourse, but we should be polite and civil about it.
Dividends can definitely make a retirement easier by making up a percentage of the corpus as increasing income. I'm from India and the dividend yield is relatively low.
Nathan. At age 74, we own a beautiful pool home in arizona. It has a 2.25% Apr mortgage with PITI of $1400. Our monthly dividend total is $1550 per month. So we consider our home free. Because the total value of those dividend stocks should be intact once the mortgage becomes amortized the home itself was at no nominal cost over time.
Do note that for European investors Dividends are usually far more appealing, especially if you have a treaty with the USA such as the w8ben. My capital gains tax rate is 28% . My American dividend Tax rate is 15%. Yep, Dividends > Capital gains.
Love the video. Would have to say that dividend investing is fairly new, so I found the ROE/opportunity matrix very helpful. I own some aristocrats and I love them ❤. I do however own some low dividend paying stock because they are more or less a monopolist (asml) in their field and able to be develop products at higher speed than competition, if any. So what do you think about this choice? Stock prices would be the only gain assuming they will hang on to this strategy for a long time.
Re: 6:37 One way that springs to mind is if the business happened to carry no debt with only common shares outstanding and also had a significant number of sellable assets at the time of closure. To stick with your example, if you had a successful YT channel humming along and earnings were 100% reinvested into the business, at least some portion of that would likely be in tangible assets which would retain value even if YT shut down or stopped sharing ad revenue with creators or whatever. A high end computer, professional grade studio equipment and maybe even backdrop decor items could likely be liquidated into a decent payout if the only competition is against, say, a 3% div yield across 10Y. It feels a bit silly framing this discussion around something like a YT channel which obviously does not trade publicly on an exchange, but just a thought.
Not just that but simply don’t invest in one company because the likelihood of it failing is high (only a handful of companies still exist from history today). You invest in 500 companies via low cost index funds.
Very well presented. And you didn’t even touch on how different investors seek different return options, and dividends can matter greatly for certain types of investors. This ‘dividends are bad’ theme is making the rounds in Finance UA-cam. Truly thoughtful challenges or fresh explorations of what is traditionally considered acceptable is a good thing to do. But…Lemmings.
My thoughts are that dividends or growth stocks are differents but both are fine. Dividends stocks tend to be less volatiles than growth stocks. But growth stocks can grow higher than dividends stocks. I think both are fine for your portfolio. Personnally, i buy and sell growth stocks on a short term time to reinvest the money into dividends stocks later. I've always done it. The 50/100 dollars value i take goes into dividends stocks. And so on year after year. I use grow stocks to go faster on dividends growth
Something that I think those opposed to dividends incorrectly assume is that the value of a company is directly correlated to it's share price. If apple pays out 100m in dividends, yes in theory the company is value 100m less valuable, but this doesn't guarantee that the share price will neatly reflect this the next day.
High growth companies often come with the huge swings in prices, not always. Some of us feel more comfortable investing is stable lower volatility. Yes it’s much slower, but still works. Investing in both ways works. I do have a few stocks that don’t pay out dividends that I’m hoping will grow quickly before I retire in about 15 years.
Through the years, I’ve learned there is no such thing as stable companies. These boring, stable dividend companies, i have over 200% return in because they are not stable.
With interest rates increasing the importance of profitability increases IMO. In other words, capital is reallocated to the higher probability of success rather than the speculative enterprise.
Dividends or No Dividends entirely depend on WHY you are investing in the first place. Most would fall into a "balanced bucket", so companies with growing dividends AND growing EPS (preferably with share buybacks) over the years will be your best bet as investors.
So basicly if you are young you should invest in growth, but if you are about to retire you grab the dividend stocks, assuming they bring more stability.
Hi Nathan, very interesting perspective and great content, you clearly know your stuff. However I disagree with you. In my view it is irrelevant if a company pays out a dividend or buys back their shares. Both produce an equal return for the investor, either in cash or the form of a direct stock increase. How do you view this? I still believe dividend firms are usually good to invest in since these are usually value firms that invest conservatively, scoring high on Fama-Frenchs Five Factor Model, on the HML and CMA dimensions. The fact, that they pay a divided, however, is not a good way to target these dimensions, IMHO. What do you think about this?
I LOVE dividends! They provide control and lock in gains which is very valuable on its own. The point about the possibility of a company going to zero means you WILL have to sold growth stocks in the end which again triggers a taxable event.
While I do agree that there is a time for a company to pay dividends, what I don't like is the attitude of some companies to keep paying dividends no matter what. Should a mature company with stable cash flows, few reinvestment opportunities and expensive stock price pay dividends? Yes. But it's not the only valid way of creating shareholder value. Why? Because if they instead decide to reinvest and grow, once that company reaches maturity it will be able to pay a much higher dividend in the future. But by the time that company gets there, the stock price is no longer as cheap as it was during its earlier growth phase. The dividend yield on your initial investment will likely be higher for those that got in a lot earlier at a cheaper price. That's why I think including non dividend growth stocks in a good idea for those who still have a long way to retirement.
The other question is is it better to pay dividends or do buybacks. Both might drive up the stock value. Something to do a video on and why one approach is better than the other.
They always do buybacks when the price is too high, thus have little impact on the price and becomes overwhelmed by sentiment. And they’re not regular so nobody cares becuas they cannot be calculated long term. Buybacks are mostly a waste of time. Stable dividends no matter what are best.
I'll admit that I am MOSTLY just a dividend investor but in some areas like energy and tech stocks I need growth stocks. For example Intel pays a dividend but Nvidia is still a good investment opportunity in the same comparison field
Guess I'ma newbie because I basically think if there is no dividend there is no point. I don't care what the Fancy Pants say. but if the dividend is irrelevant, it misses the point. I'd rather have the $500 in my pocket to do stuff I want to do rather than in the business. Down pay me a dividend that will bankrupt the company though. Pay me a dividend that allows the business to grow and for me to get some $$
IMHO, dividends matter. I don't remember what study it was, it's old but kind of famous, but it showed that the best returns over long periods included reinvested dividends. As a fairly
Non-entrepreneurs do not understand how rare it is to have a business with high opportunity. And managers are paid huge compensation for spotting opportunity - or at least, making the public believe they found some. So, this agency problem leads to non-dividend companies falling short of their promises regularly. Long-term the stats show that a high dividend-paying portfolio does better.
Nah, I respect Ben Felix and suspect he would agree with this video. Dividend policy extremely important part of capital allocation-either good or bad.
You missed one. What if I took my dividends and reinvested it in another company, perhaps a growth company beating the ROI of my dividend company? That’s a key value of dividend investing. My choice. I can also spend it on beers and dates. Now _thats_ value. Point is, my choice.
You have the choice to sell shares of a non-dividend company to buy shares of another, you don't get more choice with dividends, you actually get less, because you don't choose the timing of your cash intake.
@@ex-muslimZafarSahil "total return" is something of a bad concept, because most of that return is unrealized gains - paper gains (or losses) that mean nothing until you sell, and can evaporate overnight. You may feel rich but there aren't actually any more dollars in your checking account. We have seen how once high-flying stocks can lose a third or more of their price. On the other hand there is something tangible about a dividend that hits your account every quarter. Those are real actual dollars that you can buy things with, without having to sell any shares.
Holding is never a good option now due to lost in cryptocurrency I will advise people should invest there money in other to make more profit in the trading market.
I am pretty annoyed by the taxes on dividends, and I think that even when a company does not have high opportunities in reinvesting, repayments of debt, buybacks, or even keeping it as cash reserve is probably a better allocation.
I make plenty on dividends and personally I'd prefer to not be paying taxes on them but I fully support taxation of dividends as well as capital gains tax and other wealth-based taxes. Wealth inequality is a real and dangerous problem for freedom. Billy Billionaire should have his income taxed at the same rate as Joe Average.
@@brokenrecord3095 I agree on capital gains taxation as well, however on dividends is pretty bad if you are not investing in your residence country. For example, for most European investing in US stocks they will pay 15% in the US and something between 25 to 35% in their country. So, at the end you are paying 40 or 45% taxes, while on capital gains it will be only 25 to 30%. So, I hope this makes it more clear of why I'm not a fan of dividend on international company, but I would be more interested if the company is in my residence country because the taxation will most likely be the same of the capital gains.
@@tomuno1 Well, I think it's a fine thing for Europeans to be investing in our country but what they pay in taxes is none of my concern. If they find the taxes too onerous, they will probably invest their euros elsewhere. But their taxation is their own business and shouldn't concern us, certainly not as much as American taxation concerns us. Me, I'm an American and I pay a marginal tax rate of 24% on my salary- plus soc. sec taxes and medicare taxes, call it 31% of my next dollar gone. Meanwhile the highest rate on qualified dividends is only 20% - and dividends are not subject to FICA (and in my town not subject to local taxes, so that's another 2.5%) . Given that only the very wealthy make the half million or so in dividends to hit that 20% dividend tax, I think it's wrong that millionaires who make millions by doing nothing more strenuous than cashing dividend checks are taxed a third less percentagewise on every marginal dollar than people who work all day such as myself and (perhaps) you. At least hit them with the same FICA taxes as workers pay (and eliminate the $147,000 social security limit while we're at it). Let's keep social security solvent for a while, nobody wants to see grannies eating cat-food because they're broke.
@@brokenrecord3095 That is exactly what I am saying, as long as you have no international investments that is fine but when you try to have international exposure to manage your risk, then taxation on dividends can become pretty steep. So, personally I prefer to invest in low dividend company internationally, and nationally, I do not care much if the returns are from dividends or appreciation.
Of course he is right, in the world of academic theory and simplifications required for analyzing that theory. Do you know the difference between theory and practice? In theory there is no difference. 😂 In the real world, dividends have many advantages as shown by actual historical data. In addition some investors (myself included) find that dividends are psychologically advantageous, and since investing is primarily psychological that means dividends matter.
You’re right man. Any long term dividend investor knows all the old arguments. And they’re all true. But thats besides the point. It means dividend investing went over their head and they don’t know the secret.
1.) When a company reinvests money into itself, it hopes to generate growth, but just because a company reinvests money into itself at one stage in it's life cycle, doesn't mean it will ALWAYS reinvest excess profits into the business. I think that this is the flawed assumption you're making with your first point. Companies almost always pivot from growth to rewarding shareholders with consistent profits at the mature stage of their life cycle. 2.) How is a dividend ever better then buying back shares, considering that both achieve the same net result, but paying a dividend incurs tax penalties for the recipient?
Hello Nathan, I agree that companies with high opportunities and high ROE will grow their revenue much faster if not distributing any dividend. Ideally, for the benefit of the company itself and its managers, such a company should never pay any dividend. But from an investor standpoint, outside the stock market, who would invest in a company without having any control nor any dividend? Isn’t it exactly the definition of a Ponze? An investment in which only the contribution from new investors can give you any benefit or simply give you your money back ?
i guess the question is valid, why should i buy dividend stocks instead of just a market-etf. so we have the market with 12% growth vs high growth/low dividend stocks like visa and then some low growth high dividend stocks(maybe intel with 5%) but do they really come close to 12%? I rather take my 12% on top of my 12% this year than reinvesting 5% in some value trap
Yes, dividends are definitely irrelevant. Everyone continue to sell your dividend stocks and drive the yields even higher please. Speed up the process of me retiring on my irrelevant, passive, tax advantaged income stream where I never have to touch the principal or worry about sequence of returns risk selling in a bear market to pay my bills. Sell all your dividend stocks. I'm automatically purchasing SCHD daily into perpetuity, so I'll help provide some liquidity to get rid of your pesky dividend stocks.
Dividends are a good way for companies that don't need the cash for the business to grow their opportunities. Like if they already have a high ROE and their debt on a newly developed opportunity is done. That is where you take the dividends and reinvest them. They are actually the source for half of the returns in stocks. Long term if reinvested are a great way to build wealth. Cause what I want to do with Dividends is move it to a higher return on equity. One of the things in the next 10 years is going to be smart stocks that are going to basically remove traders but also be able to have a 10 year holders only dividend where you have to have had held the stock for 10 years to gain the dividend.
i dont understand, at the end for the investor, AS ALL, nothing change, the value of the stock its how many money the investor put in the market, so if the market cap is 5b this is the amount, if the stock will go to zero the dividend only change the amount of money do you loose, the only exception is unique, the total dividend you make in 10y its more than the amount of your investment
At 6:30 Investors collectively could earn more than $0 if a stock buyback took place. For example if Peloton goes to 0 but had bought back 100 shares for $20 each then shareholders would have made $2000 collectively.
In my investing spreadsheet, I have hidden all rows except my dividend income that is updated each month. It is the only thing I look at. My dividends cover my bills, grow at close to 10% each year and I don't know or care what the market is doing. Sleeping well at night is far from pointless.
Well said.
Exactly. The guys who consider dividends pointless are rich people with many different income streams, any one of which would be enough to live on comfortably. For them, a stock is something they buy, wait a long time for it to appreciate significantly, then sell it for the money to buy something big like a yacht or their fifth home. For most of us, stocks are a way to slowly build up an income stream during good times to live off of during bad times or simply retirement. In a way, it's a method to slowly buy a business while doing our nine-to-five job. A business that will eventually allow us to quite that nine-to-five job.
There is a huuuuge difference between how the rich view stocks and how the rest of us view stocks. A huge difference between, "I'll buy this stock, wait ten years, then sell it and buy a yacht" and "my job pays well, but I hate it, so I'll DCA into this dividend stock for 25 years and then retire or at least switch to some relaxing part time job while the dividends pay most of my bills."
The magic of compounding really loses its appeal when you are over 70 yrs old. Income now is more important.
@@scottcampbell7944 If a company buys back 4% of its shares a year (like Berkshire Hathaway that does not pay a dividend, or AAPL that does pay a dividend), it is dividend by proxy You just need to sell some shares. Total returns matter.
@@purplerain7376 Yes and no. Dividends go to you. Stock buybacks go to sellers. Everyone else gets paper gains. Paper gains can be ephemeral in a business reversal. Given the average tenure in the SP500 is down to 17-18 years, chances are pretty good that the large majority of your holdings will have failed in 35 years, diversified or not. Profit should be realized eventually, and while deferred gratification can be a great thing, one cannot defer forever. Today is also a very good day for yield. Some dividends ensure that is the case.
I started investing in the stock market because of dividends. What matters, in my opinion, is that if you invest and earn more money in addition to dividends, you will be able to live off of dividends without selling. It implies that you can pass that on to your children, giving them a head start in life. I've invested over $600k in dividend stocks over the years; I continue to buy more today and will continue to do so until the price lowers even further.
It's always inspiring to hear from a veteran investor who has weathered the storm and come out on top. When your portfolio turns from green to red, it might be unsettling, but if you have invested in great companies, you should just keep adding to them and stick with your plan.
I wholeheartedly concur, which is why I appreciate giving an investment coach the power of decision-making. Given their specialized expertise and education, as well as the fact that each and every one of their skills is centered on harnessing risk for its asymmetrical potential and controlling it as a buffer against certain unfavorable developments, it is practically impossible for them to underperform. I have made over 1.5 million dollars working with an investment coach for more than two years.
@James Cooper There are many financial coaches who excel in their profession, but for the time being, I employ Ruth Loralann Brennan because I adore her methods. You can make research and find out more.
I used to get excited when I heard the anti-dividend narratives. Now I reach for my investment journal, look at the new high I've achieved in projected annual dividends and go for a bike ride. Thanks to dividends, I'm retired now.
I'm on my way hope I can retire in ten years
King comment
Yep, the snowball is great isn't it?
I saw a video that convinced me into stock trading and investments as profitable alternative sources of income. Unfortunately, I have been down ever since. Next time, I will spend my money on myself first before considering whether I will invest or not.
Why picking random stocks if you are not ready to research on them. Again, I will advise you get a guardian if you are a newbie.
A dividend is a bird in the hand.
This was a good overview of dividend investing. I’m a huge fan of dividend growth investing but retiring on dividends alone is a very high bar to set because of cash flow -- I retired much earlier than on dividends alone by putting half my money into rental units and individual growth stocks.
Yes, I agree with you; so long risks are calculated and the right strategies are put in place, you’d rake it in. My portfolio was underperforming for a long while, I was on and off the market severally after a huge loss until I touched base with an investment-adviser who was recommended my my colleague, she devised an investment structure that matched my goals and financial structure, it’s been 3years investing through her guidance and I’ve gained over $850K+ net profit.
The Fin. Advisor guiding me through the crazy market is Jane Irene Sawyer, feel free to look her up. her requisite deets are very much Accessible to the public.
@@natureethusaism7720 yes but you don’t indicate the amount of investment, $850k on $3 million.
Thank you for the video, I agree with your points but it did completely miss the original question and ultimately argued for the irrelevance of dividends. The comment you addressed argued that dividends aren’t an efficient way of returning capital to investors because they aren’t necessarily tax efficient (wherever the commenter is from) or, at least, argues that dividends take away the from the investor’s ability to efficiently recognize taxable income. Yes, a business is only valuable if it can return cash to the investor and yes, a company is destroying shareholder value if it can’t earn more than it’s cost of capital. You perfectly explained why a bad dividend policy is an issue but not whether a dividend verse a buyback is better (the original question from my understanding of it). The implication of the original question is that a dividend by itself doesn’t tell you where a company is in the roic/roe chart you drew so by your own example, why is a dividend relevant? Why would the act of paying a dividend mean a company is managing its capital efficiently? The only local conclusion is that dividends are irrelevant, although you have another great video explaining the emotional value to investors of dividends.
Well for me, currently being retired and receiving about $30k in dividends I can say not only say dividends are awesome but it is KING.
I agree with you to some extent.
I believe the real money in investment will have to be made as most of it has been in the past, not out of buying and selling but of owning and holding securities, receiving interest and dividends and increases in value. It’s that easy…..
All I can say is I loved my dividends these last two years so I could reinvest them in their discounted shares. In the end, I have a mix of both, and I don't think either one is right or wrong.
Thats right. Your choice. Doesn’t matter your strategy. Truth is, the stock doesn’t care about your strategy. Buy good companies at the right price. Don’t limit yourself.
What stocks did you invest in?
Interestingly, using the scenario in his video: if your stock did go to zero, you'd have lost the principal and reinvested dividends, but still paid CG tax on the dividends. Imagine an asset going to zero and still paying taxes on "gains."
@@kslay5665 Over the last 25 years, this has never happened to me. But I did watch thousands of people lose millions in Bitcoin and Meme stocks over (edit to the correct word) the last year.
@@52soccerstar Hard to explain, but the research I do is extensive, but at a minimum the stock needs to have a moat and dividend growth (I hold these forever). For trading, good financials and quantitative (hold for at least a week). For most people ETF or index funds are better. Those that do bad in the market don't research, try to time the market, and aren't patient. Just because you can buy a stock doesn't mean you should.
I am a retired accountant, great job of explanation! Keep up the good work.
Thanks for the video and the great food for thought!
Up to now all of my investments have been in the company 401k which basically has a risk slider, and as I am young(ish) I've just maxxed out the risk bar, which still seems pretty conservative by my standing. Then in my Roth it is the same idea where until I hit a specific dollar amount, it is just a robo advisor with a risk slider, and as those funds have an even longer runway we just max the slider there too.
But now I've finally started a nonretirement account and... Oh man... The options are literally overwhelming! lol. Longer term, the best opportunity is probably going into growth stocks. But the purpose of the fund is something that can be drawn on and converted to cash flow if needed at a moments notice. So in that case if I was invested in growth stocks, I would have to sell and convert to dividend stocks which would be a taxable event, and then pay taxes on the income stream. No taxes until the conversion, but considering I would want to do a conversion because of a bad time, it would be the worst time to owe a large tax bill. So for that reason I'm going all in on divided stock investing for the account. Let it drip into itself and take the yearly income tax hit. And if/when that bad day comes, convert from drip to cash flow without any drama or penalty. And if that bad day never comes (ha! Fat chance!) then it is still going to reinvest and grow at a decent rate, and hopefully less volitility than nondividend stocks would.
It's my first time realizing at a deeper level why investing advice is so dangerous. The correct answer for my personal situation and goals isn't the same as the right answer for the public at large. Even the goals for my nonretirement funds that I may need to pull from in 5 years is different from funds in my HSA which may have a similar time horizon but with a different tax structure, and that is different from my 401k that will be tapped in 25-30 years, and different from my Roth funds which may not be touched for 40 years. Different goals for different vehicles. Different vehicles for different goals. If I had a huge income and few life risks, my goals would be different. Having a more medium income and major health risks in the family means less raw optomization and more requirements for flexibility. It's been fascinating to learn about!
Very informative and well balanced video. Helped me to understand better when a company should or shouldn't pay a dividend, thanks Nathan!
I don't want to depend only on my salary any more when others are making profits investing in crypto and stocks. I'm thinking about investing any suggestions....?
She is also my personal trader, crypto analyst and account manager. With an initial invested capital of $7000,it yielded returns of over $35000 within two weeks of trading. I was really impressed.
Ever since I started investing with Ms Janet Lindsey I encore no losses with an initial investment of $10,000 and I made up to $24,000 weekly.
@Joe Bryan you can contact her with the Tele-qram handl 👇 .
Lindsey427
Within a year now I have taken my portfolio to 580k$ with her help. She works with every one in all parts of the world. I'm from Australia.
Great explanation and something to look at when analysing stocks. Dividends and investment differ depending on life-stage. If you are young, high ROE and opportunity to invest would be the way but when you get older I think individual cashflow ie dividends become more important.
Thanks - I appreciate your effort at maintaining the integrity of the channel as well as the meaningful content. I'm in such a low tax bracket that tax on dividends is a non-issue. For me, dividends from my SWAN investments are the same as having my cake and eating it, too. I'm 66, the income from 80% of my portfolio is for living/reinvesting, safe, some growth, long term. The rest growth, more risk, more active trading. I don't like to sell my income positions unless it's built in to sell enough eventually to cover the original cost.
It's not a one or the other issue - it's a blend depending on investing goals and the company.
Thanks for your video!
You didn’t mention buybacks… maybe in another video?
It still puzzles me to see companies having absurdly high div yields.
Dividends are like a rental property. Once the dividends payoff the property it is 100% passive income no matter what the stock price does as long as the rental income continues to flow into the bank account
Really enjoyed this video. Thank you for all the content you provide. I follow closely, and it helps me think through my investing decisions. Keep up the good work. Two questions: Do shareholders have any claim to assets of a business that has stock price go to zero? How do stock shareholders claims to the business differ from a bond holders claim to the business?
A dividend is important because it shows a companies responsibility to its shareholders. It’s the same reason people stay at employers who consistently give raises and year end bonuses, they’re allowing you to grow with them and incentive to continue investing in them. It also likely means they’re not being too risky or foolish with their future business plans or with the revenue they re-invest back into operations because they need to post consistent profits while accounting for paying out the dividend that shareholders expect. I’d argue people who don’t care about dividends aren’t value investing but looking to turn profits and grow quickly, which is okay. But that gain is only recognized when you sell off your shares in that stock, instead of being allowed to keep it growing and still getting paid year over year.
This was Buffett & Munger 101. Thank you! :) Dividends only matter if the company can't redeploy earnings at a rate of return greater than the generally available market rate. It's the FCF + growing retained earnings that matter.
here in Australia we have whats known as " dividend imputation" . What this means is there is no double taxation on dividends , PLUS if your marginal tax rate is less than company tax ( 30%) then you get a refund for the difference . That means many retirees get cash back from the govt as their tax rate is low. So in the USA a generous div rate might be say 3% but here we are talking 6% and above . So here, many people love their dividends !
I try to think: Invest in an idea that give me return of (cashflow) capital, while waiting for return on (market value) capital. Those businesses are often in a lifespan where oppurtunity is not yet saturated and can both pay a small but growing dividend, and still invest back into the business to grow. Get rich slow and steady and use time as the key element. Thank you for some well thought out, and simple to understand content. Have a great weekend.
I‘m usually a very careful person, taking huge risk with investments is not my style. I love dividends cause every dividend payment is very rewarding and it makes me accept market drops cause I‘m buying more of my favorite businesses. At some point I don‘t have to think about which stock to sell, I can collect dividends and enjoy :)
Thanks for sharing, Norman!
A company going down to 0 at some point as a given is huge assumption to make. Bell Telephone Company being a counter example for that assumption for a multiple lifetimes lasting business. Shareholder returns in forms of Buybacks is the equivalent return strategy that was totally ignored.
Which is interesting because you have all the top, sage worthy investors from Buffett to Lynch and Bogle all arguing the opposite. While dividends are not the end all, be all, they are of value... Building wealth is sometimes a slow, yet worth it journey..
Crazy this video was suggested as I just watched Ben Felix’s video arguing that dividends don’t matter. Thanks for your insights! Still buying dividend stocks. But not totally convinced how much the matter..
I was the same way dividends is the slow steady go not the get rich quick. 10,000 will bring in 300-500 a year in dividends not much but it’s the time and money in the market that helps. Like a really good savings account. I like my dividends now. And then most stocks will go up 5% a year in value so not to bad.
@@Jackofalltradesmastersofnone Yea I don't even look at dividends as a way of getting rich, I think it's just a nice way to supplement income/retirement in the future.
Perfectly described and laid out for us! thank you for the great content!!!
I have been trying to understand ROIC and capital allocation better and this is very helpful.
Stumbled upon this channel recently and it is one of the best if not the best on yt regarding investing. Shame it doesnt have more views and subscribers since the quality and the approach is top notch.
Excellent Video Nathan! This is one of the best explanations I've seen. As investors, we have the opportunity to invest in whatever risk/reward tolerance we want; some more than others. Understanding where companies sit on their matrix takes away a lot of frustration from investors. An investor's expectations are more in line with reality as you become an owner in a company. Keep up the great work.
Fantastic take on this subject Nathan! And I completely agree with you
My question do you think the new tax law on the share buybacks will make companies pay more dividends?
The camera and laptop would be borderline worthless in 10 years
Absolutely true! Depreciation, baby…
Been using the same MacBook Pro for 12 years. Still going strong but can't update the OS any more, so I'm running on fumes, but I will ride it to the last day it works.
Perhaps in 10 years but possibly extremely useful now. I'm still using a 4th gen Intel cpu and I wouldn't exactly say my pc is 'worthless' (or you wouldn't be reading this).
@@gregwessels7205 for you that is true, but to a potential buyer it most likely is... things are only worth what the market is willing to pay... ;-)
I'm new to the idea of investing and this video is eye opening. With the information I had until now, I believed that dividend is the best way to go, but you have shown me that there is more to investing than just payouts. Thank you very much
A good example of dividends.. . I retired early and only invest in dividend growth ETFs. Thru all the ups and downs in the market this year, my portfolio has gone down less than half of the total market etf. However, I get monthly cashflow which pays all my expenses. I don't worry about market gyrations as I plan to hold my investments forever and add more if their is money left over.
Good for you! I am a dividend investor as well, also hoping for early retirement. I don't really plan on selling my investments, so the rise or loss of the share price doesn't really matter. What matters is the income stream those shares generate. Could I win the lottery by investing early in the next Amazon? Maybe but I doubt it, I'm not that clever. But it doesn't take too much smarts to invest in VIG or something similiar, and then go about my day without worrying.
@@brokenrecord3095It also doesn't take too much smarts to invest in VUG and get much better returns.
Agreed, it really comes down to capital allocation. Dividends and share repurchases are great but only under the right conditions otherwise they can potentially hurt shareholder value by hurting the balance sheet or failing to adequately invest in the core business.
Suppose we could grow food on Mars. We can send robots there, they can plant the food, tend to it, and grow the fields. We expect this growth to continue, but we know that the area on Mars is finite, so it will eventually max out. If we never planned to harvest the fields, we might start doing stupid things like trying to figure out how to make elevated or orbiting fields to increase the area and optimizing angles to sunlight etc - things that will not really have any ROI, we might start frittering away our profits on desperate attempts to continue growth. This is how I view dividends. Early on in a venture, it may be the case that there is a lot of room in the market for growth, and so it makes sense to keep reinvesting to grow the venture. But that growth can not realistically go on without bound in most cases (a small handful of conglomerates are the exception). There comes a point where the market becomes saturated, and companies start frittering profits away trying to keep things growing unrealistically. That's when they *should* instead be paying dividends, and yes, always keep looking for improvements in efficiency. Stocks have no intrinsic value if they are just unharvestable fields on Mars.
Is selling shares during a market downturn (let's say you have to as that's how you fund your life) the same as receiving a dividend during a market downturn?
It certainly depends on your local tax laws, which is something to keep in mind when most financial videos are based in the US and you as the viewer is not.
I like to think divided is like a good savings account. Get 3% interest and hope the value of the company goes up over the years(don’t buy crappy companies or sell if they turn south in the long haul). Trading is like going to work. You put money in on Monday you pull it out on Friday and get a pay check. Over simplified but it sorta works for me. I do both but not as much trading for lack of time.
I think it is an element of trust. Would I be able to trust a manager or CEO to re-invest earnings in the business in a wise or prudent manner? Or would I prefer the dividend? After looking at the history of Enron, Worldcom, Bernie Madoff, etc.., I would prefer the dividend.
Present Value of an Annuity with start value, interest rate, and ending value. Excel has a function to compute this.
a refreshing take, too many times have i heard someone try to explain how dividends ONLY just lower the value of the stock. to which my response is always, you are assuming all the money that company made was properly reinvested and made a good rate of return and not just flushed down the preverbal toilet. it's also often the case that a stock can be valued more because it pays consistent dividends, and if it were to suddenly stop for whatever reason, the price would probably fall as investors would sell stock. Stock price is what people are willing to pay. and if a stock pays No dividends, you are counting on someone else int eh future willing to pay more for the stock, not necessarily that the balance sheet just happens to look good..
This is all from the perspective of the company. I think the question is more for the investor. Will I get more returns in the long run if I buy and hold dividend or not. The answer will be no since you don't have the compound interest. But yes, it's nice to get some cash each month to cover some expenses. But this effectively taking money out of your portfolio.
I love this channel. Great work, Nathan! I'm learning a lot.
0:44 Are some dividends harmful? Bad management is harmful. Decisions by management to pay out unsupportable dividends over the long term are harmful. On the other hand, management that chooses to try to maintain a sustainable and _consistent_ dividend despite the market's ups and downs, or the share price's ups and downs, is demonstrating a financial philosophy that includes prioritizing income (an interest of some investors) and focusing on long term stability. That's not the only right way to manage a company. But there's also nothing wrong with it.
Selling shares to generate income means an investor is at the mercy of the short term movements of the market. Dividends provide a certain degree of stability to counterbalance that.
Also, a lot of random and even irrational factors affect the daily share price fluctuations. So it's simplistic to say that having no dividend and putting that money back into the business is necessarily reflected 100% in the share price.
Also when valuing two businesses to determine good share prices, if business 1 pays no dividend then the good price may be higher compared to business 2 which pays a dividend. But that's because the person evaluating the two businesses is also factoring in the dividend income from the second business, and if being thorough about it, considering the tax implications as well.
Thanks a lot! I’m glad you’re finding it helpful. The responsibility of the managers, imho, is to maximize the long-term value to shareholders. They should do the best they can towards that, so if they have some 30% ROI projects, then I’d much rather they not pay a dividend and reinvest that. If it’s 10%, then yeah, maybe the consideration should be more towards investor preference because we can reinvest the dividends ourselves and make something like 10%.
Re: the selling into down markets, I definitely see your point. I’d have to think more about whether the dividend was truly protective in a bear market or not vs. a responsibly allocated non-dividend payer (not many of those!) I think you would technically be “selling” a bit anyways with the dividend since it does come out of share price (makes sense, the company is transferring money out of their checking account so the balance sheet is worth less post dividend). So while your share count was unchanged, the value of the shares was transferred to you. So, on the day of transfer, I think you would still have net zero impact.
Actually, I got it. As I wrote this, I realized that what changed in a down market is the return you could get by reinvesting dividends. Rather than earning 10%, you could earn 15% or maybe close to 20% by buying in a bear market. So, yes, that means companies should pay out more dividends and not reinvest in projects that have a 10-20% ROI because you, as the investor, could earn more.
Thanks for helping me think through that! I’ve never made that connection before, but I think you’re right about dividends!
@@NathanWinklepleckCFA Thanks for the thoughtful reply! I'm glad to see I'm on the right track because I definitely don't have your experience.
A lot of factors affect share prices on a daily basis, beyond just a rational valuation of a company's condition. Some of the factors aren't entirely rational and some are random. So while over the long term, "on average", share prices may reflect a company's value, in the short term they will diverge from it. If a company is being managed for sustainable growth, a consistent dividend can dampen some of that volatility.
That's how it appears to me. I'm probably not using the financial jargon entirely correctly but hopefully the concept is clear.
I'm not retired yet but I will be in a few years. So I've still got all dividends being reinvested. But when I'm ready to retire the consistent dividends will be important, and not having to sell shares to generate income, and thus being subject to the daily vagaries of share prices , is an appealing prospect.
I'll just add I'm definitely in agreement with your 30% ROI idea. That makes total sense.
Another great educative video. “You should buy great business” as Mr. Buffett said many times. By great business is meant great Cash Flow and high Returns on Invested capital. Thank you!
Spot on!
This is well positioned and clear thinking. Obviously total return over the investment horizon is what matters and that's some combination of allocating the business capital in the wisest possible ways over the long term and as the business it eviction l economic environment changes that allocation strategy can adjust. Dividends and consistent and sustainable dividend growth compounding is absolutely a beneficial strategy for investors and while I want some companies to allocate on my behalf and generate outsized returns with that capital, I also want some of my portfolio to generate capital that then I can decide where to allocate best for my goals.
Excellent Video! I think I understand what you are saying, and your explanation makes sense, especially in the later part of the video with the four quadrants. So, it comes down to individual businesses and their finances and opportunities. There is not a "one size fits all" answer.
Thank You for the very last part of your video where you tell people to be civil and that you are not afraid to kick them off the channel. PERFECT!!!
More channels should do the same. We can all have discourse, but we should be polite and civil about it.
Dividends can definitely make a retirement easier by making up a percentage of the corpus as increasing income. I'm from India and the dividend yield is relatively low.
Well said , the divys just keep coming. I sleep very well no matter what the market does.
Dividends are the way to go,especially when we are in bad economy and share prices fluctuate
Nathan. At age 74, we own a beautiful pool home in arizona. It has a 2.25% Apr mortgage with PITI of $1400. Our monthly dividend total is $1550 per month. So we consider our home free. Because the total value of those dividend stocks should be intact once the mortgage becomes amortized the home itself was at no nominal cost over time.
Do note that for European investors Dividends are usually far more appealing, especially if you have a treaty with the USA such as the w8ben.
My capital gains tax rate is 28% .
My American dividend Tax rate is 15%.
Yep, Dividends > Capital gains.
Wow. That’s crazy! I can definitely see why you would favor dividends.
As usual, another thoughtful presentation/video. Bravo! 👏.
Love the video. Would have to say that dividend investing is fairly new, so I found the ROE/opportunity matrix very helpful. I own some aristocrats and I love them ❤. I do however own some low dividend paying stock because they are more or less a monopolist (asml) in their field and able to be develop products at higher speed than competition, if any. So what do you think about this choice? Stock prices would be the only gain assuming they will hang on to this strategy for a long time.
The answer is yes, he’s right. Dividend yield doesn’t affect the value of a company.
Fantastic explanation 👏 this helps a lot with understanding the benefits of both options 🤓
Best argument ever for Dividends love it.
Re: 6:37
One way that springs to mind is if the business happened to carry no debt with only common shares outstanding and also had a significant number of sellable assets at the time of closure. To stick with your example, if you had a successful YT channel humming along and earnings were 100% reinvested into the business, at least some portion of that would likely be in tangible assets which would retain value even if YT shut down or stopped sharing ad revenue with creators or whatever. A high end computer, professional grade studio equipment and maybe even backdrop decor items could likely be liquidated into a decent payout if the only competition is against, say, a 3% div yield across 10Y. It feels a bit silly framing this discussion around something like a YT channel which obviously does not trade publicly on an exchange, but just a thought.
Not just that but simply don’t invest in one company because the likelihood of it failing is high (only a handful of companies still exist from history today). You invest in 500 companies via low cost index funds.
Very well presented. And you didn’t even touch on how different investors seek different return options, and dividends can matter greatly for certain types of investors.
This ‘dividends are bad’ theme is making the rounds in Finance UA-cam. Truly thoughtful challenges or fresh explorations of what is traditionally considered acceptable is a good thing to do. But…Lemmings.
Great content. Hope your channel revenue grows 1000% per year with zero additional investment
Agreed
Fantastic video, learned a lot. Keep up the great work. Cheers
Absolutely love your content. I absolutely love dividends and think it’s a great way to subsidize your income while in retirement.
Thank you!! And agree 💯
I am currently re-investing my dividends, but when I retire I plan to take them as payments.
If you like tulips, but lots of high priced stocks that don’t pay dividends.
My thoughts are that dividends or growth stocks are differents but both are fine.
Dividends stocks tend to be less volatiles than growth stocks.
But growth stocks can grow higher than dividends stocks.
I think both are fine for your portfolio.
Personnally, i buy and sell growth stocks on a short term time to reinvest the money into dividends stocks later.
I've always done it. The 50/100 dollars value i take goes into dividends stocks. And so on year after year.
I use grow stocks to go faster on dividends growth
Something that I think those opposed to dividends incorrectly assume is that the value of a company is directly correlated to it's share price.
If apple pays out 100m in dividends, yes in theory the company is value 100m less valuable, but this doesn't guarantee that the share price will neatly reflect this the next day.
High growth companies often come with the huge swings in prices, not always. Some of us feel more comfortable investing is stable lower volatility. Yes it’s much slower, but still works. Investing in both ways works. I do have a few stocks that don’t pay out dividends that I’m hoping will grow quickly before I retire in about 15 years.
Through the years, I’ve learned there is no such thing as stable companies. These boring, stable dividend companies, i have over 200% return in because they are not stable.
No Dividend my no buy, except Bershire B, because they own companies that pay Dividends.
With interest rates increasing the importance of profitability increases IMO. In other words, capital is reallocated to the higher probability of success rather than the speculative enterprise.
Spot on
Dividends or No Dividends entirely depend on WHY you are investing in the first place. Most would fall into a "balanced bucket", so companies with growing dividends AND growing EPS (preferably with share buybacks) over the years will be your best bet as investors.
So basicly if you are young you should invest in growth, but if you are about to retire you grab the dividend stocks, assuming they bring more stability.
Hi Nathan, very interesting perspective and great content, you clearly know your stuff. However I disagree with you. In my view it is irrelevant if a company pays out a dividend or buys back their shares. Both produce an equal return for the investor, either in cash or the form of a direct stock increase. How do you view this?
I still believe dividend firms are usually good to invest in since these are usually value firms that invest conservatively, scoring high on Fama-Frenchs Five Factor Model, on the HML and CMA dimensions. The fact, that they pay a divided, however, is not a good way to target these dimensions, IMHO. What do you think about this?
I LOVE dividends! They provide control and lock in gains which is very valuable on its own. The point about the possibility of a company going to zero means you WILL have to sold growth stocks in the end which again triggers a taxable event.
*sell
Thanks for sharing, Bagel. Nice name by the way. ;)
I made it 40 seconds in....QUALIFIED dividends are tax advantaged
You made it to the comment then?
Great insights in rhe way company strategy of deploying capital and returns to shareholders.
Great video. This is one of the most insightful dividend videos of all time
Glad you liked it!
While I do agree that there is a time for a company to pay dividends, what I don't like is the attitude of some companies to keep paying dividends no matter what. Should a mature company with stable cash flows, few reinvestment opportunities and expensive stock price pay dividends? Yes. But it's not the only valid way of creating shareholder value. Why? Because if they instead decide to reinvest and grow, once that company reaches maturity it will be able to pay a much higher dividend in the future. But by the time that company gets there, the stock price is no longer as cheap as it was during its earlier growth phase. The dividend yield on your initial investment will likely be higher for those that got in a lot earlier at a cheaper price. That's why I think including non dividend growth stocks in a good idea for those who still have a long way to retirement.
The other question is is it better to pay dividends or do buybacks. Both might drive up the stock value. Something to do a video on and why one approach is better than the other.
Ideally, a company does both. Hello, Apple.
They always do buybacks when the price is too high, thus have little impact on the price and becomes overwhelmed by sentiment. And they’re not regular so nobody cares becuas they cannot be calculated long term. Buybacks are mostly a waste of time. Stable dividends no matter what are best.
I'll admit that I am MOSTLY just a dividend investor but in some areas like energy and tech stocks I need growth stocks. For example Intel pays a dividend but Nvidia is still a good investment opportunity in the same comparison field
Sorry for the late response. Busy week with YT and hospital work
Thanks.
Guess I'ma newbie because I basically think if there is no dividend there is no point. I don't care what the Fancy Pants say.
but if the dividend is irrelevant, it misses the point. I'd rather have the $500 in my pocket to do stuff I want to do rather than in the business. Down pay me a dividend that will bankrupt the company though. Pay me a dividend that allows the business to grow and for me to get some $$
This is basic Finance 101. It is not really up for debate. It is fact.
IMHO, dividends matter. I don't remember what study it was, it's old but kind of famous, but it showed that the best returns over long periods included reinvested dividends. As a fairly
Non-entrepreneurs do not understand how rare it is to have a business with high opportunity. And managers are paid huge compensation for spotting opportunity - or at least, making the public believe they found some. So, this agency problem leads to non-dividend companies falling short of their promises regularly. Long-term the stats show that a high dividend-paying portfolio does better.
At first, I thought this was in response to Ben Felix 😂
Nah, I respect Ben Felix and suspect he would agree with this video. Dividend policy extremely important part of capital allocation-either good or bad.
Dividends for life! Covered calls too!
Covered calls are overrated!! :D
You missed one. What if I took my dividends and reinvested it in another company, perhaps a growth company beating the ROI of my dividend company? That’s a key value of dividend investing. My choice.
I can also spend it on beers and dates. Now _thats_ value. Point is, my choice.
You have the choice to sell shares of a non-dividend company to buy shares of another, you don't get more choice with dividends, you actually get less, because you don't choose the timing of your cash intake.
@@ex-muslimZafarSahil Buying cheap stock, not selling anything, reinvesting dividends if they come but not making choices based on it. Same as ever.
@@ex-muslimZafarSahil "total return" is something of a bad concept, because most of that return is unrealized gains - paper gains (or losses) that mean nothing until you sell, and can evaporate overnight. You may feel rich but there aren't actually any more dollars in your checking account. We have seen how once high-flying stocks can lose a third or more of their price. On the other hand there is something tangible about a dividend that hits your account every quarter. Those are real actual dollars that you can buy things with, without having to sell any shares.
Making money is an action. Keeping money is behavior. Growing money is knowledge.
Holding is never a good option now due to lost in cryptocurrency I will advise people should invest there money in other to make more profit in the trading market.
When Crypto crashes there will be different thoughts!
Really good work, Nathan thanks
I wish you would do a review of the VLU etf by State Street
I am very Félix you posted this video!
Need to say the Latin translation between happy and Félix is not obvious for everybody.. Sorry
I am pretty annoyed by the taxes on dividends, and I think that even when a company does not have high opportunities in reinvesting, repayments of debt, buybacks, or even keeping it as cash reserve is probably a better allocation.
I make plenty on dividends and personally I'd prefer to not be paying taxes on them but I fully support taxation of dividends as well as capital gains tax and other wealth-based taxes. Wealth inequality is a real and dangerous problem for freedom. Billy Billionaire should have his income taxed at the same rate as Joe Average.
@@brokenrecord3095 I agree on capital gains taxation as well, however on dividends is pretty bad if you are not investing in your residence country. For example, for most European investing in US stocks they will pay 15% in the US and something between 25 to 35% in their country. So, at the end you are paying 40 or 45% taxes, while on capital gains it will be only 25 to 30%. So, I hope this makes it more clear of why I'm not a fan of dividend on international company, but I would be more interested if the company is in my residence country because the taxation will most likely be the same of the capital gains.
@@tomuno1 Well, I think it's a fine thing for Europeans to be investing in our country but what they pay in taxes is none of my concern. If they find the taxes too onerous, they will probably invest their euros elsewhere. But their taxation is their own business and shouldn't concern us, certainly not as much as American taxation concerns us.
Me, I'm an American and I pay a marginal tax rate of 24% on my salary- plus soc. sec taxes and medicare taxes, call it 31% of my next dollar gone. Meanwhile the highest rate on qualified dividends is only 20% - and dividends are not subject to FICA (and in my town not subject to local taxes, so that's another 2.5%) . Given that only the very wealthy make the half million or so in dividends to hit that 20% dividend tax, I think it's wrong that millionaires who make millions by doing nothing more strenuous than cashing dividend checks are taxed a third less percentagewise on every marginal dollar than people who work all day such as myself and (perhaps) you.
At least hit them with the same FICA taxes as workers pay (and eliminate the $147,000 social security limit while we're at it). Let's keep social security solvent for a while, nobody wants to see grannies eating cat-food because they're broke.
@@brokenrecord3095 That is exactly what I am saying, as long as you have no international investments that is fine but when you try to have international exposure to manage your risk, then taxation on dividends can become pretty steep. So, personally I prefer to invest in low dividend company internationally, and nationally, I do not care much if the returns are from dividends or appreciation.
Of course he is right, in the world of academic theory and simplifications required for analyzing that theory. Do you know the difference between theory and practice? In theory there is no difference. 😂
In the real world, dividends have many advantages as shown by actual historical data. In addition some investors (myself included) find that dividends are psychologically advantageous, and since investing is primarily psychological that means dividends matter.
I’m with you there. Seeing dividends paid to me and slowly growing keeps me on track, and I don’t get emotional and sell often.
You’re right man. Any long term dividend investor knows all the old arguments. And they’re all true. But thats besides the point. It means dividend investing went over their head and they don’t know the secret.
1.) When a company reinvests money into itself, it hopes to generate growth, but just because a company reinvests money into itself at one stage in it's life cycle, doesn't mean it will ALWAYS reinvest excess profits into the business. I think that this is the flawed assumption you're making with your first point. Companies almost always pivot from growth to rewarding shareholders with consistent profits at the mature stage of their life cycle.
2.) How is a dividend ever better then buying back shares, considering that both achieve the same net result, but paying a dividend incurs tax penalties for the recipient?
Hello Nathan, I agree that companies with high opportunities and high ROE will grow their revenue much faster if not distributing any dividend. Ideally, for the benefit of the company itself and its managers, such a company should never pay any dividend. But from an investor standpoint, outside the stock market, who would invest in a company without having any control nor any dividend? Isn’t it exactly the definition of a Ponze? An investment in which only the contribution from new investors can give you any benefit or simply give you your money back ?
Well it's been documented that 75% of the s&p are due to reinvested dividends so not sure where logic of dividends are useless comes from.
i guess the question is valid, why should i buy dividend stocks instead of just a market-etf. so we have the market with 12% growth vs high growth/low dividend stocks like visa and then some low growth high dividend stocks(maybe intel with 5%) but do they really come close to 12%? I rather take my 12% on top of my 12% this year than reinvesting 5% in some value trap
Yes, dividends are definitely irrelevant. Everyone continue to sell your dividend stocks and drive the yields even higher please. Speed up the process of me retiring on my irrelevant, passive, tax advantaged income stream where I never have to touch the principal or worry about sequence of returns risk selling in a bear market to pay my bills. Sell all your dividend stocks. I'm automatically purchasing SCHD daily into perpetuity, so I'll help provide some liquidity to get rid of your pesky dividend stocks.
LOL love it!!!
Dividends are a good way for companies that don't need the cash for the business to grow their opportunities. Like if they already have a high ROE and their debt on a newly developed opportunity is done. That is where you take the dividends and reinvest them. They are actually the source for half of the returns in stocks. Long term if reinvested are a great way to build wealth. Cause what I want to do with Dividends is move it to a higher return on equity. One of the things in the next 10 years is going to be smart stocks that are going to basically remove traders but also be able to have a 10 year holders only dividend where you have to have had held the stock for 10 years to gain the dividend.
It's all about total return and dividends are part of that calculation.
i dont understand, at the end for the investor, AS ALL, nothing change, the value of the stock its how many money the investor put in the market, so if the market cap is 5b this is the amount, if the stock will go to zero the dividend only change the amount of money do you loose, the only exception is unique, the total dividend you make in 10y its more than the amount of your investment
At 6:30 Investors collectively could earn more than $0 if a stock buyback took place. For example if Peloton goes to 0 but had bought back 100 shares for $20 each then shareholders would have made $2000 collectively.