The Irrelevance of Dividends
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- Опубліковано 13 вер 2019
- Meet with PWL Capital: calendly.com/d/3vm-t2j-h3p
Even in a stock-picking environment, there is no reason to believe that dividends, or the growth of dividends, would be an indication of a good stock to own.
This is a follow-up to my Dividend Growth Investing video - • Dividend Growth Investing
Referenced in this video:
Dividend Policy, Growth, and the Valuation of Shares www2.bc.edu/thomas-chemmanur/...
A Five-Factor Asset Pricing Model papers.ssrn.com/sol3/papers.c...
Profitability, Growth, and Average Returns papers.ssrn.com/sol3/papers.c...
Catch up on the latest investing advice, insights and white papers here.
www.pwlcapital.com/teams/pass...
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#investing #dividends #investors
A lot of people misunderstanding what was said here... the takeaway: don’t just invest or stock pick based solely on the fact it’s a dividend payer. The end
Thank you for paying attention and not blindly yelling at me based on the title :)
True and he is also assuming you are planning on selling the stock at some point. Addition to that, he is not assuming you are planning to reinvest your dividends by purchasing additional shares. Therefore, in summary if you are planning on selling the stock at some point dividends are irrelevant. Personally, I love dividend stocks but I don't limit myself to just them. Meaning the dividends are irrelevant to me IF I PLAN TO SELL THE STOCK! Some shares such as utility companies I won't sell. Unless someone invents a way for us human beings to live without water.
@@kaseywoody4951 actually whether or not you sell doesn't matter either. Did you listen to his argument?
@@CW-up7xv Yes I did and you absolutely have to sell to make a difference. You don't have anything until you sell. If you buy a share for $10 and it goes to a $400. Doesn't mean you have $400 until the transaction is completed and is sold to another buyer. However, if the stocked paid a dividend and you have been receiving dividend payments that cannot be taken away. They can stop or reduce it but they cannot go back and get back what they paid you. The dividend payout will reduce the money the company has and therefore (ceteris paribus) slow down the growth of company (because the retained earnings would be less) compared to company that doesn't payout the dividend again ceteris paribus. But until you sell your share you don't have the captured gain.
@@kaseywoody4951 well if you reinvest the dividends, as most people do, then it wouldn't matter. That's true about cashing out on dividends, but ultimately, to recoup the money invested you'll have to sell at some point. That said, Ben never even mentioned research showing dividend investing actually being a sub-optimal way to invest. Check out Meb Faber's white papers on it:
mebfaber.com/2017/01/09/high-dividend-stocks-worst/
Me: He's right
Also me: Uhh nice 5% div
@Gemein Hardd where you gettin dat
Simplified Crypto
Probably out of his butt 😂
Also hes not right. He is nitpicking a specific type of dividend company. He doesnt understand the value of returns. Plenty of growth stocks that will flounder and do nothing while dividend payers not only share equity but it even attracts investors and increases demand.
@@imunfathomable he's basically making a case for ETFs with little or no dividends, so when one or two growth companies fail or fall inside the ETF, it the rest of the companies should be able to absorb the losses.
@@imunfathomable "Attracting investors and increasing demand" does not prevent dividend payers from "floundering and doing nothing" themselves.
Forget the peer reviewed academic research and robust empirical evidence, let's hear that skincare routine.
word up
Right though
increase the contrast?
😂🤣
lol
Ben: “money can’t be created out of thin air”
The Fed: “hold my beer”
My thought exactly
HA yep now watch us all pay for that magic money.
Also, the market is definitely irreparably broken
This concept makes me doubt the entire interest system.
Well technically they did not. They added the total amount of cash, but the total value stays the same. It simply devalues other people cash.
In Brazil, dividends are not taxed, yet. But here we have SERIOUS problems to invest in ETFs: ETFs do NOT pay dividends and we have to pay tax over capital gains (15%) (and the dividends will be indirectly taxed when we sell the ETF, as part of the return came from dividends). Besides that, our index is super concentraded in some companies, and most companies in the index are commodities (oil, gas, etc). 1/3 of iBovespa is Commoditie, 1/3 Financials and 1/3 others.
I have heard this about Brazil. Very different environment.
Grande Fábio
meu herói
Didn't expect to see you here, haha. At the start of the video, when Ben talks about low cost index funds, I thought the exact same things you said here. Not a surprise, since I've been learning A LOT with your videos through the last year and half. Thanks for sharing your knowledge. Bora Fábio!
Dividends are taxed but there 2 scenarios. In some countries (like it was in India sometime back), companies pay dividends after paying their taxes. Then the share holders are not taxed for dividends (also also Dividend Distribution Tax (DDT)). Likewise in some other countries companies pay dividends before they pay the taxes. Then the individual has to pay tax on their dividend earnings based on the prevalent tax regulations.
In general countries where corporate tax rates are kept lower, government taxes the individuals on their dividend earnings and vice-versa.
Ben is an honest financial advisor. A rare find in this industry.
I had just created an M1Finance dividend portfolio when I first watched this. I had signed up for a trial of SimplySafe dividend filtering and chosen about 30 of the safest dividend payers, across most asset classes. But what you said here made perfect sense, and I liquidated those dividend stocks and turned my M1Finance portfolio into a diversification of domestic and international total stock market, large cap value, and small cap value index funds. Sure is nice not to have to worry about keeping an eye on individual stocks now.
Top 100 dividend paying stocks outperform the market in the long run.
U need a dividend portfolio becuz dividend matter 😀
Pick a strategy and stick to it. Whatever it may be. One video talked you out of your initial approach? Good luck to you.
@@michaelswami I sought confirmation after I watched this video and found that other financial experts I respect (e.g., Ramin Nakiska, Richard Coffin, Rob Berger) held the same view of dividend investing, and their arguments were reasonable and data based. The dividend portfolio I mentioned was less than a month old, after decades of simple index investing, and I already had a lot of misgivings about the stock picking aspect of it. If I recall correctly, I ditched technical chart analysis earlier in life after reading one book about index investing and I'm glad I didn't "stick to it". It became clear that dividend investing isn't a sound approach, so it would not have been wise to stick with that either. Sticking to a bad approach for the sake of sticking to an approach is not wise. Changing portfolios all the time isn't wise either, but that's not what I do. Evidence shows that index and factor total return investing is the best approach for someone like me. I'm glad I realized that before I was too far along the dividend stock picking path. Thanks for your well wishes. Same to you.
@@timelston4260 well done.
@@deepeshchetwani6250you are clearly not paying attention and do not know what you are talking about.
His straight face while being so savage confuses me.
Yes, i like his straight talking simple style
Lol
Canadian. Channeling the savage power of the Goose
It’s the Canadian way. Hahaha
The countenance of a serial killer...
As someone who is relatively new to investing, I thought this was actually a fairly neutral viewpoint. He never implies to steer clear of dividends, only that we shouldnt prioritize for dividend bearing stocks specifically for that reason. Seems like sound advice.
This is only true if you watched the entire video. He's being misleading for the first half and using a title that can be interpreted in two different ways.
Most people have a low attention span.
The result: People who think that dividend investing is an entirely bad idea end up linking this video. The confirmation bias allows them to overlook the real point mostly made in the second half of the video.
@@mokahless Yeah...I was shunted over by the Boglehead crowd on Reddit who are huge fans of this philosophy. For them it's only one way...
Summary: The fact that a stock pays a dividend does not give you any more information about a stock that cannot be explained by known factors ie (value, investment, beta, size, profitability).
Gosh I like it when you show scientific articles. You're the only finance channel that actually shoes scientific proof.
I am a dividend investor and I agree with what he is saying for the most part. But I do want the monthly cash. I don't want to sell my shares to get income and I want to give that income to my kids one day.
Exactly. I'd love to receive the income from dividends and give the shares to my family
So you prefer to pass on more shares of cheaper companies than less shares but at a higher price. That makes no sense. You can invest just as quickly as you can divest non-dividend shares.
Me too!
@@banana-dw3ez If the shares don't pay dividends I need to sell them to pay for my expenses in retirement and god forbid we have a recession that plunges the market 20% for a year in a 20+ year retirement that forces me to sell off a higher percentage of my portfolio for multiple years to keep up my standard of living
FidelCatto Completely correct. Dividend investing eliminates the need to sell shares barring a company completely going under but that is the same for both scenarios. With dividend investing you have a set income no matter the economic climate.
Dividends are a consequence of a business, that doesn't tell you anything on whether it's a good or bad business... So yeah... Business first.
One important thing he fails to mention is the psychology behind dividend investing. The number 1 biggest reason people lose money in the stock market, is selling out during a recession. A dividend investing strategy changes the focus from capital gains to dividend income. During a crash while your capital gains may fall (as well as some dividends may be cut) you still have some money coming in which can alleviate the fear associated with a dropping portfolio. Regardless of which strategy you pick, time in the market is the most important thing, so choosing a strategy which most effectively manages fear for you, is worth infinitely more than deciding if strategy A has a 2% better annual return then strategy B. Yes, picking a stock solely based on yield or its dividends is a bad idea, but labelling dividends irrelevant is nonsense.
This is great! Thank you for this. I like the ideas that "they are an important component of returns" & "the idea of using dividends to pick winning stocks is egregious!"
Here in New Zealand we don't pay tax on long term capital gains, so I'll always remain a growth investor. However, there's something comforting with dividends in retirement. I'll be on fixed income and will be spending around half my dividend income on living expenses, leaving the rest to compound. Dividends definitely have their place, if for no other reason than to help me sleep at night.
Literally you clarified this entire thing by 1:10. I would like to see a 10 episode series where you keep addressing this topic lol
The majority of Ben Felix's videos are shadows of one another - so, if you like what he has to say, you have plenty of opportunities to hear him say it again.
Learning about investing has taught me the greatest threat to fucking up my future is me.
But man I get the pull of those dividend stocks. When my broad market ETFs payout their quarterly dividend it does feel like free money even though it's not.
I think you summed up both sides of the argument perfectly.
do u not just re invest them lol
Companies you own exist to make a profit and pay it out to you. That is the whole point of business.
Ben is making so many friends...lol. Gotta love informed straight talk.
"Nope, that's not what I'm here for..."...lol
Thanks for making it easier to understand Ben. As a new investor I was wondering why there seems to be such a big pull to dividend only investing, but to me all I saw was that it cuts out half of the market and disregards great growing (non dividend) businesses with excellent financial fundamentals.
Your intuition was correct.
Doesn’t it cut out lots of crappy, poorly managed companies? You know, the kind that continue to get bids on their shares simply because the ticker symbol belongs to the index. No matter how awful they are, it will take years before they are disposed of by falling out of said index. Cluttering up the equity space with noise until their competitors finally gobble up their undue market share.
@@rokyericksonroks ehh sure but you do sometimes find the same thing: Boeing for example was borrowing to continue to pay out a dividend (a stupid move).
Andrei Jikh has left the chat
Andrei also accepts the fact that technically dividends are irrelevant. He looks at things from a cash flow POV. Just behavioral finance things.. Suboptimal but works for him..
Thank you for reaffirming my thinking, intermediate investor here and always wondered why anybody would use dividends as a investing stategy.
Well you miss out on free money
Index investing for life... After years of rebalancing individual stocks I learned my lesson.. Buy index, rebalance as per ur asset allocation and not listening to experts on tv has done me more good than picking stocks..
Same 😃
Schwab’s swegx rebalances the funds 4 U
@@lrac88510 I am from India brother.. We don't have it here.
irfan nadeem I agree. But this dude has a video on why to avoid index funds as well, which I have yet to watch
@Jennings you should watch it. It’s not what you think.
Great video, Ben. Dividends are great. Who doesn't love getting paid just for holding a stock?!? But you know what I don't love? Getting taxed on an ongoing basis when I spent the whole year buying. I'll stick to my portfolio of index ETFs and the occasional dalliance into sector investing based on the economic cycles.
Dad is a big fan of dividends. The reason for it is that he holds most stocks forever. He only sells if there is a big change in the companies’ ownership. If a company has a good dividend at one point, the investor sees that it actually cares about the shareholder, so it’s a mindset. Especially in the last decade with low interest, and our countries’ lenience on capital gains tax, he did really well. His education as a banker made him a humble but great type of investor since 50 years.
Another outstanding video, Ben. You've got me convinced. I was thinking of adding a dividend or quality ETF to my portfolio, but now I think that if I am going to add anything to my core holdings in broad-market indices, it should be to explore factors. I very much appreciated your paper on factor ETFs for Canadian investors.
Ben,
Thank you for creating this video. You have good data behind what you say. I think people will always feel better w tangible dividend returns in their account so they won’t ever agree with you. That’s a misjudgment for them unfortunately. Please keep up the good work.
Dude, your videos are the best finance videos. I can't stand how so many financial UA-camrs cherry pick their results and just go on their portfolio and show their dividends like "I got $1,237 last month for doing nothing". I think that the idea is attractive to people who are new to investing and then they see people picking stocks based off of dividend payout ratio and think they can do it too... Not to mention that the money these dividend investors make to invest largely comes from ad revenue paid from making videos on how dividend investing works. Can't argue with data and math, but I'm sure you face many who try.
Ben, I would love to see the same tax analysis in Australia's case. We have franking, dividend imputation and franking credits are treated as a tax refund, not an offset. Retirees that pay no income tax receive a tax return equal to the company tax paid on the dividends they received (usually 30%!).
Probably explains why our index returns >4% dividends (>6% gross of tax) and companies have >90% payout ratios.
I love this channel! For someone like myself that is studying in finance, watching your videos is a great way to link and interpret what I saw in school so I can really understand every aspect of the concepts you develop here
A dividend investor invests in businesses across multiple industries at a margin of safety to mitigate risk. We don’t invest in stocks we invest in businesses with a margin of safety. I personally like the fact that I have control over my own investments rather than index funds.
You do not have control; you have an illusion of control bias. You do not have a margin of safety; you have a familiarity bias. A shareholder is a shareholder whether they view themselves as a shareholder or a business owner. If your biases make you a successful investor, I think that's great. But they are biases, not reality.
If you pick your own stocks, multiple studies show you have a 95%+ chance of underperforming the market. If you use screening criteria and pick from Div Aristicrats list you will do better, but then there are multiple ETFs that also do this and will allow you to focus on your day job and make more money to plow in the ETF.
Hey ! Been watching a lot for investing channels. There is really a LOT of schools of thought on about everything. For example- the English really have a different world view of the entire system- that being said- I’ve really learned a LOT from your channel. A lot I didn’t know- Thanks
Ben wearing the chefs hat and now stirring the pot on dividend bois
😁
I’d so marry Ben Felix if not for, you know, us both already being married and his liking girls. But otherwise, we’d just lie in bed and laugh at the bitcoiners, dividend bois, and gold hawks. 💜
@@robb0995 oh my!
Not really. We dont invest tye same way with the same ideologies. For regular investors you must sell your shares actively to get money. For dividend investors we get a paycheck. Some paychecks can be less than others but every month know im getting paid. And I'll handle the taxes with that money also. But in an emergency I cam liquidate the funds and take my gains also. But when ive invested enough to get a 3k paycheck every month why sell my shares? And why not just live comfortably. I can also have dividends pay me 4k a month. And set 1k send directly to the irs and possibly get a return back. Simple and easy. I share my wealth with my family my government and I go out and buy things all without needed to sell a single share. I simply check up on my companies periodically and see if I need to remove my influemce from their business and place my assets elsewhere. For example AT&T id move to Coke because they're over leveraged and in bad debt. However, im buying BofA increased rates. JPm isnt high up because they are innovating and seem to not have gone far. So i leave them sitting and paying me. I get taxed less on my dividends than i would for selling my shares. And I rarely would ever sell my shares.
Keith Burns This video is not refuting your idea at all. Your stance is that the convenience of dividends makes them a good fit for you. You have said nothing about choosing dividend stocks specifically because you think you’ll get higher returns over time, which is what this video is about. He didn’t say dividends were bad.
Just to add to Ben's point, "Warren Buffett loves dividends and so should you" This is an Appeal to authority logical fallacy. Just because a prominent figure likes something does not mean whatever they like is true or the best. Also, while Buffett might like dividends, his company, Berkshire Hathaway doesn't pay dividends... hmmm 🤔🤔. If you want Warrens real take on dividends this is it: Companies should only pay dividends when they have nothing better to do with their capital, or if they cannot achieve a better return using said capital.
"A company's management should first examine reinvestment possibilities offered by its current business-projects to become more efficient, expand territorially, extend and improve product lines or to otherwise widen the economic moat separating the company from its competitors." - Warren Buffett
I mean the best way is to keep the money within the company ONLY if the company is able to invest it for its further business expansions on a proper way, but if not, then to give it to the shareholders as dividends or via buybacks.
This article explains pretty good what I think about dividend payments and stock buybacks.
www.fool.com/investing/warren-buffett-and-dividend-stocks.aspx
Berkshire Hathaway not paying dividends is irrelevant and doesn't add to this absurd take on investing. Matt's admiration for Ben clouds the fact that Ben loves companies that balance dividends with growth, and ignores the fact that this was clickbait. Index funds, huh?
I heard he bought suncor.
An appeal to authority fallacy is when Angelina Jolie says to go to college and get a degree in gender studies. Getting investment advice from Warren Buffet isn't the same thing. Not a fallacy since he's an expert in the particular field
I only invested in dividend stocks until now, thank you for explaining it so well! Thanks to the Reddit community for bringing me here.
There is no one single strategy. You should be available to a variety of options and strategies...a hybrid solution.
One of my favorite channels...always sheds light on complex subjects for me. Thanks Ben!
Thanks!
Purchasing stock without a dividend is kinda like purchasing land you don't use. It'll appreciate in value if you hold it long enough, but there are two issues here - 1) you won't see a return until you sell, and 2) you have a finite amount of land you can sell.
James Cetnar love the analogy sir
You can also look at it this way: The company is using the money that they would pay you as a dividend to grow their company and revenue. The effect is almost the same as if you just reinvest your dividend in the same company. So to make a reference to your land example: the land is "used".
That analogy doesn't really mean anything because you can buy an established value stock and sell off, say, 1-2% every quarter to emulate a dividend payment. The difference is, you don't actually need to do this if you don't need cash and the investment will grow faster than dividend counterparts.
Daniel Delos how do you know the stock will appreciate? Selling off stock in bear markets kill your portfolio
@@jeremiahmiller4640 Well that's true.
However, the lack of diversification to non dividend paying companies significantly increase risk and still don't make it worth it. Also, companies may just cut dividends so that's always a risk.
Thank you for creating this video!
I watched these dividend irrelevance videos a little out of order, but this one I appreciated the most and made the most sense. So far, I've invested primarily for dividends because I wanted them to basically be another paycheck, passive income, etc., just like you said in one of your dividend irrelevance videos. After paying taxes so heavily for the first time (only been at this for a few years), I can appreciate the argument that growth stocks are more tax efficient viscerally. Until I ran into your videos, I thought such a high tax was essentially the cost of doing business, but now you've convinced me: growth stocks actually do have value instead of the dividend lens I was looking through before. Thank you!
Well “growth stocks” aren’t the right phrasing actually. In fact the opposite of growth stocks is what Ben recommends you tilt you portfolio towards, if your risk tolerance is appropriate for it, which are called “value stocks”. But this video is more saying that you shouldn’t care about if a company has dividends or not. If you needed income higher than the distributions from index investing, it’s more tax efficient to sell shares. If this makes sense to you.
Thanks for this important message on dividend, a lot people think that dividend stocks create more value for investors but the things are much more complexe that just pick stock who pays high dividend yield
Great video, I agree with everything you said, but I do have a comment regarding "real-life trading" so to speak.
Math aside. Do you think dividends can have a stabilizing effect on the price, as people are more likely to hold on to a dividend stock, with the expectation of getting paid in the future? People also like to reinvest the dividend putting buying pressure on the stock, pushing the price up. So even if the value of the company goes down with the paid dividend, as the company now got less money (Until the dividend is reinvested) the company might maintain or gain a higher valuation in other words, in reality, a strong dividend might mean that the market overvalues the company?
In other words, when the market goes down, people might sell a stock that relies on capital gain, and hold on to a stock which gains a realized most trough a dividend?
Good points. Also, Ben asserts that being in control of when to take cap gains is of value compared to receiving dividends on some (quarterly?) schedule. Why isn’t control of your capital (it is yours even if Buffett believes he can invest it better than BRK shareholders can) important in as much as you may need to deploy it in ways other than a reinvestment? It requires deeper analysis, but I like the dividend because it rewards accountability from managers who know they must be accountable. True, they can demand the CFO produce a dividend by shady means, but not for long.
I’ve always gotten the feeling from the dividend crowd that they believe they’ve stumbled on the sacred texts in some investing ruins, a secret sauce we that they alone can know about, and forget that their dividends are seen by all market participants on the planet- it’s not a secret get rich payment. The replies here are hilarious Ben, keep up the good work!
It is, in fact, the religion of financial salvation; the answer to all of our problems.
Thanks!
I love all of the things you have to say, I just wish there was an easy way to get robust factor exposure for small individual investors
Great video, as usual. One exception to this might be borrowing to invest. At least in Canada, investments must have a reasonable expectation to produce income in order for the interest on borrowing to be eligible for deduction. There may be some flex in terms of what counts as reasonable expectation or the amount of income CRA would need to see, but it's a consideration. Dividends may also be important for people to cash flow the borrowing costs, especially if they're using the approach as a way to pay down mortgage principle while borrowing against their home to invest. Not without risks, but it may be a niche exception to your great advice.
First baiting the gold bugs, and now the dividend horde. You, sir, are a brave man indeed!
Its a Dividend Horde for real. They are still posting salty reply videos weeks later.
Im going to come back on this topic one more time. Then I’m done.
I have to admit, living off your dividends is an intoxicating story. But I cannot ignore logic. For me there are 2 things in this discussion that changed my mind about a dividend focused portfolio. Idiosyncratic risk (I had to research this) and mental accounting bias ( I also had to research this). Once these 2 terms were clear in my mind the dividend investment focused portfolio didn't make sense to me anymore.
I still like my dividends, but I like them coming from my total market, small cap, value and profitability tilted portfolio.
Just to provide a little external support and validation to Ben, here's a disclaimer that appears at the bottom of my workplace Fidelity retirement program website: "Remember that a dividend payment to fund shareholders reduces the share price of the fund."
Just wanted to come here to say thanks for the videos and podcasts with Cameron. I'm mid-20s living in Australia and your vids/pods have been very helpful.
Thank you!
But we dont have access to the dimensional funds without spending on an expensive advisor. How do i get adequate factor exposure like VIG does without dividend etfs?
$DES, $DLS, $DGS (Wisdomtree). Or $AVUV and $AVDV (Avantis). Avantis was founded by previous executive team from DFA that were seeking to productive DFA's funds as ETFs (so more people could access them with an increased tax efficiency), so I highly recommend them. Can run a factor regression of all of those ETFs on Portfolio Visualizer.
I don't think you got the argument right. It is obvious that, in a given isolated moment, Company 1 (110+10) is equivalent to Company 2 (120). Its pure algebra. In the real world, however, there's no right answer: the only thing that matters is what both companies are going to do with investor's money (free cash flow). If ROIC is higher than cost of capital AND it is possible to reinvest ALL earnings at the same rate, Company 2 is doing better use of the money by not paying dividends; if it is not true, Company 1 is clearly a better choice, because it reinvests the only portion of free cash flow that can generate the adequate returns. Although it's true that the sole fact that a company pays dividends is, in itself, irrelevant, in both cases dividend payments are far from irrelevant. The thing is most real investment conditions are likely to favor Company 1 for the following reasons: 1) only companies that yield a huge amount of free cash flow can mantain a sustainable and growing dividends payment over the long run; 2) companies that yield consistent huge amount of free cash flow are more profitable than others; 3) a great portion of the free cash flow is generally not reinvestable at the same rate of return, which makes dividends (distribution of excess cash) a better option for the shareholder.
If we're talking about investing for the long term and accumulating wealth, then the fair comparison involves reinvesting Company 1's dividend into more Company 1 stock anyway. :/
This comment needs more love.
@@la.zanmal. That was what I was thinking and I don't know if in his case the mode of investing mattered but if its a Roth IRA and you buy a dividend stock then you don't even have to worry about the taxes paid on the dividend so that portion of the video wouldnt matter.
Lol Ben is taking on the Dividend investor community head on. This will get interesting. 🍿
Here come the downvotes! I'm sending GlobeandMail commentators here.
it would be like a doctor talking to the homeopath. He would be strange arguing and at the end he would claim knowing it better than a pear reviewed studies... :-D
I believe that what he is saying does make sense and mostly any theory can be proven wrong at some point.
@@skovecka Problem is, Ben didn't read *all* the peer-reviewed research. Numerous asymmetries have been found in ex-dividend-day price going back 50 years and there are strategies to exploit this.
@@conduit242 if you can find such paper post it here. it would interest me.
Hi Ben, great content. Intuitively, I followed the logic which you generally recommend. I am equally monthly investing into 4 BlackRock’s ETFs: world, s&p 500, DAX and emerging markets (emi). Being 33, I am not currently thinking about diversifying into bonds. My questions: 1) can you see that I would be significantly missing out on any factor opportunity? I have also included DAX, because I am from Europe. 2) do you think that being with only one etf manager (BlackRock e.g.) brings any unnecessary risk? Thanks and best regards.
I agree with you. Personally i only invest into quality dividend stocks that have a fair/good P/E. If they go down i am averaging down, and still getting paid a dividend. When they are up a fair amount i just sell the stock. And deploy the cash into other good value dividend stocks. I also want to use covered calls on dividend stocks. I am doing a combination of swing/position trading and option trading ( in the future ) + receiving dividends. Want to grow my portfolio in a safe way. When you sell a stock thats 20% up you are getting paid what takes like 3/4/5 years to receive in dividends.. And the stock might go down again. Using realized profits for compounding effect by buying more dividend stocks. Same with the option premium i will recieve. They go back into dividend stocks that i want to own for a long time if they are going sideways or down. Thank you for the video.
thank you for this video, always educational.
There's also this white paper from Vanguard, creators of the VIG ETF:
"An analysis of
dividend-oriented equity strategies"
personal.vanguard.com/pdf/ISGADOS.pdf
"Compared with other equities, the performance of these strategies has been time-period dependent and largely explained by their exposure to a handful of equity factors: value
and lower volatility for high-dividend-yielding equities and lower volatility and quality for dividend growth equities"
Rationally Ben's arguments make complete sense and should be followed by most investors. In our family's portfolio, we have heavily tilted to low volatility ETF dividend strategies, for the psychological reason that we need 4.25% returns before inflation (gross returns) to meet our goals. The portfolio generates about 4.6% in income, which means that we are comfortable not having to sell units at any time. We completely understand that it may be suboptimal for total returns. We completely agree the tax efficiency isn't great. We also use the dividends to cover interest and capital on a fairly substantial margin loan and we wouldn't want to sell shares as we go or use our other income sources to cover that loan. In our case, it is a matter of choosing investments with lower beta and income to cushion the downside somewhat. There is no miracle source of gains.
Thanks for this. Too many people think dividend stocks are automatically good stocks.
In the US, Ordinary Dividends are taxed at the normal income tax rate. Qualified Dividends are taxed at the lower Capital Gains tax rate. So it's often better, tax-wise to not get dividends. REIT dividends, for example, are always taxed as ordinary dividends.
Me during video: Why is Ben so salty about dividend investing? Everything he's saying is common knowledge, surely?
Then I read the comments section.
Hehehe
These comments are classic!
@@SS-sy4uu and expected when a person goes against dividend investing here on UA-cam
Title could have been phrased better. “Dividends are irrelevant when it comes to picking quality stocks”. Instead he goes with a title he knows will get clicks and responses. Albeit negative ones. Seems childish.
Tubi well adults tend to read or listen beyond the title
Oh boy. Can’t wait for the comments on this video (which was great as always).
😂
As you’d expect most people are dumber than a rock unfortunately
In a previous video of yours, that I can no longer find, I had commented that I did not agree with you on that topic. It took me several years and a few investing mistakes to (finally) realize exactly how right you are on this ! Many books out there sound and look pretty convincing regarding dividends, some of them written by professional fund managers. Until you can check a few things from experience, and open your mind, it is very difficult to understand why this is a true fact. I have become a much better and more lucrative investor after I stopped chasing dividend growth stocks..... Keep up with the good work Ben !
Summary:
Whether a stock distribute dividends or not is irrelevant to the long-term profit for shareholders because what's distributed as dividends is not injected back into the business, thus reducing the future growth of the stock and, hence, its price.
Critique:
That would be true if the price of a stock were linearly proportional to its net worth but it's not (even assuming a theoretically efficient market), i.e. if the retained earnings aren't used efficiently towards the growth of the stock value, the dividend would have yielded a greater profit to the shareholder.
An extreme case would be a company that has reached "maximal growth" the only way for shareholders to earn money from their shares would be to earn dividends (as the share price theoretically shouldn't increase so that reselling it wouldn't be profitable)
It's my understanding that's oft why companies pay dividends. When they don't have more productive use for profits.
The reason I do dividend investing is because I can reinvest the dividends into stocks without adding money into my account. I cant do that with growth unless I sell. I get what your saying from a shares perspective but dividends is the safest way to build passive income. And they offer defense from crashes and out preform the snp.
If I have a portfolio of 50 stocks and I want monthly income and I invest in growth stocks then I will have to do ~50 trades per month to collect my income and maintain the portfolio weights. At $10/trade this will be $6000 per year. Dividends on the other hand have no cost associated with receipt.
Also there are drips which often provide shares at below market price in exchange for the the dividend payment.
Ben would would say that you should not stock pick. If you didn't invest in indexes, you wouldn't need to make 50 transaction. So at this point you are using your own sub-optimal strategy to justify to yourself why you can't exit this sub-optimal strategy.
You could also sell only your overvalued shares and you then only need 4-12 transactions per year
Well now, that's a video title that will get some riled up ^_^ My thoughts on dividends are that on one hand they're pretty much a nice little "feel good" element when they come in, and on the other annoying because now I have extra cash sitting in my portfolio that I may or may not be able to reinvest right away. I'd rather the money just stay in the market and keep doing it's thing.
I love the reasoning behind the stance though, and how well it's explained!
Great video.
Only one question -
How would you address the problem of 'running out of shares to sell' in a prolonged bear market vs the company keeps giving a dividend and the stock price falls to near zero.
However, if and when there is a recovery in stock prices; in the first case - you have no shares left! Whereas in the 2nd case your previously worthless shares pick up and now have some value again!
If you're relying on stocks for income then you would be an idiot if you didn't diversify into less volatile assets to weather market recessions. Aka, down markets won't bother if you you're properly diversified
5:45 best burn I've heard from you 💣 Great video!
Thanks!
Great video Ben. At the end of the day if you are investing in individual stocks you are are a stock picker, whether they pay dividends or not, whether that is good or bad...and the only reason to be a stock picker is if you think you can outperform index funds.
Agreed on all accounts!
If dividend chasers (not investors) knew how to measure performance, they would index invest too.
@@sideout1999 you assume the price of every stock reflects a market that trades said stock based on entirely rational fundamentals analysis?
Wouldn’t another reason be to avoid market volatility? To forsake some market gain in order to have a smoother ride?
@@sideout1999 Absolutely spot on
Awesome stuff, Ben. How would you feel about dividend ETFs then? At the very least, perhaps they move away from just "stock picking."
Hi Ben, What is the app you use for your videos to bring up the images while talking? Its a clean look, great videos as always
After being an indexer for 10 years, I’ve moved to building my own index fund with dividend paying blue chip stocks. So far, I like the results better because I don’t include a bunch of shitty companies that are in the index. If that means I’m a stock picker so be it.
Interesting. I am thinking of doing the same after seeing my private pension be diversified into some shit I don't even believe will do well in next 5 years (Brexit)
In this Video ua-cam.com/video/xfdMDGIABek/v-deo.html, Ben addresses pretty well, why your "own index" will probably underperform the index in the long run.
Receiving yields from shares isnt as important as receiving expense ratios from investors.
@@fahrradflucht8419 he's just talking about there being a small number of big winners which means it's never bad to be "over-diversified." So assuming you picked random stocks in an index, in the short run you'll end up behind the index since there are a lot of minor losers and only a small number of big winners. But in the long run it will end up about the same plus you don't pay the expense ratio. And some people actually can pick better than a random sample from an index. So even if they end up behind in the short term, in the long-term the volatility averages out and they will get disportionately more big wins than an index.
I've been doing this for the last 5 years, which is my entire investing "career" so far. Things have been going along smoothly and I am close to hitting $3k per year of dividends and have re-invested nearly $9k of dividends so far. It is a snowball that keeps gaining momentum as long as you can keep putting funds in along with the dividends.
Hi. I'm a new subscriber. Just watched with interest this video. Is there not an argument to be made for the retiree to shoot for a dividend based portfolio to reduce volatility?
I *really* enjoy the quality and variety of educational videos on this channel. All I can say is *keep* *it* *coming* ! :)
I like both dividends and non-dividend companies depending on the account it's in. As a Canadian, I prefer putting my eligible dividend paying stocks in a margin account but my growth stocks I pop in my TFSA. I get the best of both worlds this way and as far as I can tell it's a pretty tax efficient method of investing
Can dividend investing help protect against sequence of returns risk in retirement? I notice that the 'lows' of my dividend fund are less extreme during downturns. Assuming the average return of the fund is sufficient to meet a person's income needs in retirement, wouldn't this allow them to be more certain their nest-egg will last? In making retirement decisions, the top-end potential of a portfolio seems somewhat irrelevant and it's the risk of running out of money in the future that really determines when you can quit your job.
My issue with growth in share value without dividend is that you dilute your ownership as you sell off shares. While if you are paid dividends you may retain your same ownership or increase it.
Right there, that's why they're relevant
Percentage of ownership doesn't matter to most people. they just care about money. Look at Ben's example of company A and company B, they both end up with equal value portfolios.
@@SynThenergy Yea but you dont want to sell your growth shares in down market to get income.
@@fredefocusI don't think most dividend investors grasp the idea of diversification to reduce risk and volatility. You buy less volatile assets along with your stocks so you never have to sell stocks while the market is down. All the growth, way less risk. Easy
Great video Ben, Thanks. A quick question: We do not have an index ETF in my country but the local stock exchange recently launched index futures. The brochure says that the futures price incorporates the cost of carry but not dividends. Some constituents of the index pay dividends. You mention that dividends form an important constituent of total returns. Since the index futures contract captures only the capital gain and strips out the dividend part, is it correct to conclude that the underlying stocks in the index will have a higher total return than the futures contract? (for argument's sake ignoring leverage, transaction costs and taxes). Thank you.
Except in Australia where you lose 30% on sale due to a capital gains tax. And then i can use those dividends to buy more shares at discounted rate …through shares purchase plan.
This video just convinced me to keep buying dividend stocks. 😂 not sure that was your plan, but at $389 a month in divvys and rising. I think I’m good. Cheers bud!
What about the benefit of dividend stocks in a recession to bring about additional income in a tfsa? What if I don't want to reduce my units of the stocks and I just want the dividend to pay myself an income?
Big 5 Canadian bank stocks have never reduced or cut their dividend. So if their is a recession it's possible that while the stock price may drop, I can still get a tax free payout through dividend. If I sell a stock after it's fell 50 percent don't I lose more during a recession then holding a stock and taking the dividend?(assuming they do not cut dividend)
The only good point for dividend i have heard is from Peter Lynch, when business keep the money they tend to use it for diworsification.
Excellent video. Definitely enlightened me about dividends!
This past year I felt more motivated investing in dividend ETFs due to the monthly and quarterly payouts that I wouldn't have been if they were non dividend paying. I do own the largest amount in small cap value with pays little dividends but I think it's good to have both options.
If it feels good and keeps you invested, the sub-optimal risk-adjusted returns may be worth it.
Hi Ben! Very well explained, thanks!
A suggestion for a video: with interest rates going down, and negative in Europe, some people recommend to temporarily sell bond positions, and go full cash in their portfolios. To me, this seems like timing the bond market, and hence, risky. But I don't have anything to backup my concerns. What is your opinion?
Bill Nygren has mentioned how with bond yields so low, some Americans are using dividend paying utility stocks as quasi-bonds. Utilities pay 2-4% dividends and are stock prices are relatively stable...
Might not apply to Europe but I thought it worth mentioning for your question
Wi agree wholeheartedly..... except if they are fully franked. As in Australia.
So, at the end of the day pick quality stocks with less dividend yields! Makes sense and the tax part is just amazing! Never knew this and now I do! Am now rethinking my investment strategy! Thanks
I am new to your UA-cam series and appreciate the effort to put it together and the great information. A question: If an investor is nearing retirement and is looking at generating income, would dividend-paying stocks be a strong option to consider? Do dividend-paying stock (companies) that pay dividends generally pay them in good as well as poor markets? It would seem that getting income in the form of a dividend payment, without selling shares, would be the optimum way to go. Certainly, municipal bonds pay dividends as well. So, would dividends be relevant in this situation, or do you see better ways to generate income by, as I say, selling the eggs, not the goose?
Yeah, but you have many geese (a.k.a. shares) to sell to make the money as much as you want to
Love how he always throws in empirically. Nice touch.
It is important people understand dividends just one way to return value to shareholders. Buybacks and company using cash to reinvest are others. Tax treatment of each may differ based on your jurisdiction. Ben I think a good topic for future would be use of leverage eg leveraged ETFs.
Very true. Leveraged ETFs could be an interesting topic. I have a lot to cover before I get there, but I will add it to the list.
As a dividend investor I can only thank you for this video, you are so right!
Everything you said makes sense. The only thing that I would add is that, a lot of dividend payers have reinvestment programs. The more cash that comes back, lessons the damage to the stock price. I'm Canadian, I like my utility, bank and REIT dividend earners enrolled in DRIP/DPP. I put the stocks in my tax free savings accounts and watch the snowballs grow.
Thank you, UA-cam algorithm!!
for leading me to this channel... :)
Ben, I have a few questions.
#1 You once told me that my portfolio return was an anecdote. My return as an individual proves nothing (compared to empiric studies). Fair point. However, you used a simple comparison of VIG vs a Fund (Dimensional) over a short period of time (~6 years). How this comparison isn't an anecdote? How does it fare with empirical studies? Funny enough, the fund beat the ETF on top of that (I thought this wasn't possible?).
#2 Since you like academic studies so much, how can you ignore Ned Davis research? Even if you make the switch from geometric indices to arithmetic indices, Ned Davis shows dividend growers returning 12.89%, all dividend stocks 12.83%, and equal weight S&P 500 12.35%! (All beginning in 1973.) (source article from Meb Faber Dividend Growth Myth). It's not a big difference (+0.54%), but it is still better. Invest 10K at 6% for 46 years or invest 10K at 6.54% for 46 years and you get $38.4K more (+26%) in your pocket. I'll take the dividend grower option, why don't you?
#3 At the end of your video you cite Buffett (which is clearly a stock picker and 15 of its 20 largest holdings are paying dividends) to prove your point. How the opinion of a stock picker (even if he's the world's best stock picker) proves your point that investors should not pick stocks? I thought an individual's performance was an anecdote. Why Buffett's matter, but not others?
Thank you for taking the time to answer back.
Cheers,
Mike
"How the opinion of a stock picker (even if he's the world's best stock picker) proves your point that investors should not pick stocks?"
He was pointing out the irony that dividend aficionados frequently cite Buffet, but Buffet himself is not a dividend investor, not that you should invest like Buffet. The video's entire thesis is that dividend investing is illogical - that's just another example of illogical behavior.
@@ianchissy, Funny enough, Buffett isn't a ETF investor either and Ben keeps referring to him after clearly stating that anybody beating the market is just pure luck. Therefore, what we find in his investment letter should also be the produce of luck, right?
You can't say that no investors can beat the market without luck and then, pick one (Buffett) and use his "wisdom" to prove your point. That doesn't make sense at all.
@@DividendGuy there is a reason everyone's referring to Buffet all the time and not some other genius investor: because it's so rare for an individual-stock-picker to succeed so much in the long term.
Even if you exclude luck as an explanation for the rarity of "successful individual stock pickers", you're left with the explanation that it's simply too difficult to do correctly.
and if people fail to do it as their JOB (active fund managers), what would make one think that they as a RETAIL investor could hope to do any better?
@@Klayhamn There are plenty of reasons why portfolio managers can't replicate individual retail investors' performance. But it seems that this is not reported by academic studies (since it's almost impossible to conduct such research). Most researches address fees and stop there. They forgot to consider the size of the fund. It's a lot easier for me to initiate a 5% (of my portfolio) position in Royal Bank vs a 5% of a $500M portfolio. Pro must meet their boss' expectation at the end of each quarter, I don't. I don't have to fear for my job, Pros do. When there is a panic on the market, I don't have to do anything. Pros need to save their job and do better than their peers.
I've been tracking my returns publicly since 2012 and I must be the luckiest guy on earth. Funny enough, I'm sure there are tons of retail investors in the same positions. All you have to do is to have a solid investment plan and stick to it. Markets create inefficiencies all the time (if markets are efficient, please explain how banks lost 50% of their value in 2008 and recover it all in 2009, or explain what happened between September 2018 and April 2019). It's actually quite easy to beat the market. But some people just can't (or don't know how) and this is why they do index investing.
@@PowerChannel88 #2 If he proves that dividend investing outperform the market overall, why he doesn't pick dividend ETFs in his portfolio to benefit from what he just found out? The DFA core equity (both Canadian and US) ETFs have greatly unperformed their benchmark for the past 1yr, 3yr, 5yr and 10 yr. It seems quite obvious that the DFA methodology has missed a point or two while doing their research to build their ETFs. How can you trail your benchmark by 1% to 2% annualized return over all these years? Just buy the XIU and SPY then.... why Dimensional Funds?
#3 Buffett is not a reason to do anything (dividend, etf, market timing, anything!), I agree with you. Then, why citing them in multiple videos?
Sorry Ben, I don't understand the calc on 5:04, $12 minus $1 of dividend.
If the stock price is $12 and I got $1 of dividend, the price is still $12, I didn't get where subtracting the dividend is applied... can someone please explain me?
Can we get the defined maturity bond etf analysed . How does this fare for a short term savings option compared to just high interest savings account.
The argument for dividends goes like this: Managers get the urge to spend money when the company has it. Spending that money on certain things might be in the interest of shareholders, but often it isn't (company jets, dumb aquisitions). A regularly payment of dividends to shareholders will make managers think twice about spending cashflows and/or cash reserves on vanity projects or dumb stuff, cause they know shareholders will be mad if they have to cut the dividend. That is why Buffett can ignore dividends: he is able to buy entire companies or at least a large enough stake to get board influence, i.e. the power to prevent manager vanity or to fire offending managers. Average investors are normally not able to do that, so a regularly payed dividend is a plus if making investment decisions.
Ahhh... stupid managers that spend money on stupid stuff. I didn't know about this insight. Thanks for the heads up! :)
This is one model of how you can use dividends to explain returns. Unfortunately, while being conceptually easy to grasp, it doesn't have as much evidence to back it up vs the factors.
Here's a counter-narrative: it's a bear market and company X's main competitor company Y is distressed because one of their key suppliers went out of business. Company X considers buying Y for cheap and consolidating the market, but to fund the acquisition X would have to cut dividends so the idea is rejected. Y recovers and the opportunity is missed.
That's the problem: if shareholders value dividends over increased stock price then dividends discourage all investments, good or bad. That could be a good thing if shareholders are systematically bad at punishing companies who make dumb or frivolous investments, but if you believe that then you should probably exploit the market inefficiency using the investment factor rather than focusing on dividends - otherwise you're leaving money on the table.
What you are talking about is the behavioral explanation for the investment factor the influence of which was covered in the video.
So you can either a) invest in a company whose management might buy dumb things, but pays a dividend, or b) invest in a company whose management you trust to make good decisions. Mmm, which should I choose.
As both an index fund and dividend stock investor, I enjoyed the video. It's not difficult to find a dividend stock with poor total return so it makes sense whether something pays a dividend alone isn't best indicator of future returns.
What do you guys think of dividend investing in a tfsa using Henry Mah's tfsa compounder as a guide?
Here is the funny part. While Ben says it with a not so friendly tone about dividend investors as stock pickers (they are).
We are all stock pickers, even the low cost total market index funds. We are still picking those. It just happens to include everything. 😅
And while he "disproved" chasing dividends investing is better, he also proved that a good chunk of the dividend growth stocks are just conservative stocks that tend to do well because they are mostly blue chip stocks that happened to pay dividends.
While the approach to simply look and search for dividend growth stocks may not be the best way to invest, it is not the worst as a lot of the "factors" in dividend growth stocks overlap with companies that would do decently well and pays dividends.
And there is always the psychological bonus of loving a "free" paycheck. 😅
share buybacks can create the same effect as dividends and does so more tax efficiently.
buybacks are a more recent phenomenon though
I was wondering if you had any thoughts regarding Micheal Burry's recent comments that index funds were in a bubble comparable to CDO's in 2008
Jonathan Garneau I would love to see a video discussing this
I will cover this in a video.
I have had this question many times recently. I don't know why Michael Burry's opinion carries so much weight. He made the right call once and his story was told to the world. Does that give him credibility? I do not agree with his concerns. The main concerns, market integrity and liquidity, do not make sense.
Passive funds make up a tiny fraction of trading volume which kills the price discovery argument. A Vanguard paper estimated that passive funds only make up about 5% of trading volume despite their large asset flows. Active funds are still doing the vast majority of trading.
Similarly the vast majority of ETF trading occurs on the secondary market (ETF unit holds trading with each other) which kills the need for liquidity in the underlying securities. If literally everyone wanted to sell their ETF units at the same time it could be an issue, and even then if liquidity constraints pushed down the price of some securities it would create an arbitrage opportunity which would presumably be exploited relatively quickly to push prices back up.
This paper debunks a lot of what Burry said: personal.vanguard.com/pdf/ISGBEL.pdf
This comment from PWL research addresses the CDO comparison: www.pwlcapital.com/its-wrong-to-compare-etfs-with-cdos/
We talked about this briefly at the beginning of episode 62 of the Rational Reminder podcast rationalreminder.ca/podcast/62
Ben have you heard of Andre jikh a UA-cam who is big proponent of dividend investing. What are your thoughts on him
Never heard of him.
@@BenFelixCSI If you can't understand why people are paying attention to someone who was popularized on mass media... I suspect you are not likely to understand that dividends have positive effects on both management and investor behavior. Particularly investor behavior. But maybe you do. I wonder if you understand that humans are not rational beings? I admire your attempt to make them more rational... but they are not and cannot be deterministic. That is a factor, no? I am sure you can show us research on the matter. Please do. I suspect human factors are going to have more impact on volatility, not less. Have you considered this?
Great video Ben! Such clarity and common sense, and a great resource for new investors trying to decide whether they should go with indexing or dividend investing. Now, wait for the imminent attack of the Dividend Ninjas!
Thanks as always Grant!
Love the video and the data driven information . It challenged me in my approach to how I want my portfolios to look like.