dividends are not irrelevant it's actually what makes a stock great as investors can have an assurance of gains thru dividends even if their investments would go down into the gulag
@@Wasnt-1are you for real? I hope you know that the dividend amount is also variable and companies even miss payouts very often and I am talking about large companies and banks.
Correction: You are a hack, and aside from general.explanations, have no concept of how an average investor thinks/acts. Ifnnot for dividends, I would have gone broke more.than once, during market crashes, as would %85 of those that trade passively...Think of dividends as playing with "house $", in a casino, because that's essentially what it is; Stock profits on an annual basis, while keeping your original bet on the table...vs, losing any "growth", when the market dumps for a week or more. Stocks go up, and stocks go down. With a dividend, YOU (yes, you), always get payed!!!
I think your point towards the end summarised why I like the dividend strategy: I'm not good at knowing when to sell for income. I get too fearful. Knowing that dividends are paid seems like less of a headache.
Well they have a pre-announced dividend date anyway. So you could just pick the dividend date yourself -- maybe the day after tax day, or whatever -- and well a few percent on that day every year. And same thing.
@@pfeilspitze besides doing more work for, at best, the same outcome, you'd be slowly drawing down your position over time. Timing also becomes a factor because it'll be dependent on the short term swings of the market which will throw off your chosen "dividend date". You gotta remember the market is irrational in the short term.
@@uncreativename9936 Selling consistently is just like Dollar Cost Averaging when accumulating -- you remove the timing factor by being consistent about it. And these days without per-transaction costs in most brokers, you can do it just as frequently going out as you did going in. Why do you think that the company's chosen dividend date is any less timing the market?
@@uncreativename9936But selling when the stock price is down has the same impact as the company paying a dividend rather than performing a buyback when the stock price is down.
@@Wanderingbuffalo12even in Europe you can be aerospace engineer and earn less than that, USA salaries are higher (cost of living too so it isn't that simple)
I've always thought Warren Buffett's explanation was the easiest to understand. If a company can reinvest a dollar of earnings to earn more than a dollar, they should retain the earnings. If they can't, they should pay it out as dividends (or stock buybacks depending on the price of the stock)
Exactly, but that is thinking like an actual business owner. And not an ivory tower economist who wants prestige for theories that don’t reflect the real world.
any company could have unexpected stagnation for unforeseen and prolongated reasons even despite blowing through capital that could have been dividends, in which case, had you had those dividends for yourself and reinvested them, your investment could have still been growing with accelerating compounded returns. eventually the compounding return rate can become stronger than even huge price drops. it can be a solid way to diversify your growth strategies in a long term portfolio as everything has pros and cons
Any company is able to earn more than a dollar on that dollar. It might just buy treasuries and give you a bit more. But I don't think you will be happy about such earnings.
The case for dividends being relevant that makes the most sense for me is the "passive income" crowd having a preference towards dividends. Because even if they are the same as taking capital gains, I can see how not needing to manage capital gains would be attractive to them.
There is a big difference between selling assets and receiving profits, even when profits reduces the price of an asset. A price of an asset, which you hold, can increase again, an asset you sold is gone., and needs to be reacquired.
Correct me if i'm wrong. But i was under the impression, that most dividend investors see capital gains as equally valued as opposed to capital gains being the king. For us dividend investors (among other factors), i would say two things are most important. 1. If i receive dividends instead of selling shares for cashflow, i won't ever lose any shares and for the majority of my time accumulate shares. 2. I don't have to ever time my sell, to benefit "the most". I'm never getting any headache cause of market volatility, not do i care about a bear markets, cause i'm getting cash no matter what. Not only that, but i'm actually more happy seeing red in the short term then seeing green! All of this has even more weight, when you invest into ETFs instead of individual companies, cause then you really don't have to pay much attention to any underlying companies in the ETFs.
yeah you have more shares, but the actual equity those shares represent is lower because the company gave its money away. If you are accumulating still, then why do you need cashflow? Is that an emergency fund (you can still have one w/o a dividend heavy strategy). After you stop accumulating, there is sequence of return risks and I'm not sure how much dividends might help then, but companies can lower or eliminate dividend payments as well (I know there are many that have been doing it forever, but as pointed out here, they might be industries with less growth potential, so holding the shares long term may have cost you returns over the long run). (I'm dividend-agnostic in my investments, which are mostly index funds.)
My honest favorite thing about this channel is when you do the exact same thing I do when people ask me a complicated question and want a simple answer: respond with "sort of, it depends." Definitive answers are so rarely applicable so I love when somebody treats me like an adult and assumes I am willing to listen to the explanation. Please keep up the good work.
Perfectly covered Richard. Dividends, buybacks, reinvesting, they can all be either good or bad for shareholders depending on the situation. Reinvesting is good when management can execute to get great ROIC on this reinvestment. Buybacks are good if the share price is cheap relative to intrinsic value, and dividends are fine if the cash is excess and otherwise not needed by the business.
I could be very wrong about this, but in a vacuum wouldn't it be better for individuals to get a dividend that is reinvested in the company (I know you can't force people to reinvest) vs buybacks because in both scenarios the stock price increased. However in the dividend (and forced buy back) you also have more shares now. Example the company was going to spend 100m buying back shares, but instead it gave the 100m to it's share holders and made them buy it. I guess my question is would the stock go up by the same amount if the company bought 100m in shares vs if investors bought 100m in shares.
@@lotoex hypothetically speaking I think this would be the same because you either buy more shares but the outstanding share count stays the same, or you own the same # shares but the outstanding # of shares decreases due to company share buyback... Hence your % of ownership goes up the same in both situations. Technically speaking every shareholder can't simultaneously buy more shares because you can't buy shares without someone else selling you their shares.
@@SigFigNewton True and it is usually a good indicator that management is shareholder friendly. It also gives you the opportunity to redeploy the capital as you see fit.
@@manemrob1510 So if I am understanding correctly in a buyback the outstanding share count goes down and thus indirectly decreases the payout ratio. Making future dividends safer, as well as easier to increase the CARG
Dividends are great for a mature company- if there is no more organic growth available for a company, but the company has a long-term market, I would rather they pay me the profits out in dividends then expand into markets where they have no expertise. I've watched many mature companies reinvest their profits by buying unrelated companies and expanding the footprint of the company, only to realize they overpaid and have no expertise in the area, resulting in large losses for the company (and investors) when they eventually have to write-off the garbage investments.
Reading comments, this is the first one that actually makes sense. You cannot comment on this subject without understanding capital allocation. A company can reinvest profits, pay down debt, buy back shares and pay a dividend. What they should do depends on the situation of the individual company. All of them are good ideas in the right situation and bad options if the situation is not right.
This is 100% accurate. If you take a well established business that has a very established and profitable market and pays out dividends and one day the company decides to pivot for growth by keeping that dividend and investing into other ventures, you can be sure there will be begrudged investors because in fact the company is assuming more risk.
For me, my FIRE strategy is based around dividends partly because of psychology (it makes it easier to know I do not ever intend to sell my stocks, rather than have to manage how much I sell each month or quarter) and partly because of stability (with dividends generally being less volatile than stock prices) so enabling me to plan better for the future. For now it’s working well, but I totally get that this is a personal thing.
@@Zveebo I see where I was confused - it’s often displayed as a percentage of the stock price, but that’s not how it’s set by the company. So the percentage may go up or down as the price of the stock fluctuates while the set dollar value actually stays the same. My bad!
@@BusterDarcy you might be thinking about cover call etf’s but most stocks unless they are very volatile are very consistent and will increase their dividends every year or so. The only time they will cut a dividend is if it’s unsustainable or i’ve seen in cases like MPW they cut their dividend in order to pay of outstanding debt. However that just would bring people back to doing your research on a stock and not just buying into high yield just for the yield rather than the fundamentals of a company
It's very interesting to learn about this. To summarize, it all depends on the context and where you invest. In Brazil, dividends are not taxed, but there is a tax on capital gains. Therefore, a dividend strategy seems more advantageous in this scenario. Additionally, Brazil has something akin to REITS, known as Fiis, which are funds that invest in real estate and are legally required to distribute 90% of their monthly income as dividends. This is similar to buying and renting an apartment, but with the benefit of requiring lower capital and avoiding typical property management issues. Some of these can offer dividend yields ranging from 8% to 14% annually.
I am a dividend investor and this does explain the strong opposition I've had from other investors against my preferred method. I like the fact that I don't care if my stock goes up and down. I like that I'm buying a company, not a price. I like that I'm participating in the profits of that company. I like that I can take those dividends and reinvest in the same company or in another company or in a bond or other fund. When I'm older, the plan is to use my three sources if income: Social Security, 401k, and dividends. I'd like to pass on those stocks to my child who then can use those dividends. I like my strategy. I think the companies I've chosen are strong. I guess we will see
My input as a business owner is "dividend" is a form of "preservation of wealth" rather than a vehicle of income. For income I have my business, I just want to be able to sleep at night and not have to worry bout the stocks going up or down and receive a cheque every year or month for my hard work on my actual business.
I agree. Investing hardly builds wealth, maybe after the 20th year of compounding. True wealth comes from starting a successful business or successful fast career
I think if you are young you could benefit more with growth stocks, but as you're nearing retirement, having dividends coming in allows you to generate income without selling. Being forced to sell stocks when the market is down can cost a lot of money
Exactly. That is one clear benefit of it. A lot of stocks have their values heavily inflated by, for lack of a better word, vibes. Look at companies like Tesla, which had its valuation boosted to absurd levels far beyond current revenues or even beyond any reasonable hope of future profits. And that's before you even consider meme/cult stocks like the Gamestop fiasco awhile back.
But they are not. Companies can go through hardships. Companies can reduce dividends. Companies can restructure. That's the point of the dividend irrelevance statement.
@@famicomnintendo And when the market is down and companies aren't making as much money they're more likely to cut dividends. There's no free lunch. A lot of people have forgotten this because we haven't had a proper downturn in more than a decade.
I think of Dividends as kind of like dollar cost averaging the “sale” of stocks in my non registered portfolio. And I like the preferential tax treatment of Canadian dividends. I just think of dividends as one of many income streams in retirement (eg pensions, OAS, CPP, RIF, dividends, interest income, etc). I never sell stocks (except to rebalance every 6 months to my chosen asset mix of 70% stocks, 30% bonds - which means I only sell stocks when they are up).
The majority of dividend investors I've listened to invest for the income. If you don't need the income, obviously, they reinvest. With that in mind the issue with saying you can use your capital gains as income makes me think, yeah, but if you need it for income (retirement etc) you may eventually sale all the stock. Where as a dividend you'll still own the stock and receive the dividend. A lot of nuance to these discusions.
Sometimes dividends are taxed, and sometimes capital gain is taxed. Sometimes both, but at different amounts. This can help determine if receiving dividends is right for you.
@ThePlainBagel an interesting note on how the stock price is “adjusted down” by the amount of the cash dividend: I worked on the floor of the New York Stock Exchange for 7 years. I was a trader and head of operations for a firm there. I always wondered how that “adjustment” worked. I spoke to some of the market makers (specialists) that managed the book for each stock and they said that the only adjustment that occurs is that any outstanding limit orders for the stock on the open of trading the day after the dividend is paid ate adjusted down by that amount. So if there was an order to buy on the Open of trading that day for 20.10 and the dividend was 10 cents, the limit on that order would be automatically adjusted down by 10 cents to 20.00. Interestingly, some of those order have a “do not adjust” instruction on them. This means that for dividends, do NOT adjust my limit price. This means for some subset of those orders, their limit price goes UP relative to the value of the stock on that day. Thanks for your channel and all you do! The rational thinking is refreshing.
To me one of the big benefits of dividends was always as a partial hedge against bad decisions. Lets say your gains under normal circumstances are the same regardless of if a company issues dividends, as the theory proposes. If the company makes a terrible decision that severely hurts the stock price, something not uncommon in more dynamic sectors. If you've been getting your returns through dividends than you just get less income, but if you've been getting your income in the form of increased stock value than it can lead to serious losses.
But in that scenario, the bad decision already tanked the stock price, so your investment lost a lot of value even tho your div current isn’t affected….yet.
@@chowsquid but a stock crashing doesn't erase the dividend payments you got in the past while it can erase previous returns in the form of stock value if it goes below your original purchase price. Not a problem if you're regularly selling off a portion of your portfolio but for someone looking to hold long-term it can do more damage than if your returns are in the form of cash rather than stock value.
@@greenmario3011lmao how can you be so dense. if the company you talk about never paid dividends it would have a higher share price to begin with thanks to the retained earnings. dividends are not free they come out of your capital appreciation
Yes, stock drops to match the dividend distribution, but the price also elastically bounces back on the promise of continued future dividends. Point 2, when a company cuts its dividend program, the stock price drops off. Why? If divs are just a distribution of money that already is held at the company, there should be zero change in price off this news, but there is, and its clearly because there is a fundamental value that investors place on consistent dividend distributions. This value on its own supports the stock price substantially. There are some companies that are net negative profit, but their stock price is strong. There are some companies that are close to break even or making money but their price suffers. All of this points to a value system based on investors' perceived value, not on actual fundamental value. Yes, some people might invest based on those fundamentals, but most of the stock price is supported by speculation.
The reason I prefer dividend-paying stocks is because non-dividend-paying stocks fall into the "Greater fool theory", in that the only way you can make money from them (assuming they remain non-dividend-paying) is if somebody else pays more for it. While I understand that from an abstract perspective there should be no difference, purchasing an asset that doesn't bring me income simply feels wrong. To build on Warren Buffett's farm example: I would never want to buy a farm where I can only make money from it by selling it to someone else.
It's actually not different. Dividend paying stocks are still subject to greater fool theory. Say, a company pays 4 % dividends and goes bankrupt in 5 years. That's a loss in total. Just like said in the video, you could just regularly sell stock to get the dividend effect. You have to hold far more equity than you'd get out as dividends each year, so the risk is still high with dividend stocks To get to the farm analogy: every farm is at risk at stopping having enough yield to be profitable
I don't think that a stock needs to pay a dividend right now, but there has to be some mechanism for extracting wealth from the stock at some point in the lifetime of the stock. He mentions cashing out capital gains, but I don't see how an individual investor does that. Other than the company being sold in whole (the final fool) I don't see another mechanism for getting paid besides dividends.
@@jerryspringer6096 Yes, risk is never fully avoidable, but that is another topic. My comment was a very condensed summary of a macro-level point of view of these two categories of stocks and in reality there are going to be a lot of ifs and buts that could be discussed at length.
Me too. Even if they have less or no capital growth, I just love getting the payments lol. A part of my portfolio is for capital growth and that's fine, I like a balance
1) My good days come in lump sums, so when I get a chunk of cash to invest, then I tend to buy into a dividend stock that looks like it is on sale. Then, as the dividends come out of that investment I use it to divest and slowly balance out my portfolio into other sectors or investment types. 2) I perhaps have attachment issues. I will repair something until I am blue in the face before I replace it. I will wear something until it is full of holes before I throw it away. And when I buy a stock I don't want to even think about selling it for years or decades unless it is specifically a shorter term play... and even then I tend to sell the initial investment and keep the difference as stock for that longer term hold. If I sell and the price goes up, then I kick myself for selling too early. If I sell and it goes down, then I buy right back in, which defeats the point of selling if I was trying to free up cash for something else. Dividends let me get around my attachment issues so I can keep what I bought, while still freeing up money to do other things. 3) With dividends the tax hit is lower than standard income, and (at least so far) dividends are not a significant portion of my income. I view this as a way to spread that tax burden out over time. But if I buy into a stock, wait for it to jump, and then sell, then I would be taking on that tax burden all at once, and I don't particularly see how that works to my advantage. If I had $10M invested and was making thousands of dollars of dividend income a month then maybe that would be a different story... but we aren't there yet, and may never get to that level lol. 4) In the long term, my goal is steady income that I don't have to think about. Dividends provide that. I don't want to be 70 years old during a market down turn, freaking the hell out about selling Stock A vs Stock B because one company may potentially do better or recover quicker than the other, or debating if I just don't sell at all and hold through the down turn and subsist on rice and beans until things improve. I think I'd rather be dividend heavy, and take that more steady income rather than worrying about all of the different scenarios that may or may not play out. 5) Most dividend companies are significantly less volatile in stock price. Again, I'm no day trader. I review my accounts every few weeks, look for some trends on my watchlists, make a few limit orders, and hope for the best. If they don't trigger, then I feel like I dodged a bullet and can free that cash up for the next play. If they do trigger, my buy orders tend to be on the low side, so I feel like I got a deal. But I don't have the time or lifestyle that allows me to watch the markets daily... I have a very full time job, and kids, and life... and I have a *slightly major* case of ADHD, so I'm frankly not going to have the discipline to watch every move of the market, and I'll just kick myself for missing every possible opportunity trying to maximize my trading on shorter time scales.
Dividend-paying companies are no more stable or financially sound than other companies, and most dividend-paying companies won't continue paying dividends in a downturn when they're no longer making money.
Indeed. Point 4 is heavily underestimated by the adherents of the 4% rule (gradually sell accumulated assets, market growth will compensate). They think they won't suffer mentally.
If you want to actually feel like you're owning a business, then dividends make sense. Everyone is on the buyback train, but I think a company bidding up it's own stock price is far less stable than taking the direct payout. As someone in the middle class, all my investments are in tax advantaged accounts. The "tax benefits" don't matter to me as much as the reliability/stability/psychology of dividends
I picked a dividend strategy for the equity portion of my TFSA simply because it was the simplest & quickest way to diversify it without racking up a big pile of transaction costs; add a year's contribution to the previous year's accrued dividend cash and use the pile to buy a whole new equity each year. Particularly in the early years of building a portfolio, saving on broker fees that way is tempting.
I also like using dividends and capital gains to buy whole new shares and open new positions when I don't want to put more into my account, but i still want to grow the number of shares I have
These days, if you're paying broker fees to buy and sell things, consider getting a new broker. (Assuming you're an investor. If you're a trader then lots of things are different.)
For me the biggest thing about dividends is that they're...elegant. Simple, clean, and elegant. Priced in or not, dividends are still the prettiest way to earn money on stocks. And I think respecting my own aesthetic bias will make me a better invester in the long run. Find your style and stick to it.
I invest in some dividend stocks to recoup my expenses when buying stocks and ETF’s as my portfolio is like 10% stocks (which pay dividends), 90% ETF’s (which do not pay dividends). A dividend return of 50 Euros per year is the goal as this would cover it. (I live in Belgium we get taxed on dividends but not on the growth of worth of a stock, so investing in non dividend yielding stocks or accumulating ETF’s is a lot more interesting)
yo how many taxes your pay on dividends? here in ger we have 25% but we also have a tax-free amount per year that just got increased to 1.001 (before it was 801€) of course only applying to the profit relization, also do you guys have also some agreements with some country because of 2x taxation, so that it isnt 2 x 25% as example (a.e US-gouverment taxes it, and then your taxes it again (germany/belgium etc)
@@funfungerman8401 yo! Well we pay 30% but have tax-free for around 800 euros. I only invest in Belgian stocks so I don’t have the problem of double taxation. My regional spreading happens through my ETF’s. Hope that helps 😉
I really like the mix of both. I have some funds that give dividends (which are taxed at 35% here in Switzerland) because it's so easy to have it manage itself. And on the other hand I have (a majority admittedly) of funds where capital gain is automatically reinvested.
By far my favorite finance channel, along with Ben Felix.'s. Common sense should be the basis of investing, along with a good knowledge of the finance literature. So much disinformation in this space....I consider dividend investing a good strategy for psychological reason for folks who don't chase total return...I am early retiree and my portfolio's return exceeds my yearly budget by two to three folds so I consider dividends as a mandatory withdrawal...Not good...I diversify my stock allocation 50/50% with growth and dividends ETF because they are not 100% correlated. Money invested in stocks shouldn't be required for 10years +. I make sure I don't receive too much dividends because of taxes. Also nowadays, I make 5%+ on cash, very well paid to wait...So I keep 50% of my portfolio in monetary funds until I can buy low and hold long term. I would not suggest that approach for younger folks but at 60 yo, I have to consider the risk of sequence return....
Because younger people are in the accumulating phase with a long term horizon and they don't need income from their portfolio. They indeed can take more risk than a retiree. More short term risk ( volatility ) but better expected returns. Better returns makes a huge difference long term because of compounding :) @@entropyss
I didn't watch the previous video mentioned, but the biggest plus of a dividend yielding stock is behavioral. Briefly mentioned @13:00 or so. In short, a dividend is a "forced savings". A lot of people I know would never sell a stock due to perceived capital gains hassles but will gladly take a dividend.
The counter-argument to that was that dividends are taxed as regular income, meaning typically higher rate than capital gains. There was a change in the tax code during GW Bush years that dampened that somewhat though.
I cannot find anyone that mentions one key point- in my opinion. 16:39 Capital gains are mostly theoretical when you do not sell your position. But… when you actually want to get some of these in hand, you have to time the market! Who knows what the market price of the stock will be when you need some cash?? Dividends are more realistically related to how well the company operates, than stock price which can be affected by numerous irrelevant factors. I think that owning a good company -and not good a stock - is preferable, and receiving a portion of the profits is the point in participating in a company
I think the view on dividend really depends on your tax rates and if you understand the taxation on investment return. Earlier I was really on dividend. It was like free money every 3 months. But now every new dividend I receive from eligible stock are taxed at around 40% and non-eligible at 48%. Capital gains are only taxed at 26%. And you pay the capital gain taxes only when you sell. I'm from Canada
I've been wondering about this very thing about how taxes are taken out of dividends vs capital gains. Naively, I assumed they would be taxed the same. Guess it's time to go more research.
Yup…you leveled up as an investor. And you can level up some more with tax loss harvesting. And carryover. Which with div, you can’t. Div is fine in a locked up account like IRA or 401K or HSA.
@@Kathywake23 Here in Austria dividends and capital gains are taxed the same. You can also deduct trade losses from dividends. The tax is applied on the net amount of capital gains and dividends. Still, dividends are worse if they are payed outside of Austria because the source countries already keep a tax ("withholding tax") and you only get a part of it the easy way. Capital gains tax is 27.5% in Austria. Canada for example takes 25% of the dividend as withholding tax, but only 15% of that can be credited towards the Austrian tax (Austria/EU and Canada have some kind of agreement on that). To reach Austria's 27.5% from the credited 15% I have to pay another 12.5% tax here on top of the 25% withheld by Canada for a total tax of 37.5% of the dividend. There are ways to get back the 10% payed over the local rate, but it involves annoying (and sometimes costly) paperwork including the tax authorities in both countries and the broker. Barely worth it unless you get a lot of dividends in another country (I have quite a few German stocks paying dividends for example and might jump through the hoops).
To me, the old phrase "One in the hand is worth 2 in the bush" is very relevant here. Distributed dividends are realized profit sharing rather than retained and (hopefully) reflected in share price. I don't hold this company, but let's discuss "O" Realty Income, which is a favorite among dividend investors. Over the last year, the share price is down 25%. This is while the company's net income increased 142% from 2021 to 2022. As Ben Graham pointed out decades ago, the market often behaves irrationally and at illogical valuations. Is an "O" investor better served by stable and increasing dividend payments or the irrationality of the share price in light of its profitability?
From a long term pov, Q’s lowering share price is a positive for investors who are reinvesting their dividends. Q is being beaten down because of market sentiment in its sector and not because of it as a company. Thus the dividend reinvestment is catching the benefits of a lower share price with more shares cheaper to be able to buy more cheaper shares as the market keeps prices low.
I don't subscribe to either ideology but think both have their place, the reason I like dividends is because it lets me re-invest and diversify my portfolio. Stock in a single company that keeps growing is nice but can still wipe away a lot of the value overnight due to sentiment changes. A less aggressively growing stock that pays regularly lets me funnel the dividends into other stocks that moderates the volatility of the overall portfolio. So having a 50/50 mix is ideal for me.
@@dylanschang6386not really a good comparison. Because you can have 10 companies that give dividends and IS a diversified portfolio, just because in the general market it's a lower percentage doesn't mean you still can't diversify dividends.
If you are to have an active management of your portfolio, you can leverage your capital gains by selling, but if you want it as a passive income, dividends can be easier to manage in retirement
The real point of dividends are to enforce some kind of discipline on the business where they need to continue to generate and set aside sufficient cash flow to pay back capital to its owners on a regular basis instead of hoarding it in a big pile and finding often stupid things to waste it on like an overpriced and ill-advised acquisition or poorly thought out expansion. It's a shame stupid tax policy has distorted things so much here.
That all sounds great, but the problem is that company managers know that. Just look at GE, they kept their dividend steady, but that had nothing to due with underlying prudence or good capital management, it was to project that illusion and fool investors like you who treated a dividend as a proxy for sound management.
@@jonathanh-e2494 for companies like ge. Or another good example is automaker's..the point of the dividend is to just retain capital. They can not deliver growth, so without a dividend..why would i own the stock..its not that they need to fool you..they dont care about YOU, they need large investers to stay invested so if times are tough they can tap into that capital
That has been been the strategy of tech stocks for the past decade to give the illusion of growth by using these ill fated projects as assets on the books while they hold little or negative cash flow i.e. real value.
I like the psychological aspect of the relatively stable, predictable dividend payouts for several of the reasons mentioned in the video. Treating the payments separately from the principal investment that is 'untouchable', being able to invest the dividends into new opportunities without selling stocks, also the regularity of dividend payments being reinvested creates a dollar cost averaging effect.
For me, its supplemental income... like, I have access to extra income from my portfolio that I can either reinvest it, or keep it while increasing my contributions to 401k/HSA/stock purchase plans from work without changing my lifestyle... It gives me flexibility
@@Skyriderx10 It's not extra income. It's portfolio gains that you are choosing to keep in your pocket no different (besides tax considerations - moot for retirement portfolios in tax advantaged accounts) than any other income from capital gains.
@@Omar-et7sb at the end of the day, its extra cashflow for me that I would not have had to support my other investments... Without that, I would have never been able to max out my retirement contributions... If it comes at the cost of paying a higher tax on dividend income, then oh well, thats the price of flexibility, but then again, im not anywhere near that threshold where it makes much of a difference
I'm a dividend growth receiver (retired) and use this money to live. Dividends provide me with income and I don't have to sell shares, which is very important especially in a down market. The number of shares I own remains the same, so the price doesn't matter. Companies also usually raise their dividends to match inflation, which for me is important. I treat dividends like gradually filling a water trough. The company during three months fills the water trough with profits. At the end of the quarter, some of the water is taken out and given to the share holders. Yes, the water trough isn't as full, but it will fill up to again be distributed.
"I don't have to sell shares, which is very important especially in a down market" Not reinvesting your dividends in a down market is essentially the same as selling off your shares in a down market. It might be psychologically more comfy but it isn't actually better.
I do have bonds and bond funds. The key is to diversify investments. I also own growth stocks, but I'm living on my dividends and interest income. Growth stocks will fund future major purchases.
Well said Richard - I couldn't agree more . Dividends are a part of my retirement income stream - and on the months I don't need cash, I simply reinvest the dividends and grow my position.
@@xvx4848 It's not a weird strategy if you understand that: (1) the coupon on bonds is fixed; and (2) fixed income is not the same as fixed purchasing power.
A company thats pays consistently good dividends is the safest bet for an investor. It means they have cash flow and they dont hide their numbers (if their debt isnt increasing much). Also a company thats issues divident, may lose stock price but normally very soon the stock price will reach the before-divident-cut price. Cause investors have a price in mind for that stock and for sure really noone says "oh the stock gave us cash so now it worths less". There's a reason VYM is one of the top etfs.
Good insights. I generally agree with these points, but dividend growth is a reasonable counterpoint (assuming the divided payment doesn't limit the company's ability to reinvest responsibly and grow). If I need income I think I'd rather get that from a steadily growing business paying me the excess of what they need to reinvest to grow, rather than having to sell a portion of my stake in the business and thus be entitled to a smaller portion of its future cash flows.
I favor dividends because I do not intend to sell my shares - ever. I'm instructing my children to hold their inherited shares - also forever and to pass down those same shares to their children.
10:03 This right here is why dividends are anything but irrelevant. My company made money through it's core business activity, and that money is mine and is paid out to me. I can invest it as I see fit, rather than the exectutives trying to find ways to spend the stockpile of cash, sometimes on stock options, executive compensation, new offices, furniture, vacations, retreats, corporate jets, woke public relations, human resourse divisions, ill advised investments, buybacks during periods of high stock prices, et al. No, just send me the profits and make more next quarter, thank you.
I love your videos! But A few things I think you missed some companies with higher litigation risk such as Altria, cannabis stocks, alcohol stocks, and certain other industries with higher litigation risk it makes sense for them to pay higher dividends to keep that money off there balance sheet and return it to shareholders instead of risking it getting taken by litigation. Also I don’t think you talked about how during bear markets like we are in now that dividend being paid is now either buying more shares if they have a DRIP or at least paying them some return while the stock is down you don’t want to sell shares in a down market and especially for a loss! And third dividends are taxed less then cap gains in the U.S at least in some cases you pay 0% federal income tax I do a combination of high growth and dividends but I do not believe they are irrelevant for those reasons not talked about enough. But always good to hear all perspectives keep up the great videos!
Idk if there's a true meaningful difference here, but to me a big difference between cashing out capital gains and taking a dividend is that capital gains run out. Let's say I have to sell shares in a company to pay my bills, eventually the number of shares I possess will reach zero and all my investments will be gone. If I'm using dividends to pay my bills instead I can, in theory, continue indefinitely. Of course this is all dependent on the company continuing to do well, but that's true with both dividends and capital gains. Dividend investments seem like they have more longevity and security. I don't focus on dividend investing myself, but in my head if I were to retire - which isn't happening for decades - my instinct thus far tells me its better to live off dividends than it is to live off selling stock.
@tomr6955 if I go from 100 shares to 99 shares then I can only do that 99 more times before my investments are exhausted. If I collect a 1% dividend I could do that forever my position will never be exhausted. Seems like a pretty big difference to me.
Make sure to research short term treasury bills and treasury bond index funds. There are certain times I don't know what I want to invest in and yields are tempting if the government doesn't default
Getting a part of the profit without having to pay a trade to sell the underlying shares and still be able hold everyone of the buyed shares is a plus for my pocket change dividend portfolio. Especially because its not filled with big amounts of shares from one stock nor a regular savings plan. So I use the dividends to reinvest in the same or other shares.
@@alexandervp6180 Im not from Canada nor America, here its also a simple way to use a Tax Benefit in form of a capped yearly tax free profit. But I excluded this on purpose in my comment.
@@alexandervp6180 No Im efficient when I get a payout of a yearly fixed sum of Profit. This fixed maximum amount is Tax-free. You can get this benefit by selling your Shares or by Dividends. Or a mix of both.
@@alexandervp6180because you get less tax hit. The same as getting a job that earns let's say 15% of a tax rate, and then getting a better salary but not as good to be useful,, and actually lose more money for being in a different tax bracket. Here in my country that happens a lot, some employees prefer to not get a slightly better salary because that means they will get a different tax.
For me dividends are a psycological thing. I just like the feeling of having gained something, without having to sell my stocks. I provides me a feeling of freedom to chose what I want to do with it. I think it's that feeling of freedom that people like. It's not fully rational.... but people in general like having options, freedom to choose.
Dividends, if reinvested, are a psychological trigger to keep at it. Share prices go up and down but your number of shares grows , short of share consolidation
I have been a dividend only investor for a long time. I would certainly say dividends are not irrelevant. Everything that is argued is more behavioral than anything to do with dividends. However dividends are paid out of profits and every shareholder gets the same amount (per share). Buybacks and capital gains vary widely on when you sell. That is the biggest argument why dividends are important. IMHO
1. Stock buybacks are now taxed on the corporate level in the U.S. 2. Blue chip quality dividend payers can help a lot with minimizing the need to sell shares during a major downturn to maintain your desired cashflow. Has to do with market value vs the companies actual finances. 3. Qualified dividends are taxed very favorably in the U.S.
what if the amount the market crashes is less than the opportunity cost of chasing high yield dividends? IE with voo you gain 100,000 in ten years then crashes 30,000 , but with dividends you gain 80,000 and it crashes $20,000, in this case you could sell $10,000 and be equal to the dividend investment
@ryot3360 I mean… don’t chase high dividend yields? That’s the stupidest thing you could do. Do some research before buying a stock. This goes for any investment…
I remember seeing that guy's video because of YT suggestions. I had to watch it twice because I did not and still do not understand what he is trying to imply. And I have the same feeling about this video too. Aren't dividends the fundational elements of capitalism? There is a company with some business going on which has some revenue and some expenses, it is owned by different people through shares, those people agree on what to do with the potential profits: they can divide them among them, reinvest them or have them as cash for the company (I know there are more stuff, but I want to keep it linear). And if they think there is no more growth to grasp and there is no need for cash for the company, then dividends are the only other options for those profits. And if markets are truly efficient then its stock price must have plateaud for a while if that is the only option available if that has been the case for 2 years for example. And if you can actually understand the company business in and out, you can then see if that is actually the case, if the business will be the same in the future and so on which is sometimes very very difficult. And I truly do not understand that guy's argument for the graph shown at 13:26. If in the last 30 years, dividends outperformed the S&P 500, why is it less important/does not matter if other factors are involved? You still outperformed the S&P 500! It is a great result. And if markets are not efficient, all of this does not matter, doesn't it? There will always be money to be made by simply exploiting stock prices inefficiencies then. Love your videos! Keep up the good work!
Having studied finance and economics for a very very long time, all the points made by The Plain Bagel AND Ben Felix are valid. But there is still a part of me that likes the idea of having money in my pocket instead of money left with the management of the business. I can chose what to do with that money, i.e., to consume it or to reinvest it into whatever investment vehicle my heart desires.
What you describe is a common behavioral bias called loss aversion. Selling something feels like a loss because you are giving up future returns. Dividends feel like a win because the loss (drop in share price) is less visible and not initiated by you. It's ok to say it makes you feel good as long as you understand that you're acting irrationally.
Mxk is too dumb to finance his own money. So he lets someone else do it for him. And when that someone else screws around with his cash and pockets it for themselves, that’s when mxk realizes he should’ve learned how to manage money and keep cash in his own pockets
Dividends are not irrelevant. They are useful for portfolios of older people who want to create a steady income stream even in times of (extreme) market distress. But that's about the best argument I would be able to find. Example In 2008/2020 you did get your Coca Cola dividend, even if the broad market tanked +30%. The younger you are the more irrelevant dividends are.
2 things: I buy 4 shares of VOO and pretending there is no dividend, in 10 years when when it has doubled, I have to sell a share and erode my base position, losing growth opportunities. A dividend can be collected or sold without touching my base. Second point, equity prices are almost never rational and if they happen to be at some point, it mever remains. I can name several equities that are so over valued it is ludicrous and several under valued that are mostly punishment for not going along with what a few brokers or brokerages in New York think. I am not advocating one way or another, just saying people advocating dividend irrelevance are ignoring realities and people who will not invest in a company if it does not pay a dividend are short-sighted. Thank you for the conversation and your typical sane and rational approach to the markets.
Hello.. i'd like to ask a question.. im kinda new to investments industry and for me dividends in my mind are kinda equal to rental income.. for example you dont care about the value of your house if it drops of raises because you have no intentions of selling it.. you just collect rent.. isnt the dividend investment something similar? can anyone address this?
I suppose this is why the traditional retirement advice is to invest in ETFs, especially the SP500, and not be bothered by dividends existing or not, only looking for share price growth. Then when it really is time for income, you sell that and rotate to bonds or even just sell shares and call that your income. For round two, tell us whether options income is possible, or if the win/lose of options will mean that the investor's return is flat over time.
"options income is possible" It's a zero-sum game at best. Where are you on the bell curve of all options traders, and can you be sure of that position?
I'm wanting to get into dividend investing but I have a question. Does reinvesting the dividends avoid this "paying yourself from your other pocket" issue? I'm looking at dividend aristocrat investing as a way to cut out the middleman while using the fact that a company is paying out dividends as a proxy for financial health of the company instead of looking at P/E ratios all day. (Yes, I know about witholding tax). I have no interest in growth stocks given all the chicanery involved in reporting. Please shoot my logic down. EDIT: 10:04 - Oh. Never mind. 🙂
I ignore dividends for the most part, always reinvest which means I have yearly tax due on dividends earned, but my primary source of income past retirement (I'm 60) will be planned selling of shares from both tax sheltered and taxable accounts. This way I can control my yearly 'income'. Having all one type of stock in retirement can be costly, especially if you've built up a nice portfolio of dividend stocks with no way to shelter the dividend taxes. If you get paid 90K in dividends yearly then you have a 90K income and will be taxed in that bracket, no choice.
until you get a crash or a drop and you're stuck selling at major loses because you need to sell to even live. Zero planning for emergency situations. You will be the next guy crying online that he lost his money and is struggling. The exact same way every person going into retirement that uses this strategy when the market or your companies drop.
@@dancecrew1996 No, I have a bucket for a market downturn. There's nothing wrong with dividends, but don't trick yourself into thinking you are somehow insulated from a serious market downturn because you get income from dividends. Might work, but have more than one option.
Dividends are NOT irrelevant. In this market, they tell you that your company is generating profits, which is getting rarer everyday. As a shareholder, you should be picking stocks that have strong fundamentals, otherwise you're just relying on the greater fool theory.
I left a critical comment on Ben's video (I'm an avid viewer and agree with him much of the time) with an argument that Dividends create growth incentive. Your nuanced talking points out paced my own critics and yet somehow felt more balanced. Impressive!
In the end the only real net return is dividends or through acquisition, but that acquirer eventually also wants dividends. You might want to focus on growth, but in the end the purpose of growth is, from an investment point of view, to return more dividends in the future. Therefore dividends actually play a key role in investing, although often VIA growth.
Yup. Even buffet says you are buying the future stream of div income….but that future could be 10 or 25yrs out. The reinvestment and buybacks just makes your div share in the future bigger.
This is why I don't mind small companies not paying a dividend because they might have a lot of growth opportunities but if a company isn't paying dividends when it's mature I don't think that is a healthy company.
@tompuijpeNL After a point, growth stops. The best example on my mind is streaming TV services. In the developed world, the industry has all the customers they'll ever get. They trade customers back and forth, and that is small potatoes. A new player can make inroads to get some of that action. But other than a population boom, that's it. Market saturated. They are still making money. But there is no further growth potential. Not like when it was a brand new concept or intermediate growth period as half the population didn't yet have the service.
@@icecold9511this is an excellent example. Netflix has decided to grow its customer base artificially by changing their business model making it difficult for families to share their accounts. A fixation on growth.
great video but i think you casually mentioned briefly at the end the best part of the dividend, which is that the company has done the math and this is the money they think its worth it to just give u in cash rather than reinvest. you can agree (invest elsewhere) or disagree (drip), and this decision might be impacted by your own situation (you might prefer to treat the dividend as spendable) but to me the real issue is that people dont appreciate the time delay in the declaration date and the paid date. the dividend is the amount of money the company felt it could return to investors at the time it declared it. by the time u get it, it may be best to reinvest it (but u lost taxes) or best to invest it elsewhere. this is where the opportunities come from.
I like the idea of dividends for both young people and those in retirement. For young people it gets them thinking that their labor isn't the only thing they can use to pay for their needs. If they can build up a portfolio that starts paying their monthly expenses then they can feel more optimistic in job hopping for better pay and work conditions as well as feel more secure during a job layoff or short-term disability or illness. Having a house rule that your dividends be able to pay your monthly expenses helps reign in "lifestyle creep" since you'll now have to use that new raise in pay to put towards your portfolio and purchase more dividend payers if you want to be able to spend more each month. In retirement I don't want to have to worry about selling off chunks of my portfolio each year to fund my lifestyle. That would immediately create a fear that I hope I don't run out of my portfolio before I die and what happens if I'm retiring in a down market where all of my growth takes a 20% haircut? Ouch. At least with my portfolio of dividend payers, while there may not be as much if any share price appreciation, I still have the underlying stocks while still getting my regular dividends and share price appreciate is mostly irrelevant at that stage in life.
Depending on forever growth is risky as well. Markets saturate. Eventually everyone is already an industry customer. that point growth only comes from the shift from one company to another in a particular industry.
I like a hybrid model of investing in high yield dividends to help pay for those growth stocks... Dividend stocks can certainly help with income, and I think taxes should be a second though when thinking of choosing a stock.
I think in the grand scheme of things dividends are less relevant. But empirically, they might benefit individuals on a case by case basis depending on the person and the company. Dividends just feel good and seem more tangible. Dividends help people stay active in and excited about the investing process.
I loaded up on dividend stocks for my portfolio early in my career so I could use them to buy stocks in other companies and diversify into growth stocks. This helped when I went through layoffs and market downturns when I couldn't contribute to my portfolio
But you could have just sold stocks instead of using dividends to buy new stocks. What you were holding didn't go up in price as much because it paid dividends.
@@user-zc8nf6tp6uBut that is only obvious in hindsight. The case for the commenter above’s position is that they didn’t spend time agonizing over bid and ask prices for all the different shares that they own.
@@user-zc8nf6tp6u Correct, and he probably still got the same amount of returns due to dividends mixed with selling those dividend stocks as he would have if he just sold growth stocks. So what is exactly is your point?
A dividend based strategy is viable in my country of Australia due to the implementation of franking credits, which makes dividends incredibly tax efficient.
True, the franking credit system is great. But franking credits are only for Australian companies, so if you're looking for international diversification you'd have to end up dealing with capital gains tax. But that's not too bad either, since there's the 50% long-term capital gains discount.
This would be true if franking credits weren't priced in...but they are. Growth companies are actually even more important in Australia because our income tax rate is stupidly high.
I don't think you talked enough about a major reason why people like the idea of dividends: they are afraid of running out of money in retirement if they sell their shares to generate income. Sequence of returns risk or even just lower than expcted actual returns can cause your portfolio to dwindle. Also, when it comes to markets I think they are reasonably efficient in the long run, but in the shorter run they can be very volatile and that again can cause you to have to sell a lot when prices are lower. So a lot of people like the idea of dividends and feeling they are safer during their drawdown period (i.e. retirement). However, in their accumulation period I think people should be going after what gives them the best chance at better returns to grow their portfolio in the first place, and that means not chasing dividends and instead looking at total return instead (or my preference: just buying index funds since that helps avoid negative emotional behaviour like stock-picking FOMO and fear-selling.)
It might feel better to have dividend-paying stocks during a drawdown, but mathematically it is still fungible. If your portfolio drops because of a drawdown, your dividend income will drop as well, reducing your yearly income. In a portfolio that relies on capital gains to fund retirement, the action to take to mitigate sequence of return risk is to be flexible with your spending, reducing the amount of money you withdraw when the market dips. Sure a purely dividend-oriented portfolio won't run out of money, but if your portfolio drops by 90%, you better be ready to survive on 10% of your usual income. If you want to keep your yearly spending fixed, then you have to complement the dividends with some capital gains...and now you are back to square 1.
If you're relying only on dividends during retirement, there's still risk. In particular, the risk that dividends get cut and you have to sell anyway to avoid a poverty-tier lifestyle. The kind of sequence that would deplete your portfolio when selling is also the kind of sequence that would cut your dividends and force you to sell to cover your expenses. At best, you could argue that the dividend paying companies are more conservative and less likely to fluctuate as hard in down times... but then you're also more likely to under perform in the long run because down times tend to be fewer and far in between. It probably costs you more in the long run than not emphasizing the dividends. If you're well diversified, relying only on dividends probably just boils down to over-saving and accumulating too much, such that a 2% or 3% dividend on average for your entire portfolio is sufficient to cover your expenses (instead of allowing yourself to sell stocks and aiming closer to a 4% withdrawal rate). So you'd end up having to work and save for another decade or whatever to feel safer. But is it really a good idea to work longer (and closer to death) and to refuse to spend down your invested assets while you're alive? That seems like a bad strategy to me. It only really makes sense IMO if you're into nepotism and want to give heirs a huge sum of money when you're gone.
@@alessandrosavino1431 You assume dividend will also drop proportionally and fairly. This is not always the case, even Richard pointed that out showing that the payout is the same despite revenue fluctuating. And even in light of the mania of the last decade you still believe the stock price reflects the underlying asset? Get out.
I am in no camp. But, it seems to me that just trusting that the Magnificent 7 will continue to go up is not a viable investing strategy. A quick thought: What is better? Buy 100 shares, both dividend and capital gains stocks. Then try to get $$/month from them. One you would have to sell and one pays you. At the end of the experiment, you have the same amount of money from both camps. BUT! You have less shares in the capital gains pile than in the dividend pile. Not saying which one is better, I just know which one I'd pick.
Dividends are irrelevant if you don’t care about property rights and keep your shares on deposit with a broker. If you have shares registered in your own name like a true business owner - dividends are absolutely necessary.
I have dividend stocks and non dividend stocks and use my saved income and dividends to expand my portfolio. In the end it's your decision on what you want.
Something I've learned regarding M&M proposition and dividend irrelevance is that those two things are basically the finance version of frictionless question in physics. Miller and Modigliani knew the world doesn't work that way and their propositiond are definitely unrealistic but by making a lot of restrictions it helps to illustrate what would happen when that restrictions exist and conversely it drives others to look for what would happen when those restrictions doesn't exist one by one. So by making those unrealistic proposition it actually helps a lot to learn the realistic scenarios. Thanks half donut half man.
Nice physics analogy! And like physics, it sounds like jibber jabber with no basis in reality! Argument for the sake of argument. I’ll stick with dividends, and keep collecting my money every month!
I like Costco that pays a small dividend, uses capital to grow its store count, and periodically issues a special dividend when it accumulates too much cash on its balance sheet.
Great video. I am managing my own investments and do favor dividends stocks domestically due to the simplicity and the tax preference. It is nice to be able to adjust my weighting as I need without realizing as much capital gains, and being young and relatively lower income means I can take advantage of that lower tax now and then adjust myself later in life when capital gains will have more strategic uses in my tax strategy. (Implying I ever reach that bracket, fingers crossed.)
Hello, You said "It is nice to be able to adjust my weighting as I need without realizing as much capital gains..." How does that happen by getting a dividend payout?
In Brazil we do not pay taxes on dividends, yet, so dividend investing is very popular, the two most famous dividend investors in Brazil are the late Decio Bazin and the billionaire Luiz Barsi
Chances are that during a market crash the company won't be paying out dividends. And in an efficient market, market crashes reflect the companies' falling future profits and dividends are a way for companies to pay out profits to their investors, meaning that the expected future dividends are smaller.
If they announce a dividend and go bankrupt right after paying it, chances are you got more out of that dividend than you d get out of selling a bankrupt company , but that’s like a super edge case that doesn’t really make any sense
Dividends guarantee you a cash payment regardless of market conditions, but it doesn’t guarantee you any additional overall gain. Your overall return is the same regardless whether the stock pays a dividend or not.
@@mrslcomA company has no obligation to pay a dividend so there are no cash payment guarantees (at least, beyond the one you just received). If you want a guaranteed cash payments you buy bonds.
dividends are realized gains. Stock prices are unrealized gains. A portfolio of only growth stocks is exposed to additional risk in direct proportion to the amount of gain left unrealized by comparison.
Problem for a lot of us is dividends are taxed as ordinary income, so are taxed at the highest tax bracket you are in. Long term Capital gains tax (for stock held for longer than 1 year) is only 15-20%. So basically those who make more than $45k (single) or $90k (household) is better off with capital gains. Furthet more, you can sell stocks that you lost money on to offset the gains too.
Can you make a comment about REITs. I understand that they have to by law pay out a lot of their gains by way of dividends and a good way to value the sustainability of their dividends is by FFO but can you add anything more to that general knowledge that I have. ???
I have 2 reasons to pursue dividend stocks in a tax advantaged account (Roth IRA). My 401k is already focused on growth. Having a different retirement account focused on a different strategy is good diversification, especially when both are well funded. My dividends are directed into a central pool. This, along with my regular contributions, allows me to be an active participant and buy new stocks that otherwise didn't generate the dividend. This scratches my itch to "day trade" while still being a buy only strategy focused on retirement. Investing is psychological. It needs to be satisfying in the near term and long term to stay effective.
Great video. I feel like dividends are psychologically targeted to me since it's extra money that just appears and I can then go re-invest it. Even if it all washes out in the end it certainly FEELS better, and the aspect of management not wasting money on poor growth opportunities is nothing to sneeze at either.
Another point in favor of buybacks, investors seem to view them as more like special dividends than regular. As our host said, here in the US we have that custom of steady or escalating quarterly dividends. Buybacks have a more distinct beginning and end.
Saw the Ben Felix video about the irrelevance of dividends. He is absolutely right. Only way to work the dividend is for automatic dividend reinvestment - buying even more shares at the adjusted downward stock price. The problem isn't dividends themselves but they are generally thought of as free 'extra' money or an income stream; when in fact they are the profits that would otherwise be reflected in the stock price. In other words: dividends takes away stock appreciation through a forced liquidation of a piece of the investment
I Sée dividend like float.. pay for stuff to build capital... Like cover insurance or mortgage etc.. sure taxe a bib but you get taxes anyway.. the % of dividend is based on stream néed.. the rest is 100% capital grow
i think the investors expect higher profits in the future with stocks like that but maybe there is something more going i am not yet aware of@@jackjones4824
If a company can pay dividends, then it is, most likely, a profitable company. Stock price growth can be achieved by companies which are not profitable, driven by hype for a future that may or may not be achievable. Dividend payouts themselves are not free money, nor are they irrelevant. They are an illustration that you are invested in a functional, profitable, value generating company (much more often than not). Dividends also provide you an easy opportunity for portfolio rebalancing with out the need to sell shares. They are a net good indicator vs pure growth IMO. That said, they are not a magic bullet, and I agree with your points in the video.
I normally poke fun at people obsessed with dividends, but I’ll take the other side for fun. When market vibes are off, buybacks may not be able to support the price and a lot of cash is burned trying to prevent a PE compression. I think that’s why divs end up being an important component of total stock return since the cap gains are more sensitive to sentiment. It can probably be replicated through factors, but if the promise of dividends encourages more saving then I can’t knock it too hard.
@@lkangaroo Sure, but there are plenty of companies whose cash flows aren’t as sensitive to business/market cycles. I think buybacks offer more flexibility for the company and investor, but was just acknowledging that cap gains can be more volatile than just passing the cash through a div.
You need to get a financial planner or expert on investments to aid diversify your portfolio to commodities index funds, digital assets etc, to provide illumination and guidance in the financial markets.
Investors should exercise caution with their exposure and exercise caution when considering new investments, particularly during periods of inflation. It is advisable to seek guidance from a professional or trusted advisor in order to navigate this recession and achieve potential high yields.
Honestly this cannot be overemphasized, professionals helping people mitigate unforseen circumstances and mistakes .It's always good to have a financial plan,
indeed, most people downplay the roles of financial planners until burnt by there mistakes. Productivity is optimized and keeping up to date strategies and analysis makes it more lucrative. I've been able to navigate the volatilities and scaled up 880k from 220k with professional guidance.
No doubt being financially free and not having to worry much about health care and other expenses cannot be overemphasized, making smart plans and setting up diversified investment portfolios is quite essential.
No doubt being financially free and not having to worry much about health care and other expenses cannot be overemphasized, making smart plans and setting up diversified investment portfolios is quite essential.
*Correction: The five factor model includes market beta as a factor, not quality
dividends are not irrelevant it's actually what makes a stock great as investors can have an assurance of gains thru dividends even if their investments would go down into the gulag
😊@@Wasnt-1
@@Wasnt-1 That is based on the market not being efficient, if you believe it is. the amount of the dividend will decrease with the stock price
@@Wasnt-1are you for real?
I hope you know that the dividend amount is also variable and companies even miss payouts very often and I am talking about large companies and banks.
Correction: You are a hack, and aside from general.explanations, have no concept of how an average investor thinks/acts. Ifnnot for dividends, I would have gone broke more.than once, during market crashes, as would %85 of those that trade passively...Think of dividends as playing with "house $", in a casino, because that's essentially what it is; Stock profits on an annual basis, while keeping your original bet on the table...vs, losing any "growth", when the market dumps for a week or more. Stocks go up, and stocks go down. With a dividend, YOU (yes, you), always get payed!!!
Richard, you gotta stop with this rational "nuance" nonsense, I need to be able to pick a side and blindly defend it to the death
How dare he! 😁😁
Wouldn’t be modern without flipping a coin and then defending that side with all his might at thanksgiving.
Yeah, and he should spend more time showing us pics of his Lambos and private jet!
@@neuvocastezero1838That Lambo better be in a garage… with books.
Oh you must be on Facebook.
I think your point towards the end summarised why I like the dividend strategy: I'm not good at knowing when to sell for income. I get too fearful. Knowing that dividends are paid seems like less of a headache.
Well they have a pre-announced dividend date anyway. So you could just pick the dividend date yourself -- maybe the day after tax day, or whatever -- and well a few percent on that day every year. And same thing.
@@pfeilspitze besides doing more work for, at best, the same outcome, you'd be slowly drawing down your position over time. Timing also becomes a factor because it'll be dependent on the short term swings of the market which will throw off your chosen "dividend date". You gotta remember the market is irrational in the short term.
@@uncreativename9936 Selling consistently is just like Dollar Cost Averaging when accumulating -- you remove the timing factor by being consistent about it. And these days without per-transaction costs in most brokers, you can do it just as frequently going out as you did going in.
Why do you think that the company's chosen dividend date is any less timing the market?
@@uncreativename9936But selling when the stock price is down has the same impact as the company paying a dividend rather than performing a buyback when the stock price is down.
Earning a $2 dividend gets me more excited than earning my $1300 pay check
Fr 😂😂😂
I would rather earn 1% off a 100 people's efforts than 100% of my own efforts /John D. Rockefeller
Are you a student or someone who works part time? Because 1300$ is way below the minimum wage.
@@Wanderingbuffalo12 or a foreigner in a sweat factory
@@Wanderingbuffalo12even in Europe you can be aerospace engineer and earn less than that, USA salaries are higher (cost of living too so it isn't that simple)
I've always thought Warren Buffett's explanation was the easiest to understand. If a company can reinvest a dollar of earnings to earn more than a dollar, they should retain the earnings. If they can't, they should pay it out as dividends (or stock buybacks depending on the price of the stock)
Exactly, but that is thinking like an actual business owner. And not an ivory tower economist who wants prestige for theories that don’t reflect the real world.
100%
any company could have unexpected stagnation for unforeseen and prolongated reasons even despite blowing through capital that could have been dividends, in which case, had you had those dividends for yourself and reinvested them, your investment could have still been growing with accelerating compounded returns. eventually the compounding return rate can become stronger than even huge price drops. it can be a solid way to diversify your growth strategies in a long term portfolio as everything has pros and cons
@@magalengo lmao what are you even talking about ? Because return optimisation is pretty much essential in economics...
Any company is able to earn more than a dollar on that dollar. It might just buy treasuries and give you a bit more. But I don't think you will be happy about such earnings.
The case for dividends being relevant that makes the most sense for me is the "passive income" crowd having a preference towards dividends. Because even if they are the same as taking capital gains, I can see how not needing to manage capital gains would be attractive to them.
There is a big difference between selling assets and receiving profits, even when profits reduces the price of an asset.
A price of an asset, which you hold, can increase again, an asset you sold is gone., and needs to be reacquired.
@EK-gr9gd - Especially during down years! I don't think this is addressed enough during these videos.
Additionally, brokerage fees are still reality in many countries - especially while trading foreign stock exchange papers.
idk, capital gains are just added to your tax bracket. Unless you make a whole lot it wont affect you.
@burkles4456 Taxation is a completely separate issue. No one cares about your tax sheet.
Correct me if i'm wrong. But i was under the impression, that most dividend investors see capital gains as equally valued as opposed to capital gains being the king. For us dividend investors (among other factors), i would say two things are most important. 1. If i receive dividends instead of selling shares for cashflow, i won't ever lose any shares and for the majority of my time accumulate shares. 2. I don't have to ever time my sell, to benefit "the most". I'm never getting any headache cause of market volatility, not do i care about a bear markets, cause i'm getting cash no matter what. Not only that, but i'm actually more happy seeing red in the short term then seeing green! All of this has even more weight, when you invest into ETFs instead of individual companies, cause then you really don't have to pay much attention to any underlying companies in the ETFs.
yeah you have more shares, but the actual equity those shares represent is lower because the company gave its money away. If you are accumulating still, then why do you need cashflow? Is that an emergency fund (you can still have one w/o a dividend heavy strategy). After you stop accumulating, there is sequence of return risks and I'm not sure how much dividends might help then, but companies can lower or eliminate dividend payments as well (I know there are many that have been doing it forever, but as pointed out here, they might be industries with less growth potential, so holding the shares long term may have cost you returns over the long run).
(I'm dividend-agnostic in my investments, which are mostly index funds.)
My honest favorite thing about this channel is when you do the exact same thing I do when people ask me a complicated question and want a simple answer: respond with "sort of, it depends." Definitive answers are so rarely applicable so I love when somebody treats me like an adult and assumes I am willing to listen to the explanation. Please keep up the good work.
Perfectly covered Richard. Dividends, buybacks, reinvesting, they can all be either good or bad for shareholders depending on the situation. Reinvesting is good when management can execute to get great ROIC on this reinvestment. Buybacks are good if the share price is cheap relative to intrinsic value, and dividends are fine if the cash is excess and otherwise not needed by the business.
I could be very wrong about this, but in a vacuum wouldn't it be better for individuals to get a dividend that is reinvested in the company (I know you can't force people to reinvest) vs buybacks because in both scenarios the stock price increased. However in the dividend (and forced buy back) you also have more shares now.
Example the company was going to spend 100m buying back shares, but instead it gave the 100m to it's share holders and made them buy it.
I guess my question is would the stock go up by the same amount if the company bought 100m in shares vs if investors bought 100m in shares.
@@lotoex hypothetically speaking I think this would be the same because you either buy more shares but the outstanding share count stays the same, or you own the same # shares but the outstanding # of shares decreases due to company share buyback... Hence your % of ownership goes up the same in both situations.
Technically speaking every shareholder can't simultaneously buy more shares because you can't buy shares without someone else selling you their shares.
@@SigFigNewton True and it is usually a good indicator that management is shareholder friendly. It also gives you the opportunity to redeploy the capital as you see fit.
@@manemrob1510 So if I am understanding correctly in a buyback the outstanding share count goes down and thus indirectly decreases the payout ratio. Making future dividends safer, as well as easier to increase the CARG
Dividends are great for a mature company- if there is no more organic growth available for a company, but the company has a long-term market, I would rather they pay me the profits out in dividends then expand into markets where they have no expertise. I've watched many mature companies reinvest their profits by buying unrelated companies and expanding the footprint of the company, only to realize they overpaid and have no expertise in the area, resulting in large losses for the company (and investors) when they eventually have to write-off the garbage investments.
This
Reading comments, this is the first one that actually makes sense. You cannot comment on this subject without understanding capital allocation. A company can reinvest profits, pay down debt, buy back shares and pay a dividend. What they should do depends on the situation of the individual company. All of them are good ideas in the right situation and bad options if the situation is not right.
Microsoft pays a dividend and grows like crazy.
This is 100% accurate. If you take a well established business that has a very established and profitable market and pays out dividends and one day the company decides to pivot for growth by keeping that dividend and investing into other ventures, you can be sure there will be begrudged investors because in fact the company is assuming more risk.
For me, my FIRE strategy is based around dividends partly because of psychology (it makes it easier to know I do not ever intend to sell my stocks, rather than have to manage how much I sell each month or quarter) and partly because of stability (with dividends generally being less volatile than stock prices) so enabling me to plan better for the future. For now it’s working well, but I totally get that this is a personal thing.
Aren’t dividends just as if not more volatile since they are a percentage of the market value and are subject to change from quarter to quarter?
@@BusterDarcy Nope, it depends on the policy of individual companies - very few are tied to stock market value.
It is usually either a percentage of profits or a fixed amount set by the company. Stock price doesnt figure into it.
@@Zveebo I see where I was confused - it’s often displayed as a percentage of the stock price, but that’s not how it’s set by the company. So the percentage may go up or down as the price of the stock fluctuates while the set dollar value actually stays the same. My bad!
@@BusterDarcy you might be thinking about cover call etf’s but most stocks unless they are very volatile are very consistent and will increase their dividends every year or so. The only time they will cut a dividend is if it’s unsustainable or i’ve seen in cases like MPW they cut their dividend in order to pay of outstanding debt. However that just would bring people back to doing your research on a stock and not just buying into high yield just for the yield rather than the fundamentals of a company
In Switzerland it's the other way around from Canada. We pay taxes on dividends but not on capital gains...
Same as Canada in India
I wonder if tax arbitrage is possible via ADRs. I.E. A REIT in Switzerland may be priced by Swiss law but available at that price in America
Woa. So, If I sold a stock for a 50% profit, I would not be taxed?
@@TheNewCarryTrade In most cases, yes
In Brazil we do not pay taxes on dividends
It's very interesting to learn about this. To summarize, it all depends on the context and where you invest. In Brazil, dividends are not taxed, but there is a tax on capital gains. Therefore, a dividend strategy seems more advantageous in this scenario. Additionally, Brazil has something akin to REITS, known as Fiis, which are funds that invest in real estate and are legally required to distribute 90% of their monthly income as dividends. This is similar to buying and renting an apartment, but with the benefit of requiring lower capital and avoiding typical property management issues. Some of these can offer dividend yields ranging from 8% to 14% annually.
I am a dividend investor and this does explain the strong opposition I've had from other investors against my preferred method.
I like the fact that I don't care if my stock goes up and down. I like that I'm buying a company, not a price. I like that I'm participating in the profits of that company. I like that I can take those dividends and reinvest in the same company or in another company or in a bond or other fund.
When I'm older, the plan is to use my three sources if income: Social Security, 401k, and dividends. I'd like to pass on those stocks to my child who then can use those dividends.
I like my strategy. I think the companies I've chosen are strong. I guess we will see
If a company doesn't go up it's losing value
My input as a business owner is "dividend" is a form of "preservation of wealth" rather than a vehicle of income. For income I have my business, I just want to be able to sleep at night and not have to worry bout the stocks going up or down and receive a cheque every year or month for my hard work on my actual business.
I agree. Investing hardly builds wealth, maybe after the 20th year of compounding. True wealth comes from starting a successful business or successful fast career
Dividends are a form of stability when people buy and sell on speculation and emotion
I think if you are young you could benefit more with growth stocks, but as you're nearing retirement, having dividends coming in allows you to generate income without selling. Being forced to sell stocks when the market is down can cost a lot of money
Exactly. That is one clear benefit of it. A lot of stocks have their values heavily inflated by, for lack of a better word, vibes. Look at companies like Tesla, which had its valuation boosted to absurd levels far beyond current revenues or even beyond any reasonable hope of future profits. And that's before you even consider meme/cult stocks like the Gamestop fiasco awhile back.
But they are not. Companies can go through hardships. Companies can reduce dividends. Companies can restructure. That's the point of the dividend irrelevance statement.
@@famicomnintendo And when the market is down and companies aren't making as much money they're more likely to cut dividends. There's no free lunch. A lot of people have forgotten this because we haven't had a proper downturn in more than a decade.
you have to choose well, some companies have never cut their dividends in over 50 years@@ordinaryhuman5645
I think of Dividends as kind of like dollar cost averaging the “sale” of stocks in my non registered portfolio. And I like the preferential tax treatment of Canadian dividends. I just think of dividends as one of many income streams in retirement (eg pensions, OAS, CPP, RIF, dividends, interest income, etc). I never sell stocks (except to rebalance every 6 months to my chosen asset mix of 70% stocks, 30% bonds - which means I only sell stocks when they are up).
The majority of dividend investors I've listened to invest for the income. If you don't need the income, obviously, they reinvest. With that in mind the issue with saying you can use your capital gains as income makes me think, yeah, but if you need it for income (retirement etc) you may eventually sale all the stock. Where as a dividend you'll still own the stock and receive the dividend. A lot of nuance to these discusions.
Sometimes dividends are taxed, and sometimes capital gain is taxed. Sometimes both, but at different amounts. This can help determine if receiving dividends is right for you.
@ThePlainBagel an interesting note on how the stock price is “adjusted down” by the amount of the cash dividend:
I worked on the floor of the New York Stock Exchange for 7 years. I was a trader and head of operations for a firm there. I always wondered how that “adjustment” worked.
I spoke to some of the market makers (specialists) that managed the book for each stock and they said that the only adjustment that occurs is that any outstanding limit orders for the stock on the open of trading the day after the dividend is paid ate adjusted down by that amount.
So if there was an order to buy on the Open of trading that day for 20.10 and the dividend was 10 cents, the limit on that order would be automatically adjusted down by 10 cents to 20.00.
Interestingly, some of those order have a “do not adjust” instruction on them. This means that for dividends, do NOT adjust my limit price. This means for some subset of those orders, their limit price goes UP relative to the value of the stock on that day.
Thanks for your channel and all you do! The rational thinking is refreshing.
To me one of the big benefits of dividends was always as a partial hedge against bad decisions. Lets say your gains under normal circumstances are the same regardless of if a company issues dividends, as the theory proposes.
If the company makes a terrible decision that severely hurts the stock price, something not uncommon in more dynamic sectors. If you've been getting your returns through dividends than you just get less income, but if you've been getting your income in the form of increased stock value than it can lead to serious losses.
But in that scenario, the bad decision already tanked the stock price, so your investment lost a lot of value even tho your div current isn’t affected….yet.
@@chowsquid but a stock crashing doesn't erase the dividend payments you got in the past while it can erase previous returns in the form of stock value if it goes below your original purchase price. Not a problem if you're regularly selling off a portion of your portfolio but for someone looking to hold long-term it can do more damage than if your returns are in the form of cash rather than stock value.
@@greenmario3011lmao how can you be so dense. if the company you talk about never paid dividends it would have a higher share price to begin with thanks to the retained earnings. dividends are not free they come out of your capital appreciation
If they've done something that bad then the dividend is almost certainly going to be reduced or cut entirely.
By that logic, you might as well just hold cash, since you don't want your money to be inside the company.
Yes, stock drops to match the dividend distribution, but the price also elastically bounces back on the promise of continued future dividends.
Point 2, when a company cuts its dividend program, the stock price drops off. Why? If divs are just a distribution of money that already is held at the company, there should be zero change in price off this news, but there is, and its clearly because there is a fundamental value that investors place on consistent dividend distributions. This value on its own supports the stock price substantially.
There are some companies that are net negative profit, but their stock price is strong.
There are some companies that are close to break even or making money but their price suffers.
All of this points to a value system based on investors' perceived value, not on actual fundamental value. Yes, some people might invest based on those fundamentals, but most of the stock price is supported by speculation.
The reason I prefer dividend-paying stocks is because non-dividend-paying stocks fall into the "Greater fool theory", in that the only way you can make money from them (assuming they remain non-dividend-paying) is if somebody else pays more for it. While I understand that from an abstract perspective there should be no difference, purchasing an asset that doesn't bring me income simply feels wrong.
To build on Warren Buffett's farm example: I would never want to buy a farm where I can only make money from it by selling it to someone else.
Dividends are at risk of not being paid out though?
It's actually not different. Dividend paying stocks are still subject to greater fool theory. Say, a company pays 4 % dividends and goes bankrupt in 5 years. That's a loss in total. Just like said in the video, you could just regularly sell stock to get the dividend effect. You have to hold far more equity than you'd get out as dividends each year, so the risk is still high with dividend stocks
To get to the farm analogy: every farm is at risk at stopping having enough yield to be profitable
I don't think that a stock needs to pay a dividend right now, but there has to be some mechanism for extracting wealth from the stock at some point in the lifetime of the stock. He mentions cashing out capital gains, but I don't see how an individual investor does that. Other than the company being sold in whole (the final fool) I don't see another mechanism for getting paid besides dividends.
@@jerryspringer6096 Yes, risk is never fully avoidable, but that is another topic. My comment was a very condensed summary of a macro-level point of view of these two categories of stocks and in reality there are going to be a lot of ifs and buts that could be discussed at length.
@@tomlxyzI don't think you understand what greater fool theory is... Dividends do not rely on finding a buyer who will pay more than you did.
About 60% of my portfolio pays a dividend and I love it.
nice, steady stream of income :)
Me too. Even if they have less or no capital growth, I just love getting the payments lol. A part of my portfolio is for capital growth and that's fine, I like a balance
1) My good days come in lump sums, so when I get a chunk of cash to invest, then I tend to buy into a dividend stock that looks like it is on sale. Then, as the dividends come out of that investment I use it to divest and slowly balance out my portfolio into other sectors or investment types.
2) I perhaps have attachment issues. I will repair something until I am blue in the face before I replace it. I will wear something until it is full of holes before I throw it away. And when I buy a stock I don't want to even think about selling it for years or decades unless it is specifically a shorter term play... and even then I tend to sell the initial investment and keep the difference as stock for that longer term hold. If I sell and the price goes up, then I kick myself for selling too early. If I sell and it goes down, then I buy right back in, which defeats the point of selling if I was trying to free up cash for something else. Dividends let me get around my attachment issues so I can keep what I bought, while still freeing up money to do other things.
3) With dividends the tax hit is lower than standard income, and (at least so far) dividends are not a significant portion of my income. I view this as a way to spread that tax burden out over time. But if I buy into a stock, wait for it to jump, and then sell, then I would be taking on that tax burden all at once, and I don't particularly see how that works to my advantage. If I had $10M invested and was making thousands of dollars of dividend income a month then maybe that would be a different story... but we aren't there yet, and may never get to that level lol.
4) In the long term, my goal is steady income that I don't have to think about. Dividends provide that. I don't want to be 70 years old during a market down turn, freaking the hell out about selling Stock A vs Stock B because one company may potentially do better or recover quicker than the other, or debating if I just don't sell at all and hold through the down turn and subsist on rice and beans until things improve. I think I'd rather be dividend heavy, and take that more steady income rather than worrying about all of the different scenarios that may or may not play out.
5) Most dividend companies are significantly less volatile in stock price. Again, I'm no day trader. I review my accounts every few weeks, look for some trends on my watchlists, make a few limit orders, and hope for the best. If they don't trigger, then I feel like I dodged a bullet and can free that cash up for the next play. If they do trigger, my buy orders tend to be on the low side, so I feel like I got a deal. But I don't have the time or lifestyle that allows me to watch the markets daily... I have a very full time job, and kids, and life... and I have a *slightly major* case of ADHD, so I'm frankly not going to have the discipline to watch every move of the market, and I'll just kick myself for missing every possible opportunity trying to maximize my trading on shorter time scales.
This was so relatable lol
I think 4 is the best argument that can be made for dividends. Imagine having to sell low tonot starve.
Dividend-paying companies are no more stable or financially sound than other companies, and most dividend-paying companies won't continue paying dividends in a downturn when they're no longer making money.
Indeed. Point 4 is heavily underestimated by the adherents of the 4% rule (gradually sell accumulated assets, market growth will compensate). They think they won't suffer mentally.
If you want to actually feel like you're owning a business, then dividends make sense. Everyone is on the buyback train, but I think a company bidding up it's own stock price is far less stable than taking the direct payout.
As someone in the middle class, all my investments are in tax advantaged accounts. The "tax benefits" don't matter to me as much as the reliability/stability/psychology of dividends
I picked a dividend strategy for the equity portion of my TFSA simply because it was the simplest & quickest way to diversify it without racking up a big pile of transaction costs; add a year's contribution to the previous year's accrued dividend cash and use the pile to buy a whole new equity each year.
Particularly in the early years of building a portfolio, saving on broker fees that way is tempting.
I also like using dividends and capital gains to buy whole new shares and open new positions when I don't want to put more into my account, but i still want to grow the number of shares I have
These days, if you're paying broker fees to buy and sell things, consider getting a new broker. (Assuming you're an investor. If you're a trader then lots of things are different.)
For me the biggest thing about dividends is that they're...elegant. Simple, clean, and elegant. Priced in or not, dividends are still the prettiest way to earn money on stocks. And I think respecting my own aesthetic bias will make me a better invester in the long run. Find your style and stick to it.
I invest in some dividend stocks to recoup my expenses when buying stocks and ETF’s as my portfolio is like 10% stocks (which pay dividends), 90% ETF’s (which do not pay dividends). A dividend return of 50 Euros per year is the goal as this would cover it. (I live in Belgium we get taxed on dividends but not on the growth of worth of a stock, so investing in non dividend yielding stocks or accumulating ETF’s is a lot more interesting)
yo how many taxes your pay on dividends? here in ger we have 25% but we also have a tax-free amount per year that just got increased to 1.001 (before it was 801€) of course only applying to the profit relization, also do you guys have also some agreements with some country because of 2x taxation, so that it isnt 2 x 25% as example (a.e US-gouverment taxes it, and then your taxes it again (germany/belgium etc)
@@funfungerman8401 yo! Well we pay 30% but have tax-free for around 800 euros. I only invest in Belgian stocks so I don’t have the problem of double taxation. My regional spreading happens through my ETF’s. Hope that helps 😉
I really like the mix of both. I have some funds that give dividends (which are taxed at 35% here in Switzerland) because it's so easy to have it manage itself. And on the other hand I have (a majority admittedly) of funds where capital gain is automatically reinvested.
By far my favorite finance channel, along with Ben Felix.'s. Common sense should be the basis of investing, along with a good knowledge of the finance literature. So much disinformation in this space....I consider dividend investing a good strategy for psychological reason for folks who don't chase total return...I am early retiree and my portfolio's return exceeds my yearly budget by two to three folds so I consider dividends as a mandatory withdrawal...Not good...I diversify my stock allocation 50/50% with growth and dividends ETF because they are not 100% correlated. Money invested in stocks shouldn't be required for 10years +. I make sure I don't receive too much dividends because of taxes. Also nowadays, I make 5%+ on cash, very well paid to wait...So I keep 50% of my portfolio in monetary funds until I can buy low and hold long term. I would not suggest that approach for younger folks but at 60 yo, I have to consider the risk of sequence return....
why not for young folks, not risky enough? XD
Because younger people are in the accumulating phase with a long term horizon and they don't need income from their portfolio. They indeed can take more risk than a retiree. More short term risk ( volatility ) but better expected returns. Better returns makes a huge difference long term because of compounding :)
@@entropyss
I didn't watch the previous video mentioned, but the biggest plus of a dividend yielding stock is behavioral. Briefly mentioned @13:00 or so. In short, a dividend is a "forced savings". A lot of people I know would never sell a stock due to perceived capital gains hassles but will gladly take a dividend.
The counter-argument to that was that dividends are taxed as regular income, meaning typically higher rate than capital gains. There was a change in the tax code during GW Bush years that dampened that somewhat though.
@@jsizemonot if they’re qualified.
Perhaps talk about "QUALIFIED" Vs Ordinary Dividends and their tax implications, seems like an important distinction
I cannot find anyone that mentions one key point- in my opinion.
16:39 Capital gains are mostly theoretical when you do not sell your position. But… when you actually want to get some of these in hand, you have to time the market!
Who knows what the market price of the stock will be when you need some cash?? Dividends are more realistically related to how well the company operates, than stock price which can be affected by numerous irrelevant factors. I think that owning a good company -and not good a stock - is preferable, and receiving a portion of the profits is the point in participating in a company
I think the view on dividend really depends on your tax rates and if you understand the taxation on investment return. Earlier I was really on dividend. It was like free money every 3 months. But now every new dividend I receive from eligible stock are taxed at around 40% and non-eligible at 48%. Capital gains are only taxed at 26%. And you pay the capital gain taxes only when you sell. I'm from Canada
I've been wondering about this very thing about how taxes are taken out of dividends vs capital gains. Naively, I assumed they would be taxed the same. Guess it's time to go more research.
Yup…you leveled up as an investor. And you can level up some more with tax loss harvesting. And carryover.
Which with div, you can’t. Div is fine in a locked up account like IRA or 401K or HSA.
@@Kathywake23 In some countries it is taxed the same.
wow, 40% tax on dividends, what country?
@@Kathywake23
Here in Austria dividends and capital gains are taxed the same. You can also deduct trade losses from dividends. The tax is applied on the net amount of capital gains and dividends.
Still, dividends are worse if they are payed outside of Austria because the source countries already keep a tax ("withholding tax") and you only get a part of it the easy way. Capital gains tax is 27.5% in Austria. Canada for example takes 25% of the dividend as withholding tax, but only 15% of that can be credited towards the Austrian tax (Austria/EU and Canada have some kind of agreement on that). To reach Austria's 27.5% from the credited 15% I have to pay another 12.5% tax here on top of the 25% withheld by Canada for a total tax of 37.5% of the dividend. There are ways to get back the 10% payed over the local rate, but it involves annoying (and sometimes costly) paperwork including the tax authorities in both countries and the broker. Barely worth it unless you get a lot of dividends in another country (I have quite a few German stocks paying dividends for example and might jump through the hoops).
To me, the old phrase "One in the hand is worth 2 in the bush" is very relevant here. Distributed dividends are realized profit sharing rather than retained and (hopefully) reflected in share price. I don't hold this company, but let's discuss "O" Realty Income, which is a favorite among dividend investors. Over the last year, the share price is down 25%. This is while the company's net income increased 142% from 2021 to 2022. As Ben Graham pointed out decades ago, the market often behaves irrationally and at illogical valuations. Is an "O" investor better served by stable and increasing dividend payments or the irrationality of the share price in light of its profitability?
From a long term pov, Q’s lowering share price is a positive for investors who are reinvesting their dividends. Q is being beaten down because of market sentiment in its sector and not because of it as a company. Thus the dividend reinvestment is catching the benefits of a lower share price with more shares cheaper to be able to buy more cheaper shares as the market keeps prices low.
I don't subscribe to either ideology but think both have their place, the reason I like dividends is because it lets me re-invest and diversify my portfolio. Stock in a single company that keeps growing is nice but can still wipe away a lot of the value overnight due to sentiment changes. A less aggressively growing stock that pays regularly lets me funnel the dividends into other stocks that moderates the volatility of the overall portfolio. So having a 50/50 mix is ideal for me.
only 38% of stocks offer dividends, so 50% of your portfolio is relegated to only seeing 38% of the market. Dividends are inherently not diversified.
@@dylanschang6386not really a good comparison. Because you can have 10 companies that give dividends and IS a diversified portfolio, just because in the general market it's a lower percentage doesn't mean you still can't diversify dividends.
If you are to have an active management of your portfolio, you can leverage your capital gains by selling, but if you want it as a passive income, dividends can be easier to manage in retirement
The real point of dividends are to enforce some kind of discipline on the business where they need to continue to generate and set aside sufficient cash flow to pay back capital to its owners on a regular basis instead of hoarding it in a big pile and finding often stupid things to waste it on like an overpriced and ill-advised acquisition or poorly thought out expansion. It's a shame stupid tax policy has distorted things so much here.
That is the craziest reasoning for dividends i think i have ever heard and you need to stop listening to whoever told you that
That all sounds great, but the problem is that company managers know that. Just look at GE, they kept their dividend steady, but that had nothing to due with underlying prudence or good capital management, it was to project that illusion and fool investors like you who treated a dividend as a proxy for sound management.
I think Meta is a great example of what can happen when a company doesn't have a dividend policy.
@@jonathanh-e2494 for companies like ge. Or another good example is automaker's..the point of the dividend is to just retain capital. They can not deliver growth, so without a dividend..why would i own the stock..its not that they need to fool you..they dont care about YOU, they need large investers to stay invested so if times are tough they can tap into that capital
That has been been the strategy of tech stocks for the past decade to give the illusion of growth by using these ill fated projects as assets on the books while they hold little or negative cash flow i.e. real value.
I like the psychological aspect of the relatively stable, predictable dividend payouts for several of the reasons mentioned in the video. Treating the payments separately from the principal investment that is 'untouchable', being able to invest the dividends into new opportunities without selling stocks, also the regularity of dividend payments being reinvested creates a dollar cost averaging effect.
Only that it's not predictable. During severe market crashes, dividends go down too. Simple backtesting of popular Dividend ETF's can prove this.
@@Omar-et7sbDividend Aristocrats look them up.
For me, its supplemental income... like, I have access to extra income from my portfolio that I can either reinvest it, or keep it while increasing my contributions to 401k/HSA/stock purchase plans from work without changing my lifestyle... It gives me flexibility
@@Skyriderx10 It's not extra income. It's portfolio gains that you are choosing to keep in your pocket no different (besides tax considerations - moot for retirement portfolios in tax advantaged accounts) than any other income from capital gains.
@@Omar-et7sb at the end of the day, its extra cashflow for me that I would not have had to support my other investments... Without that, I would have never been able to max out my retirement contributions... If it comes at the cost of paying a higher tax on dividend income, then oh well, thats the price of flexibility, but then again, im not anywhere near that threshold where it makes much of a difference
I'm a dividend growth receiver (retired) and use this money to live. Dividends provide me with income and I don't have to sell shares, which is very important especially in a down market. The number of shares I own remains the same, so the price doesn't matter. Companies also usually raise their dividends to match inflation, which for me is important. I treat dividends like gradually filling a water trough. The company during three months fills the water trough with profits. At the end of the quarter, some of the water is taken out and given to the share holders. Yes, the water trough isn't as full, but it will fill up to again be distributed.
Seems like a weird strategy when you could just hold bonds.
"I don't have to sell shares, which is very important especially in a down market"
Not reinvesting your dividends in a down market is essentially the same as selling off your shares in a down market. It might be psychologically more comfy but it isn't actually better.
I do have bonds and bond funds. The key is to diversify investments. I also own growth stocks, but I'm living on my dividends and interest income. Growth stocks will fund future major purchases.
Well said Richard - I couldn't agree more . Dividends are a part of my retirement income stream - and on the months I don't need cash, I simply reinvest the dividends and grow my position.
@@xvx4848 It's not a weird strategy if you understand that: (1) the coupon on bonds is fixed; and (2) fixed income is not the same as fixed purchasing power.
A company thats pays consistently good dividends is the safest bet for an investor. It means they have cash flow and they dont hide their numbers (if their debt isnt increasing much). Also a company thats issues divident, may lose stock price but normally very soon the stock price will reach the before-divident-cut price. Cause investors have a price in mind for that stock and for sure really noone says "oh the stock gave us cash so now it worths less". There's a reason VYM is one of the top etfs.
Good insights. I generally agree with these points, but dividend growth is a reasonable counterpoint (assuming the divided payment doesn't limit the company's ability to reinvest responsibly and grow). If I need income I think I'd rather get that from a steadily growing business paying me the excess of what they need to reinvest to grow, rather than having to sell a portion of my stake in the business and thus be entitled to a smaller portion of its future cash flows.
I favor dividends because I do not intend to sell my shares - ever. I'm instructing my children to hold their inherited shares - also forever and to pass down those same shares to their children.
Dividends can be a convenience for cash flow.
10:03 This right here is why dividends are anything but irrelevant. My company made money through it's core business activity, and that money is mine and is paid out to me. I can invest it as I see fit, rather than the exectutives trying to find ways to spend the stockpile of cash, sometimes on stock options, executive compensation, new offices, furniture, vacations, retreats, corporate jets, woke public relations, human resourse divisions, ill advised investments, buybacks during periods of high stock prices, et al.
No, just send me the profits and make more next quarter, thank you.
You might miss out on potential on paper wealth! Think of the on paper wealth!
I love your videos! But A few things I think you missed some companies with higher litigation risk such as Altria, cannabis stocks, alcohol stocks, and certain other industries with higher litigation risk it makes sense for them to pay higher dividends to keep that money off there balance sheet and return it to shareholders instead of risking it getting taken by litigation. Also I don’t think you talked about how during bear markets like we are in now that dividend being paid is now either buying more shares if they have a DRIP or at least paying them some return while the stock is down you don’t want to sell shares in a down market and especially for a loss! And third dividends are taxed less then cap gains in the U.S at least in some cases you pay 0% federal income tax I do a combination of high growth and dividends but I do not believe they are irrelevant for those reasons not talked about enough. But always good to hear all perspectives keep up the great videos!
Exactly. You just know that if Altria announces it has a big cash pile, every Governor with a budget hole will get a huge erection.
Idk if there's a true meaningful difference here, but to me a big difference between cashing out capital gains and taking a dividend is that capital gains run out. Let's say I have to sell shares in a company to pay my bills, eventually the number of shares I possess will reach zero and all my investments will be gone. If I'm using dividends to pay my bills instead I can, in theory, continue indefinitely. Of course this is all dependent on the company continuing to do well, but that's true with both dividends and capital gains. Dividend investments seem like they have more longevity and security.
I don't focus on dividend investing myself, but in my head if I were to retire - which isn't happening for decades - my instinct thus far tells me its better to live off dividends than it is to live off selling stock.
@tomr6955 if I go from 100 shares to 99 shares then I can only do that 99 more times before my investments are exhausted. If I collect a 1% dividend I could do that forever my position will never be exhausted. Seems like a pretty big difference to me.
I'm a new dividend investor and I found this video very helpful. Thanks and keep up the good job!
Make sure to research short term treasury bills and treasury bond index funds. There are certain times I don't know what I want to invest in and yields are tempting if the government doesn't default
Great video 👌
Getting a part of the profit without having to pay a trade to sell the underlying shares and still be able hold everyone of the buyed shares is a plus for my pocket change dividend portfolio. Especially because its not filled with big amounts of shares from one stock nor a regular savings plan.
So I use the dividends to reinvest in the same or other shares.
That looks so fiscal ineficient …
@@alexandervp6180 Im not from Canada nor America, here its also a simple way to use a Tax Benefit in form of a capped yearly tax free profit. But I excluded this on purpose in my comment.
@@Jakuzziful so you are fiscal efficient as soon as you keep your profits low.
I still don’t see the benefits in keeping my profits low.
@@alexandervp6180 No Im efficient when I get a payout of a yearly fixed sum of Profit. This fixed maximum amount is Tax-free.
You can get this benefit by selling your Shares or by Dividends. Or a mix of both.
@@alexandervp6180because you get less tax hit. The same as getting a job that earns let's say 15% of a tax rate, and then getting a better salary but not as good to be useful,, and actually lose more money for being in a different tax bracket. Here in my country that happens a lot, some employees prefer to not get a slightly better salary because that means they will get a different tax.
For me dividends are a psycological thing. I just like the feeling of having gained something, without having to sell my stocks. I provides me a feeling of freedom to chose what I want to do with it. I think it's that feeling of freedom that people like. It's not fully rational.... but people in general like having options, freedom to choose.
Dividends, if reinvested, are a psychological trigger to keep at it. Share prices go up and down but your number of shares grows , short of share consolidation
"Share prices go up and down but your number of shares grows, short of share consolidation."
... you just described growth investing haha
I have been a dividend only investor for a long time. I would certainly say dividends are not irrelevant. Everything that is argued is more behavioral than anything to do with dividends. However dividends are paid out of profits and every shareholder gets the same amount (per share). Buybacks and capital gains vary widely on when you sell. That is the biggest argument why dividends are important. IMHO
1. Stock buybacks are now taxed on the corporate level in the U.S.
2. Blue chip quality dividend payers can help a lot with minimizing the need to sell shares during a major downturn to maintain your desired cashflow. Has to do with market value vs the companies actual finances.
3. Qualified dividends are taxed very favorably in the U.S.
what if the amount the market crashes is less than the opportunity cost of chasing high yield dividends? IE with voo you gain 100,000 in ten years then crashes 30,000 , but with dividends you gain 80,000 and it crashes $20,000, in this case you could sell $10,000 and be equal to the dividend investment
@@ryot3360 Blue chip isn't high yield dividends
@ryot3360 I mean… don’t chase high dividend yields? That’s the stupidest thing you could do. Do some research before buying a stock. This goes for any investment…
I remember seeing that guy's video because of YT suggestions. I had to watch it twice because I did not and still do not understand what he is trying to imply. And I have the same feeling about this video too.
Aren't dividends the fundational elements of capitalism? There is a company with some business going on which has some revenue and some expenses, it is owned by different people through shares, those people agree on what to do with the potential profits: they can divide them among them, reinvest them or have them as cash for the company (I know there are more stuff, but I want to keep it linear). And if they think there is no more growth to grasp and there is no need for cash for the company, then dividends are the only other options for those profits.
And if markets are truly efficient then its stock price must have plateaud for a while if that is the only option available if that has been the case for 2 years for example. And if you can actually understand the company business in and out, you can then see if that is actually the case, if the business will be the same in the future and so on which is sometimes very very difficult.
And I truly do not understand that guy's argument for the graph shown at 13:26. If in the last 30 years, dividends outperformed the S&P 500, why is it less important/does not matter if other factors are involved? You still outperformed the S&P 500! It is a great result.
And if markets are not efficient, all of this does not matter, doesn't it? There will always be money to be made by simply exploiting stock prices inefficiencies then.
Love your videos! Keep up the good work!
Having studied finance and economics for a very very long time, all the points made by The Plain Bagel AND Ben Felix are valid.
But there is still a part of me that likes the idea of having money in my pocket instead of money left with the management of the business. I can chose what to do with that money, i.e., to consume it or to reinvest it into whatever investment vehicle my heart desires.
You can do the same by selling shares
What you describe is a common behavioral bias called loss aversion. Selling something feels like a loss because you are giving up future returns. Dividends feel like a win because the loss (drop in share price) is less visible and not initiated by you. It's ok to say it makes you feel good as long as you understand that you're acting irrationally.
@@mxkDoes paying down a principal of a loan reduce your interest paid over time? Or am I acting "irrationally"?
@@chowsquidNot even remotely the same. Dividends come from the company. Selling shares requires a bigger fool.
Mxk is too dumb to finance his own money. So he lets someone else do it for him. And when that someone else screws around with his cash and pockets it for themselves, that’s when mxk realizes he should’ve learned how to manage money and keep cash in his own pockets
Dividends are not irrelevant. They are useful for portfolios of older people who want to create a steady income stream even in times of (extreme) market distress. But that's about the best argument I would be able to find. Example In 2008/2020 you did get your Coca Cola dividend, even if the broad market tanked +30%. The younger you are the more irrelevant dividends are.
2 things:
I buy 4 shares of VOO and pretending there is no dividend, in 10 years when when it has doubled, I have to sell a share and erode my base position, losing growth opportunities. A dividend can be collected or sold without touching my base.
Second point, equity prices are almost never rational and if they happen to be at some point, it mever remains. I can name several equities that are so over valued it is ludicrous and several under valued that are mostly punishment for not going along with what a few brokers or brokerages in New York think.
I am not advocating one way or another, just saying people advocating dividend irrelevance are ignoring realities and people who will not invest in a company if it does not pay a dividend are short-sighted.
Thank you for the conversation and your typical sane and rational approach to the markets.
Your first point was covered in the video. It doesn't matter. It's all percentages don't worry about counting shares.
Hello.. i'd like to ask a question.. im kinda new to investments industry and for me dividends in my mind are kinda equal to rental income.. for example you dont care about the value of your house if it drops of raises because you have no intentions of selling it.. you just collect rent.. isnt the dividend investment something similar? can anyone address this?
I suppose this is why the traditional retirement advice is to invest in ETFs, especially the SP500, and not be bothered by dividends existing or not, only looking for share price growth. Then when it really is time for income, you sell that and rotate to bonds or even just sell shares and call that your income. For round two, tell us whether options income is possible, or if the win/lose of options will mean that the investor's return is flat over time.
I believe Ben Felix did a video on options income, or covered it on the Rational Reminder podcast.
"options income is possible" It's a zero-sum game at best. Where are you on the bell curve of all options traders, and can you be sure of that position?
I'm wanting to get into dividend investing but I have a question.
Does reinvesting the dividends avoid this "paying yourself from your other pocket" issue?
I'm looking at dividend aristocrat investing as a way to cut out the middleman while using the fact that a company is paying out dividends as a proxy for financial health of the company instead of looking at P/E ratios all day. (Yes, I know about witholding tax). I have no interest in growth stocks given all the chicanery involved in reporting.
Please shoot my logic down.
EDIT: 10:04 - Oh. Never mind. 🙂
I ignore dividends for the most part, always reinvest which means I have yearly tax due on dividends earned, but my primary source of income past retirement (I'm 60) will be planned selling of shares from both tax sheltered and taxable accounts. This way I can control my yearly 'income'. Having all one type of stock in retirement can be costly, especially if you've built up a nice portfolio of dividend stocks with no way to shelter the dividend taxes. If you get paid 90K in dividends yearly then you have a 90K income and will be taxed in that bracket, no choice.
If your dividends are qualified, that’s taxed at 15% in the US, which is way less than other income.
until you get a crash or a drop and you're stuck selling at major loses because you need to sell to even live. Zero planning for emergency situations. You will be the next guy crying online that he lost his money and is struggling. The exact same way every person going into retirement that uses this strategy when the market or your companies drop.
@@dancecrew1996 No, I have a bucket for a market downturn. There's nothing wrong with dividends, but don't trick yourself into thinking you are somehow insulated from a serious market downturn because you get income from dividends. Might work, but have more than one option.
Dividends are NOT irrelevant. In this market, they tell you that your company is generating profits, which is getting rarer everyday. As a shareholder, you should be picking stocks that have strong fundamentals, otherwise you're just relying on the greater fool theory.
I enjoy the idea that I have recurring revenue that is completely passive, grows every year, and can provide for my family once I'm gone.
I left a critical comment on Ben's video (I'm an avid viewer and agree with him much of the time) with an argument that Dividends create growth incentive. Your nuanced talking points out paced my own critics and yet somehow felt more balanced. Impressive!
In the end the only real net return is dividends or through acquisition, but that acquirer eventually also wants dividends.
You might want to focus on growth, but in the end the purpose of growth is, from an investment point of view, to return more dividends in the future.
Therefore dividends actually play a key role in investing, although often VIA growth.
Yup. Even buffet says you are buying the future stream of div income….but that future could be 10 or 25yrs out.
The reinvestment and buybacks just makes your div share in the future bigger.
This is why I don't mind small companies not paying a dividend because they might have a lot of growth opportunities but if a company isn't paying dividends when it's mature I don't think that is a healthy company.
@tompuijpeNL
After a point, growth stops. The best example on my mind is streaming TV services. In the developed world, the industry has all the customers they'll ever get. They trade customers back and forth, and that is small potatoes. A new player can make inroads to get some of that action. But other than a population boom, that's it. Market saturated. They are still making money. But there is no further growth potential. Not like when it was a brand new concept or intermediate growth period as half the population didn't yet have the service.
@@icecold9511 Exactly, these companies should pay dividends when they see growth declines.
@@icecold9511this is an excellent example. Netflix has decided to grow its customer base artificially by changing their business model making it difficult for families to share their accounts. A fixation on growth.
great video but i think you casually mentioned briefly at the end the best part of the dividend, which is that the company has done the math and this is the money they think its worth it to just give u in cash rather than reinvest. you can agree (invest elsewhere) or disagree (drip), and this decision might be impacted by your own situation (you might prefer to treat the dividend as spendable) but to me the real issue is that people dont appreciate the time delay in the declaration date and the paid date. the dividend is the amount of money the company felt it could return to investors at the time it declared it. by the time u get it, it may be best to reinvest it (but u lost taxes) or best to invest it elsewhere. this is where the opportunities come from.
I like the idea of dividends for both young people and those in retirement. For young people it gets them thinking that their labor isn't the only thing they can use to pay for their needs. If they can build up a portfolio that starts paying their monthly expenses then they can feel more optimistic in job hopping for better pay and work conditions as well as feel more secure during a job layoff or short-term disability or illness. Having a house rule that your dividends be able to pay your monthly expenses helps reign in "lifestyle creep" since you'll now have to use that new raise in pay to put towards your portfolio and purchase more dividend payers if you want to be able to spend more each month. In retirement I don't want to have to worry about selling off chunks of my portfolio each year to fund my lifestyle. That would immediately create a fear that I hope I don't run out of my portfolio before I die and what happens if I'm retiring in a down market where all of my growth takes a 20% haircut? Ouch. At least with my portfolio of dividend payers, while there may not be as much if any share price appreciation, I still have the underlying stocks while still getting my regular dividends and share price appreciate is mostly irrelevant at that stage in life.
Depending on forever growth is risky as well. Markets saturate. Eventually everyone is already an industry customer.
that point growth only comes from the shift from one company to another in a particular industry.
I like a hybrid model of investing in high yield dividends to help pay for those growth stocks... Dividend stocks can certainly help with income, and I think taxes should be a second though when thinking of choosing a stock.
I think in the grand scheme of things dividends are less relevant. But empirically, they might benefit individuals on a case by case basis depending on the person and the company. Dividends just feel good and seem more tangible. Dividends help people stay active in and excited about the investing process.
Dividend stocks are an important part of every portfolio. The problem is when people go all in on one strategy.
I loaded up on dividend stocks for my portfolio early in my career so I could use them to buy stocks in other companies and diversify into growth stocks. This helped when I went through layoffs and market downturns when I couldn't contribute to my portfolio
But you could have just sold stocks instead of using dividends to buy new stocks. What you were holding didn't go up in price as much because it paid dividends.
@@user-zc8nf6tp6uBut that is only obvious in hindsight. The case for the commenter above’s position is that they didn’t spend time agonizing over bid and ask prices for all the different shares that they own.
@@user-zc8nf6tp6u But my dividend stocks didn't go down in price as much either compared to some of my growth stocks
@@user-zc8nf6tp6u Correct, and he probably still got the same amount of returns due to dividends mixed with selling those dividend stocks as he would have if he just sold growth stocks. So what is exactly is your point?
This is full stop the best finance UA-cam channel.
A dividend based strategy is viable in my country of Australia due to the implementation of franking credits, which makes dividends incredibly tax efficient.
True, the franking credit system is great. But franking credits are only for Australian companies, so if you're looking for international diversification you'd have to end up dealing with capital gains tax. But that's not too bad either, since there's the 50% long-term capital gains discount.
This would be true if franking credits weren't priced in...but they are. Growth companies are actually even more important in Australia because our income tax rate is stupidly high.
Best thing I ever did in my life, invest in dividend stocks.
I don't think you talked enough about a major reason why people like the idea of dividends: they are afraid of running out of money in retirement if they sell their shares to generate income. Sequence of returns risk or even just lower than expcted actual returns can cause your portfolio to dwindle.
Also, when it comes to markets I think they are reasonably efficient in the long run, but in the shorter run they can be very volatile and that again can cause you to have to sell a lot when prices are lower.
So a lot of people like the idea of dividends and feeling they are safer during their drawdown period (i.e. retirement). However, in their accumulation period I think people should be going after what gives them the best chance at better returns to grow their portfolio in the first place, and that means not chasing dividends and instead looking at total return instead (or my preference: just buying index funds since that helps avoid negative emotional behaviour like stock-picking FOMO and fear-selling.)
It might feel better to have dividend-paying stocks during a drawdown, but mathematically it is still fungible. If your portfolio drops because of a drawdown, your dividend income will drop as well, reducing your yearly income. In a portfolio that relies on capital gains to fund retirement, the action to take to mitigate sequence of return risk is to be flexible with your spending, reducing the amount of money you withdraw when the market dips. Sure a purely dividend-oriented portfolio won't run out of money, but if your portfolio drops by 90%, you better be ready to survive on 10% of your usual income. If you want to keep your yearly spending fixed, then you have to complement the dividends with some capital gains...and now you are back to square 1.
If you're relying only on dividends during retirement, there's still risk. In particular, the risk that dividends get cut and you have to sell anyway to avoid a poverty-tier lifestyle. The kind of sequence that would deplete your portfolio when selling is also the kind of sequence that would cut your dividends and force you to sell to cover your expenses.
At best, you could argue that the dividend paying companies are more conservative and less likely to fluctuate as hard in down times... but then you're also more likely to under perform in the long run because down times tend to be fewer and far in between. It probably costs you more in the long run than not emphasizing the dividends.
If you're well diversified, relying only on dividends probably just boils down to over-saving and accumulating too much, such that a 2% or 3% dividend on average for your entire portfolio is sufficient to cover your expenses (instead of allowing yourself to sell stocks and aiming closer to a 4% withdrawal rate). So you'd end up having to work and save for another decade or whatever to feel safer. But is it really a good idea to work longer (and closer to death) and to refuse to spend down your invested assets while you're alive? That seems like a bad strategy to me. It only really makes sense IMO if you're into nepotism and want to give heirs a huge sum of money when you're gone.
@@alessandrosavino1431 You assume dividend will also drop proportionally and fairly. This is not always the case, even Richard pointed that out showing that the payout is the same despite revenue fluctuating. And even in light of the mania of the last decade you still believe the stock price reflects the underlying asset? Get out.
@@sor3999 I think I'll stay, but thanks :)
I am in no camp. But, it seems to me that just trusting that the Magnificent 7 will continue to go up is not a viable investing strategy.
A quick thought: What is better? Buy 100 shares, both dividend and capital gains stocks. Then try to get $$/month from them. One you would have to sell and one pays you. At the end of the experiment, you have the same amount of money from both camps. BUT! You have less shares in the capital gains pile than in the dividend pile. Not saying which one is better, I just know which one I'd pick.
Dividends are irrelevant if you don’t care about property rights and keep your shares on deposit with a broker. If you have shares registered in your own name like a true business owner - dividends are absolutely necessary.
I have a dividend portfolio fond of. Watching it grow over the past few years has been delightful, and it doesn't demand much of my time to manage.
i dont like capital gains as much becuase that required me to sell off stock but with dividends i get those capital gains in a tangable manner
I have dividend stocks and non dividend stocks and use my saved income and dividends to expand my portfolio. In the end it's your decision on what you want.
Something I've learned regarding M&M proposition and dividend irrelevance is that those two things are basically the finance version of frictionless question in physics. Miller and Modigliani knew the world doesn't work that way and their propositiond are definitely unrealistic but by making a lot of restrictions it helps to illustrate what would happen when that restrictions exist and conversely it drives others to look for what would happen when those restrictions doesn't exist one by one.
So by making those unrealistic proposition it actually helps a lot to learn the realistic scenarios. Thanks half donut half man.
Nice physics analogy! And like physics, it sounds like jibber jabber with no basis in reality! Argument for the sake of argument. I’ll stick with dividends, and keep collecting my money every month!
I like Costco that pays a small dividend, uses capital to grow its store count, and periodically issues a special dividend when it accumulates too much cash on its balance sheet.
Great video. I am managing my own investments and do favor dividends stocks domestically due to the simplicity and the tax preference. It is nice to be able to adjust my weighting as I need without realizing as much capital gains, and being young and relatively lower income means I can take advantage of that lower tax now and then adjust myself later in life when capital gains will have more strategic uses in my tax strategy. (Implying I ever reach that bracket, fingers crossed.)
Hello,
You said "It is nice to be
able to adjust my weighting
as I need without realizing
as much capital gains..."
How does that happen by
getting a dividend payout?
In Brazil we do not pay taxes on dividends, yet, so dividend investing is very popular, the two most famous dividend investors in Brazil are the late Decio Bazin and the billionaire Luiz Barsi
As a finance noob, isn't a dividend good because it guarantees a percentage of gains in the case the stock will fall? Like in a market crash
You would also be able to sell a portion of the stock and earn a percentage of the stock as well. It would behave similar to a growth stock.
Chances are that during a market crash the company won't be paying out dividends. And in an efficient market, market crashes reflect the companies' falling future profits and dividends are a way for companies to pay out profits to their investors, meaning that the expected future dividends are smaller.
If they announce a dividend and go bankrupt right after paying it, chances are you got more out of that dividend than you d get out of selling a bankrupt company , but that’s like a super edge case that doesn’t really make any sense
Dividends guarantee you a cash payment regardless of market conditions, but it doesn’t guarantee you any additional overall gain. Your overall return is the same regardless whether the stock pays a dividend or not.
@@mrslcomA company has no obligation to pay a dividend so there are no cash payment guarantees (at least, beyond the one you just received). If you want a guaranteed cash payments you buy bonds.
dividends are realized gains. Stock prices are unrealized gains. A portfolio of only growth stocks is exposed to additional risk in direct proportion to the amount of gain left unrealized by comparison.
Problem for a lot of us is dividends are taxed as ordinary income, so are taxed at the highest tax bracket you are in. Long term Capital gains tax (for stock held for longer than 1 year) is only 15-20%. So basically those who make more than $45k (single) or $90k (household) is better off with capital gains. Furthet more, you can sell stocks that you lost money on to offset the gains too.
52000$ cuz of the standard tax deduction and if you invest in trad ira then you get an extra 6500$ bump
Not if they’re qualified dividends.
How could you believe the market is efficient. If it's efficient, there's no point in investing in stocks
Can you make a comment about REITs. I understand that they have to by law pay out a lot of their gains by way of dividends and a good way to value the sustainability of their dividends is by FFO but can you add anything more to that general knowledge that I have. ???
I have 2 reasons to pursue dividend stocks in a tax advantaged account (Roth IRA).
My 401k is already focused on growth. Having a different retirement account focused on a different strategy is good diversification, especially when both are well funded.
My dividends are directed into a central pool. This, along with my regular contributions, allows me to be an active participant and buy new stocks that otherwise didn't generate the dividend. This scratches my itch to "day trade" while still being a buy only strategy focused on retirement.
Investing is psychological. It needs to be satisfying in the near term and long term to stay effective.
Great video. I feel like dividends are psychologically targeted to me since it's extra money that just appears and I can then go re-invest it. Even if it all washes out in the end it certainly FEELS better, and the aspect of management not wasting money on poor growth opportunities is nothing to sneeze at either.
Another point in favor of buybacks, investors seem to view them as more like special dividends than regular. As our host said, here in the US we have that custom of steady or escalating quarterly dividends. Buybacks have a more distinct beginning and end.
Saw the Ben Felix video about the irrelevance of dividends. He is absolutely right. Only way to work the dividend is for automatic dividend reinvestment - buying even more shares at the adjusted downward stock price. The problem isn't dividends themselves but they are generally thought of as free 'extra' money or an income stream; when in fact they are the profits that would otherwise be reflected in the stock price. In other words: dividends takes away stock appreciation through a forced liquidation of a piece of the investment
I only use dividends to buy additional stock/ETF shares. The less money that comes out of my paycheck the better.
You could try accumulating etfs they reinvest the dividend automatically :)@@Lonovavir
I Sée dividend like float.. pay for stuff to build capital... Like cover insurance or mortgage etc.. sure taxe a bib but you get taxes anyway.. the % of dividend is based on stream néed.. the rest is 100% capital grow
i think the investors expect higher profits in the future with stocks like that but maybe there is something more going i am not yet aware of@@jackjones4824
Price and value aren’t the same.
If a company can pay dividends, then it is, most likely, a profitable company. Stock price growth can be achieved by companies which are not profitable, driven by hype for a future that may or may not be achievable. Dividend payouts themselves are not free money, nor are they irrelevant. They are an illustration that you are invested in a functional, profitable, value generating company (much more often than not).
Dividends also provide you an easy opportunity for portfolio rebalancing with out the need to sell shares. They are a net good indicator vs pure growth IMO. That said, they are not a magic bullet, and I agree with your points in the video.
I normally poke fun at people obsessed with dividends, but I’ll take the other side for fun. When market vibes are off, buybacks may not be able to support the price and a lot of cash is burned trying to prevent a PE compression. I think that’s why divs end up being an important component of total stock return since the cap gains are more sensitive to sentiment. It can probably be replicated through factors, but if the promise of dividends encourages more saving then I can’t knock it too hard.
Most jurisdictions tax dividends as income so you still end up losing a lot of potential return
@@nobobonobo I agree. Buybacks beat divs in most cases under current tax rules.
Dividends can be down in down markets too
@@lkangaroo Sure, but there are plenty of companies whose cash flows aren’t as sensitive to business/market cycles. I think buybacks offer more flexibility for the company and investor, but was just acknowledging that cap gains can be more volatile than just passing the cash through a div.
@@nobobonobonot all dividends are taxed as income. Some are qualified, some can be taxed as capital gains, and some can be return of Capital.
Getting paid a dividend is just extracting your gain before the company can piss it all away
You need to get a financial planner or expert on investments to aid diversify your portfolio to commodities index funds, digital assets etc, to provide illumination and guidance in the financial markets.
Investors should exercise caution with their exposure and exercise caution when considering new investments, particularly during periods of inflation. It is advisable to seek guidance from a professional or trusted advisor in order to navigate this recession and achieve potential high yields.
Honestly this cannot be overemphasized, professionals helping people mitigate unforseen circumstances and mistakes .It's always good to have a financial plan,
indeed, most people downplay the roles of financial planners until burnt by there mistakes. Productivity is optimized and keeping up to date strategies and analysis makes it more lucrative. I've been able to navigate the volatilities and scaled up 880k from 220k with professional guidance.
No doubt being financially free and not having to worry much about health care and other expenses cannot be overemphasized, making smart plans and setting up diversified investment portfolios is quite essential.
No doubt being financially free and not having to worry much about health care and other expenses cannot be overemphasized, making smart plans and setting up diversified investment portfolios is quite essential.
12:25 Another good example is Realty Income.
5% dividend yield with a P/E ratio of 40.