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Death to Dividends

Michael Flack

KIPLINGER’S HAS TOUTED using dividends to “Fund 20 Years of Retirement,” Forbes insists they’re useful “For Sleeping Well At Night During Turbulent Times,” and Seeking Alpha declares “I’m Living The Retirement Dream, Paid With Big Dividends.”

Morningstar has an entire monthly newsletter devoted to the subject of dividends. I even vaguely recall HumbleDollar praising the virtues of dividend-paying stocks.

Investing in such stocks is perhaps the oldest investing meme in the world, most likely invented right after the second company went public. It sounds like a great idea. Discard all stocks that don’t pay a dividend, analyze each remaining stock’s dividend “track record,” invest in ones that have a history of increasing dividends over time, and—voila—success is apparently assured.

If folks want to invest their money this way, so be it. To me, it’s akin to religion. Whatever people want to do in their private life is fine with me. But when they start foisting their ideas on others, something must be done.

Investing in dividend-paying stocks is lunacy for two reasons. The main reason is that there are zero studies that show this stratagem can beat the market. This is the acid test of investing. A few years ago, while enjoying a free lunch, I listened to a professional money manager tout his dividend-paying stock strategy.

His had the added twist of only investing in stocks that had a dividend yield within a certain range. Not too low, where the dividend was insignificant, and not too high, where the dividend was overstretched. But in the middle or, as Goldilocks might say, “just right.”

I subsequently investigated and could not find a single study confirming that investing in dividend-paying stocks can beat the market. Not one. If a strategy can’t beat the market, then it’s useless and shouldn’t be followed, let alone advocated.

The second reason for not investing in dividend-paying stocks is that it’s tax-inefficient. Every year, if you hold these stocks in a regular taxable account, you have to pay taxes on your dividends and have no control over their timing or amount.

Years ago, I had a dividend-paying golden child. Year after year, he raised his dividend until one day, after a corporate restructuring, he stuck me with a colossal capital gains tax hit and then subsequently cut his dividend in half.

Proof that investing in dividend-paying stock is lunacy is that its antithesis—investing in stocks that don’t pay a dividend—is incredibly appealing. I have no evidence that this Buffett-esque strategy will beat the market, but you won’t pay any tax until the year of your choosing.

Another dividend-loving Kiplinger’s article mentions the requirement to get “rid of stocks that suspend or cut their dividends.” What? So, when a company suffers a financial reversal, it should do everything possible to keep paying the dividend? I don’t know about you, but when I’ve faced some fiscally trying times in my life, I didn’t maintain my spending level and I certainly didn’t increase it a little bit more.

There may be ways to beat the market. I’m still looking for one myself and, until I find it, I’m sticking with index funds. If you have a strategy, I’m all ears. But please provide some evidence that substantiates your claims. As author Christopher Hitchens said, “Extraordinary claims require extraordinary evidence.”

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TechnoPeasantx
TechnoPeasantx
3 days ago

I’m grateful to be retired with a plan that doesn’t need to beat the market.
That my tax-free dividends automatically sweep into an FDIC bank account.
I’m grateful that my portfolio was only down 7.25% in 2022 while the dividend income rose and that I don’t need to sell shares in a down market in order to eat.

Last edited 3 days ago by TechnoPeasantx
mjflack
mjflack
2 days ago
Reply to  TechnoPeasantx

TechnoPeasantx, I and grateful for you taking the time to read my article. And grateful for your comments.

John LaRosa
John LaRosa
12 days ago

You assertion that investing in dividends stocks is lunacy is simplistic and silly. Your other assertion that the only purpose of investing is to beat the market is also wrong bcause you are ignoring Risk. Someone could certainly pusue a dividend stock strategy to create a portfolio that generates the income they need with a risk profile below the market. While selling stocks to generate income is plausible, it has the bad side effect of forcing you to sell more shares when prices are low and less shares when prices are high. Personally, 90% of my equity portfolio is in the total stock market fund but I am not in the drawdown phase of my investment life.

John S. Harville
John S. Harville
12 days ago

Could have also said that I don’t buy a stock unless it has a sustainable 3% dividend yield, or higher. There are many. Good luck Michael!

John S. Harville
John S. Harville
12 days ago

Could have also said that I don’t buy a stock unless it has a sustainable 3% dividend yield, or higher. There are many. Further, I am the proverbial buy and hold investor, paying no capital gains taxes because I sell nothing, except for occasional tax loss harvesting. That will fall to my children on their updated basis. Good luck Michael !

John S. Harville
John S. Harville
12 days ago

Buffett-esque strategy? Don’t tell this to Warren. As per a recent Kiplinger article, his $300-billion portfolio is expected to yield more than $6-billion dollars in dividend income over the next 12 months. If that’s crazy, the rest of us are gone down the road loco.

More down to earth, my own 34 stock portfolio generated $10,085.00 in dividend income for 2021. Yes I paid taxes on it, to the tune of 24%, or $2,420.40. A net gain of $7,664.60. Shabby you think? Had nothing to do with beating markets, and a number of the long held stocks have appreciated immensely.

Further, I paid taxes on the dividends only because my retired income was high due to large Roth conversions. Tax rates for 2023 qualified dividends are zero per cent for individuals with income up to $44,625 and $89,250 for married couples.

mjflack
mjflack
12 days ago

John S. Harville, It looks like the dividend yield on Buffett’s portfolio is 2%. I appreciate your comments and the update on your tax situation.

Olin
Olin
13 days ago

There may be ways to beat the market.”

Heck, I just try to beat what my bank pays. It’s almost impossible to beat the market consistently, but some months/years you do get lucky depending on your allocation.

Nate Allen
Nate Allen
13 days ago

Wow, Michael! Given the comments, you certainly jumped into a hornet’s nest with this article. (Although I am sure you expected as much.)

I agree with you that I am trying to simulate the market as well as I can and I don’t know what the best segment is. The same reason that I don’t have an outsized amount in tech or water utilities or REITs or anything else is the reason that I wouldn’t put more into dividend stocks. I am careful to make sure I am diversified across the entire planet with things like VT as well for the same reason of not wanting to overweight to the US. I want to experience the growth of the WHOLE market as opposed to placing a bet on one particular thing.

I do enjoy the fight you stirred up, however. Reading the passionate responses is entertaining..

Steven Reynard
Steven Reynard
13 days ago

Investing in dividend-paying stocks is lunacy for two reasons. The main reason is that there are zero studies that show this stratagem can beat the market. This is the acid test of investing. A few years ago, while enjoying a free lunch, I listened to a professional money manager tout his dividend-paying stock strategy.

Oh the irony…

Michael, when a lot of people do something we don’t understand, we can come to two reasonable conclusions. Either they are all crazy, which is obviously your conclusion here; or maybe there is something we are missing or fail to understand. I would suggest that perhaps the second may be a bit safer to reach and is much more likely to be correct…

You seem to be under the mistaken impression that the goal of investing is to “beat the market”. You are not alone. Many, many people have suffered greatly under that mistaken idea over the millennia. Then you look for evidence and demand proof that dividend investing accomplishes that goal. As one test, and I can think of many, to see if you are mistaken, consider this, why do people hold bonds? Are you going to claim that a 60/40 or 50/50 portfolio is going to “beat the market”? Are all the holders of such portfolios lunatics? Only a 100% TSM portfolio is rational? Are you sure or could you be mistaken?

No, you are wrong. The acid test of investing is (are their more than one?) whether the investor’s plan meets their needs. While there are people that focus solely on making the most money possible, and you could very well be one of them, that is, believe it or not, not everyone’s primary or only goal. Not everyone that has the ability to become a billionaire will or desires to become one. Mostly because they are not willing to make the sacrifices required. Other goals are more important to them. Maybe hard to believe, but true, nonetheless.

This is the first of your articles I’ve read, but it strikes me that perhaps you would be better served learning before teaching? I would recommend reading, for example, Jack Bogle, William Bernstein, Taylor Larimore, JL Collins, Johnathan Clements… OK, there are a lot of good authors out there.

You may be, and probably are, correct that dividend investing is suboptimal for most people for several reasons. But your argument fails to establish that conclusion. It is always dangerous to conclude something is “always” or “never”. Unless someone is omniscient, they are probably unqualified to reach that conclusion.

Funny you should quote Christopher Hitchens. Perhaps you should look at his quote another way. If your extraordinary claim that investing in dividend stocks is lunacy, just maybe your conclusion requires extraordinary evidenced? Just saying… 😉

Last edited 13 days ago by Steven Reynard
mjflack
mjflack
12 days ago
Reply to  Steven Reynard

Steven Reynard, I appreciate all your comments, especially the one about “You may be, and probably are, correct that dividend investing is suboptimal for most people . . .”

Wayne Koppa
Wayne Koppa
13 days ago

Sorry to do this over again. The formatting on original post did not work.

Now you can say there is at least one study showing dividends win.

Calendar Year 2022 End of Year Numbers from Morningstar

Vanguard S&P 500 VFINX 1yr -18.44 5yr 9.28 10yr 12.59 15yr 8.62

Vanguard Div Gwth VDIGX 1yr -4.88 5yr 11.8 10yr 13.09 15yr 9.84

mjflack
mjflack
13 days ago
Reply to  Wayne Koppa

Wayne Koppa, thanks for the post, and may I add:

iShares Select Div ETF (DVY)
Cal Yr 2022 End of Yr (per Morningstar)

1 yr 5 yr 10 yr 15 yr
1.82 7.93 11.48 8.11

Last edited 13 days ago by mjflack
Wayne Koppa
Wayne Koppa
13 days ago

Calendar Year 2022 End of Year Numbers

1 yr 5 yr 10 yr 15 yr

Vanguard S&P 500 VFINX -18.44 9.28 12.59 8.62

Vanguard Div Growth VDIGX – 4.88 11.8 13.09 9.84

I hope I copied these correctly from Morningstar.

Philip Stein
Philip Stein
13 days ago

Mike, I invested in Vanguard’s Dividend Appreciation fund (VIG) in my Roth IRA account, but never with any expectation of beating the market.

In my Roth IRA, I can choose to either add those dividends tax-free to my income or, if I don’t need the money, I can reinvest those dividends in additional shares thereby growing my investment.

I, like I suspect many HumbleDollar readers, have an investment in Vanguard’s Total Stock Market ETF in my taxable brokerage account because this fund is tax-efficient, never having paid me a capital gains distribution as far as I can recall.

Yes, I do receive mostly qualified dividend distributions for which I must pay tax. But I have reinvested those dividends over the years and have seen the value of my holding compound far beyond the money I invested out-of-pocket. I find this result more than compensates me for the additional taxes I’ve paid.

In my personal experience, compound growth is a far more reliable way to increase your wealth than attempts to beat the market, dividends or no.

mjflack
mjflack
13 days ago
Reply to  Philip Stein

Philip Stein, thanks for the reply. Regarding placing “Vanguard’s Total Stock Market ETF in my taxable brokerage because this fund is tax-efficient”. This makes sense as minimizing taxes is a wise strategy.

Harold Tynes
Harold Tynes
13 days ago

Michael, great topic. The construction of a diversified portfolio will have a mixture of dividend and non dividend stocks. In an indexed portfolio, this mix will be determined by the market. However, two factors skew the mix. 1)Growth stocks pay less dividends than value. 2)Company management is compensated on EPS and stock buyback strategies take cash that could be paid in dividends and reduces share count and raises EPS. Bottom line, dividend paying stocks are in the value bucket and have become more scarce because of management bias towards stock buybacks.

Olin
Olin
13 days ago

I enjoyed the article and reading the high number of comments. Michael is one of my favorite writers, and for me, he writes in a way to that gets my attention and expresses things that I sometimes think about.

All the comments (+/-) were interesting to read as it is also good to see how others viewed Death of Dividends. Not sure about the title, but it did get many readers attention.

booch221
booch221
13 days ago

If a strategy can’t beat the market, then it’s useless and shouldn’t be followed, let alone advocated.

 I’m sticking with index funds. 

Index funds, by definition, can’t beat the market.

Tooney
Tooney
13 days ago
Reply to  booch221

booch221, your comment made me laugh. Thanks.

Last edited 13 days ago by Tooney
Rob Jennings
Rob Jennings
13 days ago

Dividends are simply small, regular (forced) sales of the stock that the investor has no control of. My theory on why they are popular is some folks think of them like a bank account that pays regular interest-the difference however is that the dividend stock loses the value of the dividend when issued.

John Wood
John Wood
13 days ago
Reply to  Rob Jennings

I think the economics are more enticing if you reinvest the dividends. The stock price does drop, equal to the amount of cash disbursed via the dividend. However, if you reinvest the dividend, you’re buying shares (with the company’s money) at that dropped price, so you’re buying more shares at a discount to the pre-dividend price. In addition, the investor’s personal, out-of-pocket cost for those additional shares (in a taxable account) is their tax rate on the dividend distribution. So, from a personal cash flow standpoint, the investor buys more stock at an 80% to 100% discount to the actual cost of the shares (depending upon the 0% – 20% dividend tax rate that the investor is subject to). Dividends don’t drive my investing decision, but I certainly don’t mind receiving and reinvesting them.

Steven Reynard
Steven Reynard
13 days ago
Reply to  Rob Jennings

And retained earnings are the company management forcing investors to accept their plan for how to invest the investors’ money. “My way or the highway.” If I agree with the management’s plan, I can invest the dividends back with the company. If I see a better opportunity, I can invest the dividends elsewhere, or spend them, as needed.

How many companies have made a good profit and then invested that profit in ways that didn’t pan out? I know the company I work for did, many times. We used to joke that our management bought small companies for $400M and sold them three years later for $40M. The core business was fine. It was their extracurricular “growth” initiatives that were suspect. Watching my company stock go from $40 to $120 and then back to $12 over a decade wasn’t all that fun. I think I would have preferred to collect “my share” of the profits along the way.

How many companies have purchased their own stock at what turned out to be a really bad time (most?). How many have watched the price go up and then right back down, completely wiping out all those retained profits.

I don’t do dividend investing myself, but I can sure see the appeal. It may not be a strategy that “beats the market” (good luck discovering one of those and I sure wouldn’t trust anybody that says they have found one), it sure doesn’t seem insane to me.

No, it may not be optimal, but it is rational.

mjflack
mjflack
13 days ago
Reply to  Steven Reynard

Steven Reynard, when it comes to investing I try to optimize and not rationalize.

Scott Gibson
Scott Gibson
14 days ago

Each individual must decide on an investing approach that works for them. Since no one knows the future, “bringing evidence” about any approach is nothing more than referencing what has happened in the past. What time frame is useful? What conditions existed? Beat the market? What market? The S&P 500? If that’s the case, invest only in small cap value because that has beaten the market. Behavorial Finance is also something important to consider. It’s easier for a lot of people to collect their dividend and feed themselves rather than sell some stocks that have just cratered to pay the bills. Bring evidence about the future and then you have something.

Richard Gore
Richard Gore
14 days ago
Reply to  Scott Gibson

All I know is that buying dividend paying stocks has worked well for me. And, yes, I have beaten the market (S&P500) in total over the past 22 years.

However, I don’t think the HumbleDollar is useful site for debating investment approaches.

But, if you are interested in a different take on investing you might try reading Plan Valley Capital’s January 11 Blog – Crispy Bacon. Now that is thought provoking!

Richard Gore
Richard Gore
14 days ago
Reply to  Richard Gore

My note shouldn’t have been a reply to Mr. Gibson. I totally agree with his point of view. It should have been a note to the author of the essay. It was just that Mr. Gibson’s note that sparked my thought.

Harry Crawford
Harry Crawford
14 days ago

I worked for a guy who picked his own dividend paying stocks and would never invest in a mutual fund or ETF because he was sure he could do better than any mutual fund manager. He retired when he was 44 years old and he’s still retired at age 66. Picking individual dividend paying stocks works for some. Not for me, but certainly for him.

Purple Rain
Purple Rain
14 days ago

I make a distinction between high dividend stocks and dividend growth stocks.

Companies that grew or initiated a dividend have experienced the highest returns relative to other stocks since 1973—with significantly less volatility.

https://www.hartfordfunds.com/insights/market-perspectives/equity/the-power-of-dividends.html

https://www.schwab.com/learn/story/it-may-be-time-to-consider-dividend-paying-stocks

Most of my stocks happen to pay growing dividends and my dividend growth portfolio has outperformed my VTI investment, which is about 25% of my portfolio over the past five years and one year. I don’t aim to beat the market. I just like knowing that my dividends grow at around 10% a year and they keep buying more shares. Since I focus on dividends and not market prices, I don’t sweat when there is a market crash.

How the market performs is one thing. How individuals perform in the same market is quite another. My dividends ensure that I never panic and sell. I suspect dividend growth investors perform better than indexers even if the passive index does better than an active strategy.

Last edited 14 days ago by Purple Rain
Steven Reynard
Steven Reynard
13 days ago
Reply to  Purple Rain

Right, the source of the dividends are rather important. A company paying money they can’t afford, or worse taking out a loan to pay dividends, shows a problem. A company that retains 50% of profits to fund profit sharing, increased R&D, and maybe acquisitions; and then pays the rest in dividends is probably doing fine. Losing money, but still paying dividends is a great way to become bankrupt.

Ben Rodriguez
Ben Rodriguez
14 days ago

You know it’s an automatic laugh for me when you mention a free lunch. LOL. You’re heading straight for the lion’s den again…good luck.

Steven Reynard
Steven Reynard
13 days ago
Reply to  Ben Rodriguez

Ah, did he get the joke? I’m not sure…

mjflack
mjflack
14 days ago
Reply to  Ben Rodriguez

Ben Rodriguez, thanks for the kind words. I like to eat a free lunch with no taxes, others . . . not so much.

M Plate
M Plate
14 days ago

In the last few years dividends made up roughly 80% of my income. 2022 was a brutal year for investors, but my dividend income went up. When Social security and my pension kick in, dividends will likely be 1/3rd of my income.
In order to reap the gains of non-dividend stock, I’d have to sell that stock. It could be a poor time to sell, or it could be a stock that had a bright future if I had kept it.
I have my growth stocks/funds too. Dividends are not a religion to me; they are a valuable income stream that I am eternally grateful for.

mjflack
mjflack
14 days ago
Reply to  M Plate

M Plate, thinking that “a stock that had a bright future” sounds like faith to me. Also, when you had “to sell that stock,” would be determined by you and not by a corporate buyout or a special dividend. I am the captain of this investment ship and like to have a say in the timing and amount of my taxes.

Steven Reynard
Steven Reynard
13 days ago
Reply to  mjflack

Thinking you are going to receive an increased share price for all those retained earnings “sounds like faith to me”.

How many companies that were in the S&P 500 in 1950 are still there today? What would you rather have had, the promises of management (that after all took their money and ran), or the dividends from your share of the earnings?

Maybe the best choice would have been to reinvest all those earnings, but wouldn’t you have wanted the choice of what to do with them? The idea that management had your best interests at heart “sounds like faith to me.”

macropundit
macropundit
14 days ago
Reply to  mjflack

>> thinking that “a stock that had a bright future” sounds like faith to me. 

You make it sound like a bad thing. In fact, everything depends on the reasons one thinks that. No idea in general is any better than the assumptions justifying it.

Look, professional advisors and those who think like them have faith in the tenets of Modern Portfolio Theory and/or assumptions about what certain averages and generalities tell us about reality, the latter supposedly justifying the former. That’s faith too, isn’t it? Faith is just a scary word for belief in something. It says nothing about whether it is true or not. The financial advisor industrial complex –as with many professional groups– would have you believe they’re rational and those they disagree with are irrational. But the truth is not all financial advisors agree in the tenets of MPT –at least as typically applied to individual investors by those in thrall to it. So the truth is always that ideological differences can be declared by the apparent current winners in the struggle as the only voices to listen to. But life is seldom so simple.

Martymac
Martymac
14 days ago

Sorry, I look at risk adjusted returns and standard deviation, especially when you are retired.
Take a look at the income and total rent of SVAIX for 2022? Compare that to the SP500.
Dividends are another tool in the toolbox of diversification

Gary Cahn
Gary Cahn
13 days ago
Reply to  Martymac

This data is from Morningstar for SVAIX which you can find on their performance page:

Here are the after tax adjust returns for the last 1, 3, 5, 10 and 15 years
4.47% 4.17% 3.45% 6.46% 4.35%

Percentile rank of these after tax returns for the same 5 time periods. 1 is best and 99 is worst

2%, 67%, 79%, 88% and 85%

mjflack
mjflack
14 days ago
Reply to  Martymac

Martymac, you had me until SVAIX. Any fund that has an expense ratio of 0.94% has no place in a prudent investor’s portfolio.

Martymac
Martymac
14 days ago
Reply to  mjflack

It’s actually 81 basis points. You were looking at gross expenses.
it’s always net.
I have no issues with your analysis.
We all have different risk tolerance.
Also, I use it as a portion of an overall strategy. It serves as a good hedge.

mjflack
mjflack
14 days ago
Reply to  Martymac

Martymac, I’m working on an article for HD about curiosity. So I gotta ask, why is it “always net?”.

William Perry
William Perry
14 days ago

Thanks Michael for another thought provoking article.

Taxes on dividends are complex and unique to each of us based on our individual circumstances. On 1/5/2023 the Motley Fool had a good article that summarizes most if not all of the tax impact dividends will have on our individual taxes in 2023. https://www.fool.com/investing/stock-market/types-of-stocks/dividend-stocks/how-dividends-taxed/

Over the years I was in public accounting the vast majority of closely held businesses I worked with chose to be organized as either a S-corporation or a limited liability company precisely to avoid the tax inefficiencies of double taxation that occur when a C-corporation is taxed at the corporate level and their dividends are taxable again to their shareholders as all publicly traded corporations dividends are.

If you attend a possible future HD convention in Philly I hope you review it in your blog the after action report.

Best, Bill

mjflack
mjflack
14 days ago
Reply to  William Perry

William Perry, thanks for the kind words. I can understand why closely held businesses would want to avoid tax inefficiencies that dividends cause.

Brent Wilson
Brent Wilson
14 days ago

I also support total return because that is the only way to guarantee our fair share of market returns. That said, I think if one were to invest in a reputable Dividend ETF, they’ll probably do just fine.

Where I think some folks get into trouble is trying to pick a handful of dividend paying stocks themselves. They’re getting steady, reliable income but I suspect most are lagging the total market.

I think some will probably argue that Dividend paying stocks are less volatile than the total market which also includes many growth stocks. This could be another reason why many retirees swear by them.

But when I look at Vanguard’s Dividend Appreciation ETF (VIG) vs Vanguard’s Total Stock Market ETF (VTI), they seem to track pretty closely over the last 15 years, with the exception of the most recent Pandemic years, where VTI shot up higher than VIG before 2022, but then crashed lower than VIG did during 2022.

So, perhaps Dividend Paying stocks will fare better during a severe market crash, as we just went through in 2022. I would only say that if one has enough bonds and cash reserves, they probably shouldn’t worry too much about achieving slightly less volatility in their stocks, keep it simple, and invest for total return in their stocks.

mjflack
mjflack
14 days ago
Reply to  Brent Wilson

Brent Wilson, “do just fine” is not a valid argument. One of the benefits of talking about investing is that it can be quantified. If someone wants to recommend a certain investment strategy they need to bring evidence – otherwise, it is all talk.

Steven Reynard
Steven Reynard
13 days ago
Reply to  mjflack

OK, that’s probably one of the “unwisest” comments I’ve seen in a while…

Perhaps you would care to read, “Enough” by a guy called Jack Bogle…

Last edited 13 days ago by Steven Reynard
AJ
AJ
13 days ago
Reply to  mjflack

The clearest summation I’ve heard for the various dividend investing strategies is that they offer a form of naive factor exposure. So, by focusing on some aspect of dividend policy (appreciation, high yield, etc.) a given strategy might be indirectly tilting toward value companies or toward companies that have higher relative profitability. However, they are ignoring all non-dividend paying stocks in whatever potential pool of stocks they’re pulling from. That said, from my limited perspective, the world of passive/index funds that claim to be incorporating factors like profitability or investment irrespective of dividends seems to be relatively new and prone to marketing departments attempting to capitalize on buzz words (e.g. multifactor, smart beta, etc).

macropundit
macropundit
14 days ago
Reply to  mjflack

>> “do just fine” is not a valid argument

It was an expression, not an argument. And I’ll be no one misunderstood it, probably not even you though you pretend otherwise.

>> One of the benefits of talking about investing is that it can be quantified.

Sounds like you’re a investor who identifies with the quant mindset. The two most general divisions being fundamental or traditional and quantitive or systematic. The fundamentals investors know that quants exist and get their place and function, whereas the quants don’t know or pretend other legitimate views don’t exist. In my experience the vast majority of disagreements about investing stem from failing to understand this difference. And 90% of the time it’s the quants trying to declare the fundamentals investors are naive cranks even if it requires bulldozing common sense ideas in the way. The quants are find not just luck (as would be reasonable) but the purest of dumb luck everywhere they look. They’re the financial world’s Calvinists, who sacrifices commonsense understandings of things to better accord with abstract theory.

mjflack
mjflack
14 days ago
Reply to  macropundit

macropundit, not sure where I fall on the investing spectrum. If someone has an investment strategy, I’m all ears – I just want them to provide some sort of evidence. If you claim that dividend-paying stocks add value to your portfolio, then provide some evidence why. Statements like “What market?”, “I worked for a guy . . “, “I don’t care if I beat the market, the taxes were inefficient”, “Bring evidence about the future”, and ‘if “the market” really exists’, do not help us get any further towards the truth.

macropundit
macropundit
12 days ago
Reply to  mjflack

Of course you don’t know where you fall on the spectrum. Neither do fish know anything about water.

You know full well you’re going to rule out strategies you don’t approve of as not sufficiently of the quant mindset and call them not strategies at all. This is an old game and not particularly clever.

I never claimed anything about dividend stocks. FWIW, my major holding wasn’t a dividend stock but to my surprise started paying dividends long after I’d already bought in and I hold it still. I’m an accidental dividend investor.

Brent Wilson
Brent Wilson
14 days ago
Reply to  mjflack

If you would like numbers, it’s not that hard to plug in VTI vs VIG on the website portfoliovisualizer.com
From Jan 2007 – Dec 2022, the inflation adjusted return of VTI was 8.51%. The return for VIG was 8.91%. You can read the rest of the numbers yourself if you’d like, which supports the rest of what I said, assuming you read that far.
I understand that this is a limited timeframe. I’m not advocating it as “proof” of anything. I’m just saying that to me, it seems reasonable to expect this ETF to not lag the total market by much with how closely these two funds have tracked over the past 15 years.

Jim Burrows
Jim Burrows
14 days ago

Qualified dividends can be very tax efficient. A married couple filing jointly using the standard deduction with all of their income from qualified dividends would pay no income tax on the first $109,250 and only 15% on the amount over that threshold in 2022. If you have other income, then the tax-free threshold is reduced dollar for dollar. Say you also have $30,000 in earned income from a part-time job, then you can still collect $79,250 in tax free qualified dividends. Now THAT is tax efficient.

Last edited 14 days ago by Jim Burrows
Michael1
Michael1
14 days ago
Reply to  Jim Burrows

Jim your illustration is a useful way of putting it. I believe it would also be roughly true if the same married couple had all of their income not from qualified dividends but from long term capital gains, correct?

Michael1
Michael1
13 days ago
Reply to  Michael1

Wow, three down votes to this question…

Interesting how some debates raise hackles, and I don’t have a strong leaning in the debate! This wasn’t passive aggression, but me seriously liking the illustration and asking a question.

I guess I’ll go look it up instead…

mjflack
mjflack
13 days ago
Reply to  Michael1

Michael1, I know how you feel . . .

Steven Reynard
Steven Reynard
13 days ago
Reply to  Michael1

Yea, no idea why the down votes for your question??? Seems like a reasonable question to me.

But the answer is yes, the long term capital gains for the couple would probably be at 15%. Of course we don’t have all the details, like traditional IRA contributions, etc. to know for sure.

mjflack
mjflack
14 days ago
Reply to  Jim Burrows

Jim Burrows, Berkshire Hathway compounded Annual Gain, 1965-2021 = 20.1% (per Annual Report). Total Taxes paid on dividends by shareholders = $0. NOW THAT IS TAX EFFICIENT.

Jim Burrows
Jim Burrows
14 days ago
Reply to  mjflack

Michael Flack, you can’t eat capital gains you don’t realize. However, if you aren’t interested in your investments buying food for you, i.e. you’re in the accumulation phase of your life, you have a good point. As someone said elsewhere in these comments, the details matter.

Michael1
Michael1
14 days ago
Reply to  Jim Burrows

deleted

Last edited 14 days ago by Michael1
R Quinn
R Quinn
14 days ago

”But when they start foisting their ideas on others, something must be done.”

Isn’t that what you are doing here and we all do at times? Presenting a point of view – ideas if you will is how we learn and decide and hopefully make informed decisions. if you recall I’m opposed to budgets, credit card balances, cats and traveling in an RV😎 I’ve foisted away many times.

I have been investing in a dividend paying stock for 60 years and reinvesting all those years. I don’t care if I beat the market, the taxes were inefficient or anything other than I have several thousand shares of that stock which now will kick off an income stream equal to my monthly net Social Security check if I need it.

My idea is that using dividends as part of a total retirement income strategy is a good idea for average people just looking for income supplements.

mjflack
mjflack
14 days ago
Reply to  R Quinn

R Quinn, much of personal finance is quite subjective, but investing is quantifiable. Risk, returns, and taxes can be measured (if however complicated and messy). Promoting various investing schemes without addressing them is a waste of time.

IRT “I don’t care if I beat the market, the taxes were inefficient”, I’m just glad you’re not my investment advisor.

I always thought one of the main points of HD was to improve our investing acumen. If people don’t care . . . then what’s the point?

R Quinn
R Quinn
14 days ago
Reply to  mjflack

For many HD readers you are probably right, all the details matter. How you get from here to there matters because of risk, fees, returns, taxes and such.

For the average person just trying to save something for retirement is the goal. While paying attention to the details should matter to some degree and may affect their journey most people have no clue. So, in the final analysis if the goal is $1,000,000 and they reach $1,000,000 they are happy. 0.15% difference in investment fees doesn’t matter.

If my goal is to supplement income stream as reliably as possible rather than maximize total assets, are dividend paying stocks bad?

Michael1
Michael1
14 days ago

Michael, I enjoyed the article.

I’m not at ardent follower of the dividend religion, so I’m not the best person to debate you here. That’s okay, as I’m sure someone else will! But there were a few things in your article that made me think.

Your main points:

  1. Doesn’t beat the market. I’m a little surprised, perhaps like you, that NO studies show a dividend strategy would beat the market. You’d think that some afficionado of the strategy would have found a time when it did. Then again, I’m not trying to beat the market either.
  2. Tax inefficient. I’m mixed. Dividends come whether you want them or not, and are taxable. Then again, they’re taxed at 15%, probably below one’s marginal tax rate. Dividends are also quite predicable, unlike mutual fund capital gains distributions, so that cash flow and tax on it can be better planned for.

Additional points:

  1. Reliable cash flow. I think that many fans of dividend payers like them for the reliable cash flow. Beating or even matching the market is secondary. Given that dividends are taxed at probably below one’s marginal rate, cash flow from dividends is more tax efficient that distributions from a retirement account, and more efficient than interest in a savings account or from a bond. (Of course one could potentially hold non-dividend payers, sell them for cash flow, and pay the same 15% or even less on the capital gains.)
  1. Quality. I think some others like dividend growth stocks not for the dividend per se, but for the implied quality factor. Christine Benz of Morningstar has Vanguard Dividend Appreciation ETF (VIG) as the largest holding in her retiree portfolios for this reason, and I’ve recently taken a position myself. Almost 62% of VIG holdings are wide-moat companies, compared to 43% of VTI holdings. The hit to tax efficiency? VIG’s current SEC yield is 1.92%, compared to 1.65% for Vanguard Total Stock Market ETF (VTI).

Overall I’m in the total return camp – happy to sell positions for cash flow as I need it, rather than have it programmed in for me in the form of dividends. Still, I recently bought some VIG and will buy more. I also own a few individual stocks that pay well above what VIG does. If I don’t need that cash flow, then one could say this prompts unneccessary taxation. I would actually prefer to have a couple of years without these dividends so I can make other moves. Then again, my second largest individual stock (behind my old employer) is Berkshire Hathaway, the ultimate in tax efficiency. Call me in the middle.

Thanks again for the thought provoking article!

Michael1
Michael1
14 days ago
Reply to  Michael1

Btw, regarding dividends being more predictable than capital gains… I didn’t mean predictable in the sense that they can be relied upon. Rather, I mean that most likely no one is going to upset my cash flow and tax planning with a ginormous extra dividend – unlike capital gains distributions.

mjflack
mjflack
14 days ago
Reply to  Michael1

Michael1, appreciate the kind words.

I’m actually surprised that some people think that dividend-paying stocks may offer superior returns. If it was that easy then everyone would do it.

Dividends and capital gains (from the stock being sold) are predictable until they are not – I specifically mentioned that in my article.

I can understand the value of “reliable cash flow” and therefore may accept lower returns. If someone wanted to write an article about that I would be quite interested. Of course, I would expect they compare that scheme to selling off a portion of their index funds to create a similar “reliable cash flow.”

I personally think that the implied “quality” of dividend-paying stocks is nonsense, but have no evidence to back this up. If an article were to be written analyzing this “quality”, I would be quite interested.

Michael1
Michael1
14 days ago
Reply to  mjflack

Btw, I may have been unclear is saying dividends are more predictable than capital gains… I didn’t mean predictable in the sense that they can be relied upon. Rather, I mean that most likely no one is going to upset my cash flow and tax planning with a ginormous extra dividend – unlike capital gains distributions. Right now the latter is more of a bother for me than a cut dividend.

Ormode
Ormode
14 days ago

Many retirees have absolutely no interest in “beating the market”, if “the market” really exists. Sure gigantic fad stocks will increase their market cap to an enormous value, until they make up the bulk of the S&P 500, but then they may plummet. Do you really want to put your money in Tesla and Facebook?
Meanwhile, prudent retirees have millions of dollars invested in conservative, dividend paying stocks. Their portfolio doesn’t soar and then crash, but it keeps up with inflation, and they have a steady stream of income to live on without ever selling a single share. If you invest this way, you can live very nicely, which is the whole purpose of investing for most people.

mjflack
mjflack
14 days ago
Reply to  Ormode

Ormode, apparently more investors than I ever realized have ‘no interest in “beating the market”’. I myself am content to equal the market (though I’d rather beat it). Call me crazy (or a minority), but the one thing that I do not want to do is under perform the market.

R Quinn
R Quinn
14 days ago
Reply to  Ormode

Well said.

Jo Bo
Jo Bo
14 days ago

Thanks, Michael, for reminding us not to try to beat the market.

Interesting, though, that you mention Warren Buffet. His Berkshire Hathaway is in a sense it’s own mutual fund. Fifteen years ago, I bought shares in my taxable account precisely because BRK seemed like a good value and didn’t pay dividends, have annual gains and distributions, or charge fees. The returns have been ample too, besting the S&P500 by multiple points. But then, that’s stock picking… and I have had some losers, too!

mjflack
mjflack
14 days ago
Reply to  Jo Bo

Jo Bo, So what you’re saying is: the most successful investor in the world runs a mutual fund that does not pay dividends?

AJ
AJ
13 days ago
Reply to  mjflack

Berkshire does not pay dividends to it’s shareholders, but some of the underlying companies/stocks it owns do pay dividends to BRK which are then reallocated internally to other investments instead of being distributed to BRK shareholders. Also, BRK often buys back its own shares if the managers feel BRK stock is currently selling below its intrinsic value (a popular alternative to issuing a dividend that still returns value to shareholders through increased share price). In theory, it all comes down to the managers’ assessment of where capital can be most profitably deployed. Even Buffet himself has mentioned that BRK could end up paying a dividend at some point in the future if it’s managers determine that there are no available investments within BRK that are profitable enough to justify retaining excess capital.

Jo Bo
Jo Bo
14 days ago
Reply to  mjflack

From an investor perspective, BRK resembles a mutual fund in that its underlying companies and stock portfolio is greatly diversified.

John Yeigh
John Yeigh
14 days ago

A comparison of Vanguard’s ETF index funds – Dividend VYM to their S&P 500 VOO shows that they largely tracked together until 2013. The S&P 500 ETF beat the Dividend ETF returns for most of the last decade due to the growth of tech stocks. However, over the last two and particularly one year periods, VYM has outperformed VOO due to the shift toward value stocks.

I prefer VOO for the long-term for all the reasons you outlined, but in fairness, VYM has been the winner recently.

mjflack
mjflack
14 days ago
Reply to  John Yeigh

John Yeigh, appreciate that you cited evidence in your reply.

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