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Today, I’m going to channel my inner “RDQ” and raise some peoples ire:
About one month ago, there was a post about dividends. It contained quite a bit of what I will politely call, “magical thinking”. Despite my linking two excellent articles which debunk the dividend myth, clearly subsequent posters did not bother to read either of them and persisted in posting the dividend dogma that commonly persists. I even resorted to asking Jonathan to chime in (which he kindly did) as too many folks seemed to still not be “getting it”, to my dismay.
In an effort to never give up the good fight (LOL), a new post dropped this morning elsewhere, and I have attached the link above, in an effort once again at dispelling the false ideas people have about dividends.
Please feel free to use your down arrow votes aggressively and make my day !
I’m not sure that my comments even apply to the article but I’ll comment anyways.
Since getting closer to retirement the thought of dividend investing or growth investing articles did exactly what I read HD for.
It challenged my thoughts that I’ve always had to invest for growth and sell a regular dollar amount to meet our needs.
Now retired I’m still not convinced for the need of dividend investing so I continue to invest in two broad market and one growth etf.
The preference I do have is for each of us not to get snippy with each other but to see value in our differences of opinion
The bulk of my portfolio is invested in index ETFs, but I did invest some cash in Div King/Aristocrat dividend stocks back in March, 2020. I like the convenience of not having to decide what stock to sell, especially during a down market, to pay for a home project or trip. And we did invest some of the dividends in two ETFs during the dip earlier this year.
For index investors like myself, this theory is irrelevant. If you happen to have $1M of VTI in your taxable portfolio, you will receive $10,900 in dividends this year. You didn’t buy VTI to get these dividends. You bought it as a part of your asset allocation scheme. Likewise all the other index equity ETFs pay some amount of dividends. Unless you buy an ETF that has the purpose of maximizing dividends, the dividends that these equity ETFs pay is incidental to your ownership.
However, to you, these dividends from your taxable account represent incoming cash flow. This cash flow is just as valid as $$ from a pension, SS, earned income, or a gift from someone. Cash is cash. You can spend it, reinvest it, or save it.
There is no reason to denigrate dividends that originate from within equity index funds. In retirement, they are just another cash flow source.
Here’s a take on the dividend irrelevance theory: https://www.whitecoatinvestor.com/dividend-irrelevancy-theory/
The issue of taxes on Dividends as well as those on Capital Gains are mitigated when stocks and [ETFs] are held in tax advantaged accounts.
The author of the article noted that “A better argument is that when a dividend is paid, management is saying, “We think you have a better use for this money than we do.” I actually like this argument because that’s how I run my own business. “
That’s precisely how I ran my businesses and why, when I founded the first in 1978 it was a C-Corp. I had the choice of keeping profits in the business, which I could invest in the business or, I could disburse it as a “dividend” or some form of profit sharing to employees.
My experience was that my business performance was far, far better than that of the stock market overall, and I had significant control as the major shareholder and a member of the board.
The only reason to buy a stock, any stock is to own a portion of the business. Pursuing dividends isn’t a good approach, IMHO. If it was our portfolios would be comprised of shares of REITs or shares in some questionable enterprises that pay annual dividends of 12% or more. What’s questionable? Purchasing shares in companies that may be unable to sustain such dividends. [I take a long-term approach.]
That said, I do own stock in businesses that pay dividends. I also own shares of a “Dividend Equity” ETF which is a “Large Value” fund with about 100 holdings. I find it to be easier than purchasing shares in the individual companies.
As for the dividends that I receive, I can and have used these to purchase stock in other companies or ETFs. Now that I am truly retired, dividends help to fund my RMDs and avoid the selling of shares. However, looking at the equity portion of my portfolio it is 32% value stocks, 38% core stocks, some of which might be defined as growth-dividend companies. The remainder is 30% growth stocks. While I consider dividends to be useful, I avoid purchasing a stock simply because it pays dividends.
I wish HumbleDollar supported the ability to pin a Forum post so it never ages away; I’d pin this one. Could not have said it better.
Not everyone would want a particular post to stay current, so I can see why pins are not available.
Instead, in my browser I bookmark posts I myself want to keep handy.
You should be looking at what role dividends play in corporate capital allocation.
If a company has extra money, it can pay dividends, buy back stock, pay down debt, make capitol expenditures, or just put the money in the bank. Which course is likely to be most profitable in the long term?
It obviously depends on the company and the industry. One size does not fit all.
Where does the investor seeking income fit it?
If you are an investor, you want to look at whether the company is allocating capital wisely or foolishly. If you need dividend income, you should buy companies where paying a dividend is the most sensible thing to do.
That’s the thing. I’m not really an investor. No time or interest in looking at all that.
Having read many pro-and-con articles on dividends over the years, the only thing I do is make sure I click the “reinvest dividends” option on my index funds.
In Morgan Housel’s superb book The Psychology of Money, he notes “Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works.” He goes on to say: “People do some crazy things with money. But no one is crazy. … People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies, experiencing different job markets with different incentives and different degrees of luck, learn very different lessons.”
Housel gives a few examples:
On and on.
We are each playing different games with our money, in how we earn and save, how we spend, how we think about risk, and how we invest.
So it should surprise no one that we shareholders each place different value on cash gained from investments through share buybacks, dividends, share sales after price appreciation, or special capital gain distributions.
David, thank you for your thought-provoking piece on how our experiences shape our financial views — and just about our views on most things in life. I certainly see it in observations and interactions within my community involving money, politics, empathy, etc. It makes me curious what experiences my adult children and their spouses have had that shaped their financial views up to this point. I’ll have to ponder on how best to start that conversation with them.
After graduating high school in ’73–’74, I drove a Rambler American. Then the gas shortage hit. In the city, lines stretched for blocks; where I lived, it wasn’t as severe, but still noticeable. That experience has shaped the way I think about investing in the energy sector ever since.
During that time period in New Hampshire you could only get gas on odd or even days based on the last number on your plate (no vanity plates back then). A lot of gas stations were closed on Sundays. When we travelled long distances playing youth hockey games the other team had to guarantee there would be a station open so we could fill up for the trip home.
I had a job pumping gas at a BP station in town thru that period. No one wanted to put the “Last Car” sign up. It was a long, long walk and you took your life in your hands.
“It’s rumored that once Mr. Buffett steps down, Berkshire will likely start paying dividends, as future management may choose to return cash to shareholders rather than reinvesting it all in the business. Why is that?”
I do believe that generally in a bull market growth will outperform blue chip dividend paying stocks. The value of (blue chip) dividend paying stocks for providing (steady) income shines during the (repeating) long term periods where the S&P500 (or DJI) languish before reaching a permanent new high. This occurred from 1929-1954, 1968-1980, and 2000-2012. During those periods the income from blue chip dividend producers provided steady income without selling off shares. The Dividend Aristocrats is a list of S&P500 stocks that have increased their dividend every year for at least the last 25 years (which covers the 2000-2012 downturn). The article you referenced didn’t evaluate dividend paying stocks from that perspective. Hence I found its conclusions of limited value to me since it didn’t address my goal of steady income in retirement regardless of the price movements of the stock market (the basis for my investing in blue chip dividend paying stocks). No “magical thinking” involved. Hence a portion of my portfolio is in dividend aristocrat stocks for steady income. All that said, I do believe people should invest their money how they feel most comfortable since they’ll be ones living with the consequences.
The Holy Grail of investing is Total Return.
This statement from the linked article is flatly wrong: “In the US, we pay the same tax rates on dividends that we pay on capital gains.”
eg, I don’t think there are any bond dividends that are qualified.
Bonds pay interest, not dividends, that is taxed at ordinary income tax rates. Stocks pay dividends and if ‘qualified’ are taxed the same as long-term capital gains rates.
Except municipal bonds
Dick is correct that Muni bonds are generally not taxable. But this is the tax code, so there are always exceptions and caveats. This Schwab article has some good info if you are thinking of inviting in municipals
Yeah, counting the interest in MAGI really bugs me when Roth income is not. I see nothing logical in that. MUNI bonds benefit society, ROTH costs money for society. 🙄
You keep getting this wrong. Tax-free Munis are never taxed by the Fed, Roth contribution have already been taxed. Congress loves Roth’s because they get their tax $$ right away, not waiting 30 to 40 years. Everything I read about the creation of Roth’s is that was a major selling point.
Not sure of your point Rick.
Contributions to a Roth are after- tax. Purchase of muni bonds is with after- tax money. Roth tax- free earnings are not counted in the MAGI calculation. Tax-free interest on munis is counted in the MAGI calculation. One source of tax- free income affects IRMAA, the other doesn’t.
Unless I am sadly misinformed, I don’t see the logic applied to this.
Both investments with after-tax dollars, Both with tax exempt income. One counts in MAGI, the other doesn’t.
what do I get wrong?
I think Buffett gave an excellent explanation in his 2012 annual letter as to why Berkshire Hathaway does not pay a dividend. He pointed out the fact that not all shareholders desire an annual taxable distribution. For those who do, they can effectively create the same thing by simply selling an annual fixed percentage of their shares, and the tax treatment will be the same. (Of course, those shares must have been owned for over a year, etc.). I highly recommend going to http://www.berkshirehathaway.com and clicking on “Shareholder Letters” not only for a discussion of this subject, but to glean his and Munger’s views on a number of topics.
Yes, Berkshire stock itself does not pay a dividend; however, depending on the source, 60–70% of the companies in which it holds stakes do.
Thats true William, and Buffett loves them, because he can invest that cash along with the earnings of Berkshire not paid out as a dividend. I’ve read some comments suggesting dividend paying stocks are better for investors who are in the distribution phase, and his comments disprove that.
I read the article and I didn’t care for the slant that dividends are inherently bad. Anytime it is an all or nothing proposal, I get a bit turned off. The author does make some good points that we should be aware of if we choose to invest in dividend paying stocks. I am not big dividend investor. My portfolio is tailored towards growth but I do own some individual stocks that pay a dividend. Yes, I have been the victim of poor timing which led to less than optimal tax implications. For some investors, especially those in retirement getting the dividend check monthly sorts of automates some of their retirement income rather than having to sell equities which requires more intentionality. I could see the value of having some dividends being swept into a retiree spending bucket each month, alleviating the need to sell the underlying investment. To me it is about options, some of which are better than others.
I am happy you called this out though, as it causes me to think more strategically about dividends and the role I want them to play, something that had never crossed my mind before. I am 54, and probably 4 years from partial retirement.
Agree with you, not sure why this should be an all or nothing approach. I see value in setting aside a small portion of one’s portfolio to dividend paying stocks. If nothing else dividends choreograph to the investors that company is confident enough in its cash flows. And to me as an investor, I see dividends as adding “ballast” – stability of sorts.
Mike, good thoughts. Thanks. Chris
All fluff and stuff. Dividends serve a valuable purpose and I can use them, but I can’t use stock appreciation unless I sell the stock. I like both. I subscribe to the bird in the hand approach. The value of dividends to a person may increase with the age of the investor too.
Most of the shares of my one individual stock were acquired at about $45 a share (excluding those from reinvested dividends). They are now at $84.00 a share and pay me $25,000 a year in dividends. That’s all I care about, a growing asset and cash when I need it.
I don’t care if the stock price would be higher without dividends, but I sure care if dividends were stopped.
I read the article you mentioned at the top of your post. I learned some things from it, the biggest one being to think carefully when you are wanting to buy individual stocks b/c the ones without dividends you just sell shares and they are taxed at capital gains rates vs the dividends, which are taxed as ordinary income. I knew this, but the way he laid it out was common sense to me. We don’t have a lot of individual stocks, so this topic is not really too relevant to us. I am not sure if it would be better to hold individual stocks in a retirement acct vs a taxable one. Hopefully someone knows more than me. Chris
Qualified dividends are taxed at 0%, 15%, or 20%, depending on your taxable income and filing status.
Identical to capital gains rates.
Long term capital gains rates
My only comment on this is that I see dividend-paying stocks as a portfolio stability tool. They are normally well-managed, established businesses with less volatility, and they perform better during market drawdowns. I hold a portion of my portfolio in accumulation-class dividend trackers for this reason, but certainly not for income. They’re sort of like a supercharged bond alternative.
Companies often reduce or stop paying dividends during a market drawdown.
Much less likely if you are in a dividend growth index fund.
I’m not contesting that. Still doesn’t distract from the central theme of my reply