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An e-mail I received from Retirement Researchers by Wade Pfau contains this:
“If a retiree owns 1,000 shares before receiving a dividend and still owns 1,000 shares afterward, it can seem as though nothing has been spent. Selling 20 shares feels different because the account now holds fewer shares. That visual difference can reinforce the idea that dividends allow you to spend income while preserving principal.
For example, suppose a company is trading at $100 per share, and an investor owns 100 shares worth $10,000. If the company pays a $4 dividend, the investor receives $400 in cash. Ignoring normal market movements, the stock’s value adjusts downward to reflect the cash that left the company, leaving the investor with about $9,600 in stock and $400 in cash. The investor has not gained an additional $400 of wealth. Some of the value that had been held inside the company has simply been distributed in cash.”
I see it differently (are you surprised?)
The “ignoring normal market movements” make no sense to me. Market movements could cause the stock to rise immediately after a dividend. If I still hold the same number of shares, I benefit more than if I sold shares equivalent to the dividend income. The combined dollar value of the stock and dividend may be equal, but selling shares lowers potential future growth to my way of think.
Wade goes on to say, “The same basic economics apply if the company does not pay a dividend. If the investment is still worth $10,000, the investor could sell $400 of it to raise the same amount of cash. One approach leaves the investor with the same number of shares at a lower value. The other leaves the investor with fewer shares at the same price. In both cases, a portion of the investment has been converted into spendable cash.”
“The same number of shares” is the key in my book. Why would I want fewer shares? In retirement I want to generate income and preserve capital (shares in this case) as much as possible to aid in future income generation.
Wade also makes the point it is not a good idea to only rely on dividend income in retirement. That makes sense, but dividends can be a way to deal with inflation as well if they are in addition to basic income. For decades I reinvested dividends in two companies. In recent years I changed that to cash payments placed in a money market account. My number of shares stopped growing, but now I have a larger cash reserve that also grows with interest, but without decline risk.
In the last year the price of those two stocks have seen an all time high and now dropped $16 a share (market movements) but I still have all the shares generating dividends with the possibility of regaining the $16 and more – if you can believe analyst’s price targets. It is what it is and is what it isn’t.
In 2013(?) when our airline chose to follow the herd (meaning declare bankruptcy to shed itself of pension obligations), I was in a panic (airline pilots can’t just throw out a resume and rejoin a corporate ladder equal to where they happened to be at their last gig. They start from the bottom all over again…but I digress). In my panic, I discovered the DGI (Dividend Growth Investing) crowd over at Seeking Alpha and haven’t looked back.
Yes, in a booming market you would be very successful in the S&P 500, more so than with a Blue Chip dividend portfolio. But we sleep very well with our dividends (now DHI, Dividend “Harvesting” Investments). Everything, including our 20-year Treasury ladder (roughly 40%), yields 3.84%, has an annual dividend growth of 4.2% over the last 5 years (beating inflation if I am not mistaken), and a portfolio Beta of just 0.63. We never have to sell a share to pay a bill. And the one time I took a profit (LLY), I regretted doing so. The “dividend machine” (#shares) was smaller, and LLY recovered, so we didn’t participate as much in their latest rally.
This isn’t for everyone, but you certainly can come close (not chasing yield!!) with ETFs like SCHD, VYM, and FDVV.
The best approach IMHO is a “both and”. Focus on dividend growers, but don’t chase yield. And have some growth-oriented stocks to fortify your portfolio (think VUG). Still diversify across the board (think VYMI or VIGI).
The news says, “The market was down 300 points today!” I say, “Oh look! Another dividend!”
That’s what I’m going to say on September 30, the stock is down $15, but I have the new cash in our MM fund🤑
All good comments below but, like Dick, I like a good size segment of my portfolio to throw off reliable income to augment our lifestyle spending. I’ve tracked my dividend stream for decades and it has a pretty reliable “COLA” going up a little over 6% per year….plus only a 15% tax. I just like the feel of regular, reliable income without selling something and trying to figure out what to sell.
Yup, forget all the calculations and spreadsheets, for a few of us it is just a simple reliable income stream with lowest taxes possible. 😎
I’m two weeks away from getting my next dividend🤑 Unfortunately, the markets don’t seem to care as the stock has been in free fall for a couple of week and hit 52 week low yesterday worried more about not building AI centers in the service territory than the $0.67 divided.
I encourage anyone interested in this topic to log on to Berkshirehathaway.com and click on the 2012 annual report, and read Buffett’s letter, pages 19-21. I have never read a more clearly written, masterful discussion about dividends than this.
I like this part of the letter.
”Most companies pay consistent dividends, generally trying to increase them annually and cutting them very reluctantly. Our “Big Four” portfolio companies follow this sensible and understandable approach and, in certain
cases, also repurchase shares quite aggressively.
We applaud their actions and hope they continue on their present paths. We like increased dividends, and we love repurchases at appropriate prices.
At Berkshire, however, we have consistently followed a different approach that we know has been sensible and that we hope has been made understandable by the paragraphs you have just read.
We will stick with this policy
as long as we believe our assumptions about the book-value buildup and the market-price premium seem reasonable.
If the prospects for either factor change materially for the worse, we will reexamine our actions.”
He always says that if or when conditions change, they will adapt accordingly.
I was thinking more about what he says about their companies using dividends and buybacks.
Thank you. That IS masterful. And funny how they like receiving dividends on their investments!
I know, but there is no contradiction. Berkshire pays no dividend so it is a very tax efficient investment to hold in a taxable account. An annual dividend would generate a taxable distribution for each owner. His solution for those owners who desire a dividend is to instead follow a “sell-off” strategy, and illustrated how and why this is a superior method, and can be tailored to the individual. This lesson is applicable to the larger issue of generating an annual cash flow in retirement.
Jack thanks for sharing. It’s interesting too that while you can read stock analysts saying that circumstances have changed and Berkshire should start paying a dividend, many (most?) individual shareholders are strongly against it. They have heard and internalized Warren’s advice.
Class A shares are valued at 1,500X class B shares, while their voting rights are 10,000X. Many long term investors hold primarily Class A shares, as does Mr. Buffett. Their voting power is therefore much greater than their proportional share of ownership. Furthermore, many additional investors, like me, who are not so wealthy also support Buffett’s long term policy. And any shareholder who desires a dividend who reads the passage I referenced above will see how they can achieve an equivalent result by following his suggestions.
Yep. I also hope Greg continues the same policy.
Amen.
We’ve held BRKB for over 25 years. I was pondering selling it off as part of our ongoing migration to all index funds -except for 5 or fewer individual equities – but have decided for now to make it one of the “5”. If they change philosophies on dividends, I’ll probably sell it at that point. Meanwhile, I think it remains good diversification in turbulent market waters.
Ironically Apple with a very low dividend, is one of the top historical investments Berkshire has made. That’s another one of the “5” we are keeping after decades of holding/adding to it.
Both of these growth plays are sitting out there in long term taxable or Roth accounts that will probably be passed on to heirs vs used.
As eluded to by Rob Thompson above, a blend of growth and dividends is wise – too much of anything is potentially hazardous to your wealth long term.
I must admit I’m more interested in the names of the two stocks then in your unique analysis. You make it seem all so mysterious. Are their names some sort of secret?
No secret, just didn’t see it as necessary, but they are D and PEG, both utilities.
Unlike your the balance of your article, I agree with you.
Lots of exchange of views in the comments on this topic. I would suggest there is no “wrong” or “right” answer to the question on how to employ dividends. Like all aspects of the investment universe, it’s all about using various tools in various ways to accomplish what you are setting out to do in any given time period/stage of life.
Everyone chooses their own investment “lane and speeds” at various times during their journey. The key is to “get on the road and stay on the road” to retirement savings as early as possible in life.
For younger readers, my suggestion is focus on growth, not dividends when building your wealth and retirement portfolios.
Dunn, You may want to edit your reply when it’s longer than article you are replying to.
Thanks Michael, I was trying to take a middle ground but it got way too wordy. I edited it down to basically the first and last paragraph.
I have always liked the saying “too much of anything is ineffective”.
I usually stick to that in virtually all things (not just investing).
I appreciate the nudge.
I do not like dividends and I am not alone. Dividends do not increase your wealth. They result in double taxation since they are paid out of corporate profits after taxes and then taxed again when you receive them. There is an ETF run by Roundhill, XDIV, that indexes the S&P 500 without paying dividends. If you are not convinced yet, look at how Berkshire Hathaway has performed without ever paying a dividend. Warren Buffet does however buy back shares when they are attractively priced. That makes sense to me as it does not result in unnecessary taxes.
There are really only two meaningful measures of investment success: TR(total return) and risk-adjusted return. TR includes everything (distributions too), income doesn’t.
Yet there is a group of investors who are obsessed with income. Historically, income was a reasonable measure of a successful blue-chip company, particularly before the 1970s. A company that could consistently pay and grow its dividend demonstrated that it was profitable and generating real cash.
Then came the tech revolution.
Many of these companies chose to reinvest their cash in R&D, acquisitions, and buybacks rather than pay large dividends. Some paid very little or no dividend at all.
And what happened? The performance of the technology sector left many of the traditional high-income companies in the dust. Yet some investors are still drinking the income Kool-Aid, focusing on how much a company pays out rather than how much wealth it actually creates.
To me, the logical approach is simple: first look for the best total return or risk-adjusted return. Then, and only then, consider income. If a high-income investment also delivers great performance, that’s a bonus. But income by itself is not a measure of investment success.
Or…
Just invest in the S&P 500 and forget about the rest.
The S&P 500 is one of the best momentum-driven indexes ever created. Ultimately, it is driven by market capitalization, which is based on stock prices. And price is the market’s ultimate measure of success, regardless of what anyone says.
The higher a company’s stock price goes, the larger its market capitalization becomes—and therefore, the larger its representation in the index.
You don’t have to predict which companies will win. The index automatically gives more weight to the winners and less weight to the losers.
So why even try to outsmart it?
Some people don’t get capitol allocation. Often, dividends are the best use of excess cash thrown off by mature companies. They don’t have anything good in their business to re-invest the cash in, and there’s no point to share buybacks if a company is on a downward path.
Really ? Again ? I am going to link this excellent article, for at least the second time, by Josh Brown, on dividends.
https://www.downtownjoshbrown.com/p/dividends-are-a-feature-nothing-more
I’m certainly not suggesting “Weighting your stock market exposure based on dividends.” As the article says. I only have two stocks among several mutual funds and various bond funds. However, the bond funds also kick off an income stream.
“However, the bond funds also kick off an income stream”
Bond income is NOT the same as a dividend
1) when you receive bond income the total value of your asset has gone up – your original investment PLUS the interest
2) when you receive a dividend, the total value of your asset has NOT changed ; the value of the stock goes DOWN exactly in proportion to the dividend payed. You have made NO money.
Edited from ChatGPT:
— ”$100 bond + 5% interest = $105, while a $5 stock dividend doesn’t turn $100 into $105” —
Never said they were. I was pointing out that i never weighted stock exposure based on dividends.
Yes you did:
However, the bond funds also kick off an income stream.
Key word – ALSO
Yikes, dividends kick off an income stream, bonds kick off an income stream. At least that’s what happens to me.
‘Who said anything about change in total asset value?
on The Compound and Friends / What Are Your Thoughts on April 7, 2026, with Josh Brown and Michael Batnick. They were discussing a survey by Meb Faber about whether investors understand how dividends work.
The question was essentially:
If a stock is worth $100 and pays a $5 dividend, what do you have afterward?
The correct answer is $95 of stock + $5 cash = $100, not $100 of stock + $5 cash = $105.
The striking result they discussed was that about 75% of respondents apparently thought the dividend was essentially “free money”—i.e., that they ended up with $105. Only roughly 25% understood that the stock price adjusts downward for the dividend.
It seems to me this is only real world math if the share price of a stock actually reflects the value of a company, including its cash. Then if cash is paid out, value declines, but we all know that is not true. Share prices are not based on actual value, but more on expectations and several other factors, some beyond any companies control.
It is confusing to see the impact because of other market movements, but sometimes it can be clearly seen. The stock price is mechanically adjusted at the open on the ex-dividend date. Public Service and Gas (PEG) previous dividends show a few good examples.
PEG closed at $80.20 on June 6 and opened at $79.58 on June 9, the ex-dividend date. The decline was $0.62, compared with a $0.63 dividend—almost a one-for-one adjustment.
Ninety days later, on September 9, 2025 the stock fell $0.60 from the prior close of $80.19 to an opening price of $79.59, versus a $0.63 dividend.
Of the last 6 PEG dividends, 2 ( 6/6/25 & 9/9/25) opening dividend reduced prices were approximately equal to the dividend reduced amount, two opened higher than the dividend reduced amount, and 2 opened lower than the dividend reduced amount.
After market trading often cloud the impact of dividend payouts on stock prices, but it is real. The current PEG quarterly dividend of $0.67 is about 0.94% of today’s closing price of $70.92. This is comparable to PEG’s normal daily price movement, so not insignificant.
Dropping from $79 to $70 has nothing to do with the $0.67 dividend. The $0.67 drop is temporary and insignificant in my book. The dividend puts cash (or more shares) in my pocket and given all the variables affecting the stock price I can’t see not paying a dividend makes much difference. I bet if the dividend was cut the stock price would significantly drop, not increase.
“I bet if the dividend was cut the stock price would significantly drop, not increase”
…..In the case of a utility stock of course it would drop as utility stocks don’t have much else going for them as an investment vs the broader market other than dividends.
True to an extent, but not long ago analysts had a price target of nearly $100 a share and it was up to $90 or so. Now it’s down to about $70. Not a growth stock for sure, but until the last nine months or so it grew steadily. I acquired most of my shares when it was in the $40s range.
Temporary and insignificant only because you are stubbornly refusing to grasp the core premise.
You are in favour of good financial education but because this concept is not part of your personal Quinnonomics you are trying to reject it which is putting out bad financial education.
Dividends are not free money. They cost a business real cash which could be being deployed to generate further growth and hence an enhanced share price.
The idea that dividend or income stocks are in some way superior is old and largely redundant financial thinking also. They fill an emotional need for some investors who are less neuroplastic regarding accepting the fundamental fungibility of money when it comes to investing.
Not trying to put out any education. Never said dividend stocks are superior.
Never said dividends are free money.
They must have value to both companies and investors or why would they exist?
Why don’t all companies favor further growth over dividends? I suspect there comes a point where investors want some of their investment returned on a regular basis and growth in value becomes secondary to both investor and companies.
Not intending to put out education.
Yet you started a whole thread specifically to throw shade on Mr Pfau, whose work is pretty valuable in the field.
I have owned this particular stock for over fifty years. So the theory goes I could total all the dividends paid on a share and add them to the current share price and that’s what the price of the stock should be today?
No. The fact that it gave out dividends is meaningless to its price today. Its value is based on whether its earnings/share have increased over 50 years. As per Sam Ro of TKer, the most important determinant of a stocks price is EARNINGS
Yours is a purely emotional response not a logical economic one. Which you niftily illustrate by the issue of reinvesting divs back in the same stock – a bunch of admin friction and tax leakage with no direct benefit.
Absent emotion it’s only tax arbitrage that possibly makes divs better than disposals if needed for cashflow. Which yours isn’t anyway. Now if they are effectively a slow rebalance into cash which you wanted anyway happy days but seems unlikely you’re that sort of planner.
I might be able to provide a logical response if I understood what you were saying. However, I am driven by income, income streams especially. At the same time I want a pool of assets to leave to our children.
So I am happy that this investment generates $25,000 a year in dividend income. As I said, I now take that as cash into a money market account after years of reinvesting.
I’m happy, but as you noted, I can’t recall doing any kind of tax planning except hoping the adjusted cost basis is in place for our children’s inheritance.
If you’ve taken cash and born tax on it but otherwise left it unutilized wouldn’t it be net better for your heirs to achieve a step up in basis on higher value stock if the company had never paid dividends?
Not saying that as a rather prosaic utility it would have found better applications of the cash internally of course. There is a reason some companies pay dividends after all.
Some folks feel better getting dividends. I do not in my taxable account because it forces me to pay taxes rather than me deciding to sell for a capital gain at the time of my choosing.
Dick, it’s the age-old debate: dividends vs. total return. I’ll admit I have a soft spot for dividends, since part of my portfolio sits in a Vanguard high-yield dividend fund currently yielding north of 5%, having also appreciated by 19% over the last 12 months. But the bulk of my portfolio takes a total-return approach.
The drop in share price on the ex-dividend date is hard to spot day-to-day, since it gets lost in normal market noise. The easiest way to actually see it is to pick any dividend fund on your investment platform and compare the long-term performance of its accumulation share class against its income share class. Zoom out far enough, and you’ll see the two lines diverge, that gap is basically the effect of dividend payments being paid out rather than reinvested.
More or less agree – but I have to point out that the highest yielding stock fund at Vanguard is only yielding 2.16% right now (VHYAX). The comparable ETF (VYM) is yielding 2.2%.
Vanguard’s VYMI is yielding 3.5% and is up 13.5% YTD.
Adam, the main detail I’d left out is that this isn’t a US-based Vanguard fund. It’s run by Vanguard’s UK division, Vanguard Asset Management Limited, and it invests entirely in UK dividend-paying companies.
But you prompted me to log into my Vanguard account to double check, and I have to admit I’d fallen into the trap of yield anchoring. I was going off an historic yield north of 5%, without accounting for the recent run-up in UK equity valuations — which has pushed that yield down to a forward yield of 4% now… thanks for keeping me honest.
I have to correct myself also. Vanguard in the US only reports yields on their domestic funds. You really have to dig for dividend yield info on their international funds. They have a high yield international fund with what appears to be a yield of about 3.5%
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