The Relevance of Dividend Irrelevance
HTML-код
- Опубликовано: 8 июн 2022
- Dividends are irrelevant as a predictor of differences in expected returns. Building investment portfolios based on dividends results in lower expected returns when yield is in high demand, a lack of diversification, tax inefficiency, and an arbitrary retirement spending rule dictated by corporations. Basing investment or consumption decisions on dividends does not make sense.
Referenced in this video:
The Dividend Disconnect: drive.google.com/file/d/15Z94...
Settling the Size Matter: drive.google.com/file/d/1G3da...
Stock Market Returns and Consumption: drive.google.com/file/d/1kVBK...
Consuming Dividends: academic.oup.com/rfs/advance-...
Should You Chase Dividend Stocks to Combat Inflation and Rate Hikes?: www.dimensional.com/us-en/ins...
------------------
Follow Ben Felix on
- Twitter: / benjaminwfelix
- LinkedIn: / benjaminwfelix
Visit Rational Reminder: www.rationalreminder.ca/
Follow the Rational Reminder on:
- Twitter: / rationalremind
Visit PWL Capital: www.pwlcapital.com/teams/pass...
Follow PWL Capital on:
- Twitter: / pwlcapital
- Facebook: / pwlcapital
- LinkedIn: / pwl-capital
You can find the Rational Reminder podcast on
Google Podcasts:
www.google.com/podcasts?feed=...
Apple Podcasts:
itunes.apple.com/ca/podcast/t...
Spotify Podcasts:
open.spotify.com/show/6RHWTH9...
------------------
@Ben Felix
3:28 "Driving up their expected returns"
You mean driving down ?
I said the wrong word. Should have been down (prices up, expected returns down). We have clipped that out to avoid confusion for other viewers.
@@fungjungkung "Ben Felix is never wrong" Where is the lie though?
@@fungjungkung Mr. Felix can be wrong as he's human, just like all of us. Do your own DD. Ben is just helping you out with directions.
@@fungjungkung I've seen other RUclipsrs like him. Arrogant guys with a poor track record of results. Just unsubscribe and move on.
@@BenFelixCSI I would drop the entire video. Your approach would have had terrible results in 2022. How can you feel justified giving such poor advice? I would be curious what your results are for your clients in 2022? How much did they lose?
I love how Ben's outfit gets more casual over time. He started off in a blazer and shirt, to just a collared shirt, to a polo shirt, to sweaters, hoodies and now a simple t-shirt. I call this the efficient outfit hypothesis. The casualness of Ben's outfit reflects the total amount of economic information he has imparted to the world at any given time.
🤣🤣🤣
Agreed, I don't care what he wears as long as he can provide some useful information.
Shirtless 2025?
Every time you put up a video, I take out pen and paper. Thanks for spreading the information and please continue doing these!
Thank you for best content on youtube!
While I'm fully aware of the dividend irrelevance, I tend to prefer ETFs or stocks that pay out dividends for a purely psychological reason. Getting those monthly payments and seeing it grow keeps me motivated to invest continuously espacially in bear markets. Since no one is a perfect rationalist or homo oeconomicus i find that to be the "strength" of portfolios that have some amount of dividend payout.
Monthly? Are you thinking of bond ETFs? This video pertains to stock dividends, which are different than bond dividends. As far as I know, stocks don't pay monthly dividends. Stocks issue dividends on a quarterly, semiannually, and/or annual basis.
@@alankoslowski9473 Well if you have different stocks, you can get dividends at different times and if you're inclined you could even find a stock for every month of the year. Also i have investet in a REIT, that does pay monthly.
@@jonasmuller7437 What stocks pay monthly dividends? I don't know of any. REITs aren't the same as stocks.
Can't get enough of these videos🔥
Always glad to see another video from this channel.
I was wondering if you were planning on making another video on bonds? Specifically how people invest in bonds, how they're influenced by maturation dates & interest rates etc... Your videos have convinced me ETFs are superior but it would be interesting to learn the fundamentals of bond investing.
Thanks again Ben your efforts are greatly appreciated.
This is a timeless gem
Ben, you mentioned variable spending being more efficient over one's lifetime than a fixed spending regime. I'm unfamiliar with this, could you make a video on it in the future?
That smirk while crushing the dreams of dividend investors is so cruel. I love it
@@chessdad182 I have to admit that after watching the performance chasing and people claiming that value is dead over the last several years, I have enjoyed watching growth tank and value hold steady. This could turn out to be quite an "I told you so" year.
@@chessdad182 look at the bigger picture
I have the same smirk when I look at PWL capital returns vs mine ;-) hahaha!
I'm quite enjoying seeing the indexes tank while I receive regular payments.
@@DividendGuy Fatal stab in the heart.😂😂
As a broad index investor, only value I see in dividends is they (at the current moment in time) payout from typically value stocks which is automatically reinvested proportionally to the SNP500 which is at the moment is top-heavy with growth stocks.
Hi Ben, does this video apply to covered call ETFs and split share corps where the underlying dividend is only part of the yield? My thinking is if you can get a higher yield through a mixed product like these, you can continue to yield long after you would have sold your shares. Thanks for making us think differently about risk with your great videos.
The only finance-related content on youtube that I take seriously.
To paraphrase The Beetles, 'Ben is all you need.'
You’re telling us you know how to beat the market consistently? What’s your alpha and how do you know it’s statistically significant?
You’re telling us you know how to beat the market consistently? What’s your alpha and how do you know it’s statistically significant?
@@MrSupernova111 The vast majority of professional active managers under-perform the market (after fees).
@@MrSupernova111 You definitly should learn from Ben and start a RUclips channel. It's a good financial decision.
Hi Ben! Love your content!
What software do you use to record the videos? Do you do it by yourself? Thanks!!
Anecdotally, I have noticed a strong bias against companies that were paying dividends and then stop. If the stop was driven by financial difficulty for the company, then a negative reaction may be warranted, but often the reaction is negative regardless of the underlying fundamentals (such as a company that stops dividends to reinvest in growth internally).
I think the issue is that many companies are so afraid of their stock price being demolished that they continue paying dividends even when it is no longer a good decision. Therefore, a stop in a regular dividend is usually a good sign that the company is struggling. I actually can't think of any dividend paying company that stopped their dividend when they were doing well
@@catlover666666 yeah I don't think they are very common for the reasons you highlighted. The examples I found were small caps, and it might be more prevalent there than with large caps. Since large caps generally have access to cheaper financing, they may opt to keep the dividend stable and issue more debt for expansion instead.
These biases is easy alpha for investor, espesically on emeging markets, where hedge funds not creeped yet.
Hi Ben, big fan of your videos. I have a potential critique to your repeated analysis on this topic, and in particular your final comment about targeting factors directly. I recently got into q-factors and its advantages over FF factors. I've been trying to find an easy way to q-factor exposure and it seems that dividend (aristocrat) ETFs are the only kind of ETFs that have good exposure to investment-to-assets (I/A). (Value stocks do not have sufficient exposure. I don't want to use Sector-specific ETFs, as per your video advice.) How else could I directly target the q-Factors and specifically investment-to-assets (I/A), without using dividend ETFs?
I always have to watch your videos more than once!
This was extremely informative for me. While I am mostly a dividend investor due to my interest 8n building passive income streams to support myself and those I care about, it was a good reminder that this should not be the only driver in my investment strategy. Thanks, Ben!
Dividends shouldn't be a driver at all. That's the entire point of this vid.
I not only watch Ben's videos and listen to his podcasts. I learn it all, take notes and revise them. Ben Felix is an educator of academic investing.
“academic”
Another masterpiece and empirical video 👏
Great video, love to see one on income funds like enhanced covered call ETF's gaining popularity
Great video! I'm not a dividend investor, but I think many people are excited by getting the regular dividend payments. If that's what motivates them and gets them to be more consistent, I guess it's good for them.
Good point. If it motivates them to invest in the first place. Same argument in favor of expensive money managers.
Yeh I think it helps them stay invested , which is a beneficial behaviour even if it is based on flawed reasoning
Exactly my thought. Knowledge of coming dividends can affect the savings/investing rate.... Which, especially early, is much more important than rate of return.
The problem, as Ben says, is targeting dividends reduces diversification resulting in less consistent returns.
@@alankoslowski9473 this is problematic assuming an investor puts the same amount into the market. If investor A: is excited about dividend investing because it seems like it is a cash printing machine and invests 25% of their income, they will almost always end up in a better place than someone who doesn't care about dividends but only puts in 10% of their income. The psychological effect of seeing "free money" produced holds a lot of weight for or a lot of people.... even if they are mistaken in their assumption it is in fact free money.
You:
Dividend Growth Investing
The Guy She Tells You Not To Worry About:
Ben Felix
Keep up the amazing work Ben!
The Guy She Tells You Not To Worry About:
Underperforms dividend growth investors
Guess she was right
Ben, thanks for the videos. Always great content. Would you consider adding a bullet recap of all your points at the end of your videos? It would be a great memory help of all your points.
This is serious stuff fantastic explanation
Great video. I like your explanation on financial topics. Can you make a video on future of algorithm trading
Yes! Finally ;)
Ok, good video to ask my long lasting question: Could it be possible, that avoiding dividends boosts portfolio performace (because of tax negatives of dividends) or is the lost diversification too much? thx :)
Hey ben, one question. In your last video you said "picking stocks because they pay growing dividends is no different than picking stocks that start with the letter A". The suggestion here of course is that whether or not a stock pays a growing dividend is totally irrelevant.
Your own research on this subject seems to conflict with that earlier statement. This is from the PWL report: "By nature of the fact that they pay consistent and growing dividends, it is sensible to think that dividend growth stocks are likely to be larger stocks with robust profitability that reinvest conservatively - robust profits and conservative investment should result in the cash to pay consistent growing dividends. It would also be reasonable to expect that companies with long histories of growing their dividend to have low prices relative to book value of their assets - growth stocks with high prices relative to their book value do not tend to be dividend growth stocks"
Your regression testing shows that dividend growth has worked as a filter for many of the factors that led to outperformance. This seems to stand in contrast of your earlier statement that picking a growing dividend stock is no different than picking a stock that starts with the letter "A". Also, don't you think the fact that they do pay a dividend could impact their level of reinvestment? How are you supposed to predict future companies that have low reinvestment better than investing in ones that are expected to pay a growing dividend?
I know your point of the video is that you can bypass the dividend filter and jump straight to those factors, but I wanted to clarify this point.
I guess you are not familiar with the letter A index. This was a very geeky joke in the older video. I'm glad someone noticed!. An index consisting of stocks that start with the letter A has outperformed the market, dividend growth, tech, BRK, and pretty much anything else you can imagine for the last 20+ years. It also has positive loadings to common risk factors and a statistically significant alpha. Of course, there is no theoretical basis to believe that the letter A tells us anything about differences in expected returns, or that we should use it as a proxy for factor exposures going forward. I still think it's a pretty good analogy for dividends.
_don't you think the fact that they do pay a dividend could impact their level of reinvestment?_
No. This is the whole point of the theorem. Given investment policy, dividend policy is irrelevant, or stated differently, dividend policy is a financing decision (which is irrelevant to valuation). This is a good writeup: www.chicagobooth.edu/review/why-merton-miller-remains-misunderstood
_The Miller-Modigliani model innovatively identified the factors to hold constant in order to isolate dividend policy: the cash flows coming into the firm and the real investments being made. That left a gap, which is a constant amount once these are fixed. However, the dividend payout could be larger or smaller than this amount because the firm could issue or retire shares. This rendered dividends (given investment policy) irrelevant to the value of the firm except in cases where dividends revealed information or had tax implications (such as the retained earnings tax that the United States had in the 1940s, which made paying out cash a sensible investment policy)._
The predictor for future investment that is used in models like the five factor model and in line investment strategies like Dimensional and Avantis funds is growth in the book value of assets (reinvestment). Past asset growth predicts future asset growth.
@@BenFelixCSI You're right, I had never heard of the A index! What an odd but interesting fact. I think I understand what you're saying - all else equal, if two firms have the same investment policy, one of them wouldn't be more valuable simply by paying a dividend. Makes total sense. I realize the focus on this video is centered around dividends, but do you hold the same views then on buybacks as well? Is that equally as irrelevant - should investors favor any capital allocation strategy (dividend/buybacks/cash/reinvestment)?
Also interesting in the article you linked that firm cutting dividend shouldn't be viewed as "cutting the dividend" as much as "investing in cash". Great way to put it.
@@JosephCarlsonShow I agree with how you summarized it.
_all else equal, if two firms have the same investment policy, one of them wouldn't be more valuable simply by paying a dividend_
I would expand on this. The corollary is that given investment policy and profitability, dividends should not be assumed to contain information about expected returns.
For security selection, I do not believe that investors need to look for characteristics beyond size, relative price, profitability, and investment for the purpose of identifying differences in expected returns. Maybe momentum should be a secondary consideration. There could be reasons separate from expected returns to consider other characteristics. Buybacks have the same issue as dividends in terms of their informational content.
@@BenFelixCSI Makes sense! Appreciate the reply Ben, have a great weekend
you would have done very well with stocks that start with the letter A; Apple, Amazon, Abbvie.
Ben might not have the reach of more popular, controversial wealth management gurus, but this kind of content does WAY more good than the gurus. I wish the PWL capital link was FIRST in the description, like "I work for PWL Capital: " then the hyperlink. This is the kind of guy I want managing my capital.
Great video. See lots of “dividend investors” these days. On the flip side, see too many “growth investors” as well. The reality is you should have some of both. I buy the whole market and sprinkle in some individual stocks where I have high conviction. May or may not be best for total return, but keeps me motivated to invest and helps me pay attention to the world around me.
Sorry to burst your bubble, but your strategy isn’t the best for total return (on a risk-adjusted basis, at least)
@@Mosesusorer that’s exactly what I said lol, I’m aware of that and okay with that, as it keeps me motivated to continue to invest as opposed to spend on impulses and material things I don’t need. A psychological tactic more than a portfolio one.
I do the same thing.
@@w7855 Um that’s NOT what you said. “May or may not be best for total return…” is what you said, opening up a serious possibility that you might do better than average even though we know you most likely won’t doing what you’re doing
@@Mosesusorer By decreasing diversification he increases the dispersion. So he might be right. Some people following his strategy will gain more and some other will gain less return.
Not all dividends are the same, goes without saying. Easiest math for someone fluent in math or those barely gradated highschool is yield + growth = longterm return (without multiple expansion/compression). Very few are able to beat the market as they miss the forest for the trees. Like Buffett said, investing isn't hard. The hard part is the temperament and patience.
I think you finally addressed the real allure of dividend investing at 6:50: Dividend investing feels like getting a paycheck.
I mean, I make more in dividends from ATT in a portfolio that I inherited than I do from my full time pharmacy job. So essentially it is a paycheck?
@@nicholasjaworski9368 No, it's no more a paycheck than price-appreciation. Remember, dividend issuance reduces stock price proportionately, so it's no different than selling the same amount in shares.
@@nicholasjaworski9368 Did you watch the video?
@@alankoslowski9473 Pretty much right and it's worth adding that dividends force taxation whereas price appreciation does not unless a sale is voluntarily made (on gains) so one can otherwise compound gains tax free in that respect vs. a dividend.
@@nicholasjaworski9368 You might be shortchanging yourself as you potentially earn more income with other investments on that capital especially net of tax and adjusted for risk. Watch the video back again
I take Felix videos seriously...not just entreteinment here.
I think he is the best source of knowledge for investors on youtube.
Yes!!! I think Felix is pretty awesome 👏🏾
Top notch information!
Lovin’ your Fjällräven sweater! 🇸🇪
Looked for this comment! :)
great video Ben. Proper research is so hard to come by these days. So your underlying message is that Dividend Stocks/Funds underperform the broader market (whole index) in the long run when using Total Return as the outcome. Correct?
No. A portfolio formed on dividends may very well beat the market. However, the reason is not dividends. The reason is exposure to other risk premiums like value and profitability which can be targeted more efficiently directly.
@@BenFelixCSI target these risk premiums by buying the whole market, correct? has it been proven that those risk premiums (e.g. value) lead to outperformance in the long run?
You need to increase the weights of some securities relative to market weights to get the risk factor exposures. Total market only delivers one risk. More details here ruclips.net/video/jKWbW7Wgm0w/видео.html
Although I agree in the data, does the same hold true if the capital gains inclusion rate rises from 50% to 100%? Hypothetical of course but there seems to be some rumblings that the inclusion rate will increase. Are dividends still irrelevant in that case?
It is very rare that 100% of an asset sale is a capital gain, so even at 100% inclusion, and depending on the tax bracket, gains may be more tax efficient. It would certainty change the numbers though.
is this about using dividends for reinvestment into more stock, or for just retirement handout? i would have thought that you use dividends, to help snowball a portfolio through reinvestment.
If I heard him correctly, Ben would rely on risk premiums associated with things like company size and value to grow his portfolio. As he said in his previous video on the same topic, dividends are an important part of total stock returns, and should "snowball", but that doesn't mean dividends are predictors of total returns.
This is about specifically buying dividend paying stocks only - if we are a rational investor, we are indifferent to whether a security pays a dividend or not. The snowball effect from dividends is no different than the snowball effect of non dividend paying stocks
Ben, I have one question, which has been bothering me for long time. Is there a peer-reviewed scientific research on the following topic: does a world diversified dividend paying ETF have the same irrelevance ratio as choosing individual dividend paying stocks over „normal“ stocks and ETFs?
As a dividend investor, I agree with your points. But tracking and having a nearly predictable payment schedule is what I love about investing and it keeps me passionate about it. I would estimate my returns would be worse without learning to research companies with that passion. I love waiting for the right time to buy, and feel very smug that my portfolio is comfortably in the green YTD and providing me more cash to invest into non-dividend payers at these prices if I wish.
I agree. One thing that isn't taken into account is human emotion. It is much harder to hold onto equities during rough times. Even if non-dividend-paying companies potentially have a better long-term capital appreciation, there is no guarantee that the investor would have still been holding onto that company. Basically, we're getting paid to continue holding onto the company.
@@joe97nsx That's the whole point. 'Human emotion' should be removed from investment decision making. p.s. Ben isn't a human. He's a robot, pretending to be human. He views humans as flawed investors. Ben is correct. And lastly, why do you think companies pay dividends? Answer: because they're hoping to manipulate your emotions, and keep you from selling. You're being baited, and it's working.
You're making Ben said. :( There's nothing about payment schedules or tracking that require dividends. Arguably, dividends make all that more complicated, not easier.
@@larryjones9773 I am doing just fine thank you. Not all companies are the same, including dividend-paying companies. They don't all pay dividends just to manipulate emotions. At some point you're going to have to sell anyway, whether it's in retirement or some other life circumstance that requires you to. Been doing this since 1990. I can live with the slightly lower returns over non-div paying stocks if it means I sell only when I need to as opposed to selling over some emotional response. Know thyself. And I know what I'm not good at and what I'm not good at. The earlier you do that, the better. And hey, if you can hold take all your emotions out of it, good for you. I do have a small portion of my portfolio in non-div stocks but it is exactly that. Small enough where I don't care what happens to it. I'm just not willing to expand that in a broader sense to the rest of my portfolio where I am generating an income for other purposes.
As a Canadian, there are also some tax advantages where I can deduct certain US charitable expenses from US divs that I can't from US cap gains. I love Ben but one shoe doesn't fit everyone's investment strategy.
@@joe97nsx calling dividend investing an “investment strategy” is like saying that investing in companies that only start with the letter A is an “investment strategy,” meaning that I’m sure you’d agree it wouldn’t make sense to base your investing decisions off of what letter a company starts its name with, it similarly doesn’t make sense to invest in something which doesn’t offer any assistance with your investing outcome (except for potentially lower returns).
I posted this elsewhere in the comments but for you:
Company A is worth $100. You receive a $5 dividend. The position is now worth $95 and you have $5 in your pocket.
Company B is worth $100. You sell $5 of your position. The position is worth $95 and you have $5 in your pocket.
Thinking you are somehow better with company A over company B is silly (no offense).
Still my favorite episode!
3:30 was that supposed to be "driving down expected returns"?
Great video as always.
Came here to say exactly this (both the mistake and good video :D )
I said the wrong word. Should have been down (prices up, expected returns down). We have clipped that out to avoid confusion for other viewers.
Nice one! Loved the title as well
Hi Ben, from what I learned, expected returns can be broken down in two parts: dividend yield and growth. How can you then assert that dividend policy is irrelevant to expected returns? I do love your videos but on this one, I am not 100% convinced,😁
In assessing historical returns you need to include dividends in the data alongside capital appreciation because dividends reduce capital when they are paid. Ignoring them does not make sense, but they are neutral to total returns. A stock with no capital appreciation that pays dividends will have a return of 0% when dividends are included in the return calculation. In assessing expected returns, dividends are irrelevant. In other words, in estimating the discount rate that the market is applying to expected cash flows to arrive at the price, dividends do not contain any information.
@@BenFelixCSI so to take it another step, we shouldn’t use the Dividend Discount Model to value companies?
I agree with that. The replacement model is the one I show in the video. Rather than capitalizing dividends, we want to capitalize earnings net of investments (growth in the book value of assets).
@@BenFelixCSI Ok Thx Ben, that's clear !
@@BenFelixCSI How do you explain the difference in volatility between dividend yields and pe ratios? Without dividends that portion of our return dependent on future valuations becomes 100%....so please answer, why would this not matter to someone needing to live off income?
If you own individual shares in a nominee account, some brokers allow you to reinvest dividends automatically for free. This effectively eliminates the difference between dividend paying and non dividend paying stocks.
Thank you Ben!
Hi Ben, are dividends truly irrelevant in all situations? For example in the recent pullback SCHD experienced less of a hit than the total stock market, wouldn't accumulating said fund in such a time help your money weather the bear market storm while aiding in growth from the purchase of additional shares at a lower price with the dividend? The fund itself is centered around companies with good financial standing so wouldn't it's addition to a portfolio help with diversification vs going purely with a total market fund like VTI which is heavily weighted toward tech?
This can be done without a dividend bias though. As Ben said, there are dividend-neutral funds/strategies that target such companies without the unnecessary dividend preference.
Thank you for the high-quality contents! Same question as on previous video on dividends: can you please check whether the sentence below is correct?
Sentence: « dividends-paying stocks have a protection against high downturns as a decrease in stock price increases the dividend yield, making the stock more attractive. »
Thanks again!!!
Why would decreasing share-price necessarily result in higher dividend yield? I can't think of a reason why that would make sense.
As long as the dividend remains the same, yield goes up as price goes down (yield = dividend/price).
In general, but certainly not always, dividend-paying stocks tend to be companies having established businesses (e.g. banks & utilities) with a track record of consistent cash flows and profitability. That may give them some resilience in a volatile market environment as long as the business can continue to afford the dividend but it is extremely dangerous to generalize with a statement like that. There are plenty of companies in sectors whose revenues fluctuate with the business cycle and/or economy (resource stocks, REITs, small caps etc.) that will cut or eliminate their dividend to conserve cash in an effort to just survive. Hence the topic of the video.
@@pseudocynic1 Thank you for the reply. Yes the recent example of airlines company comes to mind for instance.
@@alankoslowski9473 Hyeronimus answered below :)
I don't think anyone was arguing that dividend stocks will outperform growth, everyone knows getting dividends today comes with a tradeoff of some growth tomorrow.
Ben Felix hits it out of the park!! Per usual.
Would TD bank stock go down the same amount as the dividend payout that day? Whether or not it recovers during that trading day is a different story but am I right about my first question?
Well you are right if people only do Dividend investing like some of the RUclipsrs do. My wife has her own ISA (UK savings account) & Pension which are invested in growth and value companies. My pension is in Index funds and my ISA is a Dividend one. Each investment has their own plan. My pension and my wife's are for our retirement living, my wife's ISA for buying a nice place in 10 years when we retire (along with the value of our current house) and my dividend one is for the fun life and paying bills etc. Also I see my Dividend ISA as a hobby and I enjoy finding companies that pay regular dividends. So you are right but also wrong in my opinion. :-)
hey ben what's your take on quantitative value etfs such as QVAL and IVAL by alpha architect?
Hi, love you contant, I do have a question.
No argue that mathamtiacly the same company stocks without divedends would be worth exactly the same with divedends which are reinvested (minus the taxes), but in real life many times the stock value is not a true representation of that company value, it might be much higer or much lower, which might evens out evantuly for most cases but my point is the stock price is volatile. much more than most divedends price changes. So won't you at least agree that divened investing can much less volatile than soley stock investing?
To me, it sounds like divend are less prefered for long time investing as it might involve more hustle and taxes, but for short term - people who live off that money a divivend investing can be a much more stable option, compare to drawing a percnatge (or fixed amount) of ones protfolio.
You are correct but a lot of financial professionals ignore this obvious flaw in assuming dividends don't matter....not to mention if an owner never took dividends and never sold their shares they would all eventually go to zero having earned nothing.
@@dakotadak100 ‘if an owner never took dividends and never sold their shares….’
Here you seem to be missing the main point of the dividend irrelevance theory. The point of the theory is that receiving dividends has the same affect on shareholder capital as selling shares does.
You havnt discovered some smoking gun by effectively saying ‘if no capital is returned to a shareholder then they will receive no return’ 😂
You havnt pointed out a flaw in the theory in your made up scenario at all , you’ve only misrepresented it.
Would be kinda cool promotion if you had a viewer guest on your show and you look over their portfolio. :)
Could there be political risk in companies that rely on stock buybacks and non-dividend means of creating returns for shareholders? If politicians tax stock buybacks as immoral and greedy, but shield dividends as being the traditional and "virtuous" way a company should pay shareholders, the way the money gets out of the company would seem to have relevance, due to the mere cultural perception. I've encountered people who (wrongly) view stock returns as a casino, "except for the dividends". I guess it's answering my own question if I also say these taxes are not in place, and so their relevance is limited, but the proposals to implement them have been real in the past few years.
Never underestimate the power of dividend investors in large voting groups, basically.
Please normalize the volume level of the video (it's a bit too quiet)
How about REITs that are mandated to distribute dividends from rental income?
I understand about Dividend stocks vs just buying the SP500, but what about Dividend ETF like SCHD paired with something like VIX? You do not pick and choose your high dividend stocks but an ETF
Good stuff!
Damn… what a great video!!!
Can you make a video about covered call ETFs? I feel like they are getting quite popular especially in this market
If constructing a portfolio with a bias towards dividends leads to 2%|4% relative underperformance (because buyers tend to overpay for dividend stocks) does that lead to a conclusion that we should be underweight such stocks?
Not necessarily. That under-performance occurs during times of high demand for dividends. It's better to just ignore them entirely since they're inconsequential.
Hey ben, a year ago you said that the etf you invest into was not available to the public. Did anything change in this year? Can we now invest into five factor without making complex portfolios?
Unfortunately there is still no single ETF that delivers a factor tilted portfolio that I would recommend.
@@BenFelixCSI Ash shucks! Please do make a video if that eventually happens!
The reason it's unavailable is because they are probably underperforming.🤣
Imagine managing capital by combining some low cost funds. That's a lame strategy.
Ben is the type of guy who needs to talk smart, sell his idea so that he can have some job security.
It's almost as if many people equate dividends with buying a paycheck... Of course people will will gravitate to a payout model that they are familiar with.
I would add an additional comment for your evaluation, Ben.
Back in the old days, before Charles Schwab killed high commission rates, if an investor needed cash each year, he had to sell off a small portion of his stock. This was a costly way to manage accounts each time money was required. Getting a dividend check was free of commissions and also let someone slowly reduce their holding in that stock.
Now that stock transactions are mostly free, this shouldn't be a reason to manage ones spending needs or allocation levels.
I have only mutual funds and ETFs. I don't select investments because of dividends. I like to avoid dividends if I can, but certain industries require dividends or share buybacks.
Is there any way to research my opinion?
@@MrSupernova111 Utilities are an example of industries that pay high dividends. An electric utility cannot keep selling more electricity in their service area, unless there is a need.
When a dividend is paid, it is paid out of the money that the company has (or can borrow). That reduces the value of the company slightly as the money has been spent on the dividend. This gets reflected in the share price over time.
Buybacks aren't really required, but sometimes a company has so much cash, it can be a drag on the overall returns of the company due to the high amounts of cash earning almost nothing. They can loan out the money too, but these days, that is not much of a profit center.
@@MrSupernova111 I appreciate your comments. First, I'm not a professional. I was mainly asking Ben about my speculations.
Utility dividends or buybacks are not a regulatory requirement in the US. Dividends or buybacks are not regulated. Companies do what they feel is best for their owners, the shareholders.
Dividends can be raised, lowered or eliminated at the discretion of the company at any time.
If there are share buybacks, those shares are effectively eliminated. They could pay the dividend to themselves, but that wouldn't do anything.
Fewer outstanding shares means a higher possible valuation of the company, or increased dividend payouts for the remaining shareholders.
Most of my money is in taxable accounts, and a dividend requires me to pay a tax on that dividend, even if I don't need the money. It also causes my adjusted gross income to increase, which can cause other costly events such as increased Medicare payments.
@@MrSupernova111 I use tax loss harvesting methods to mitigate my tax situation. It isn't out of control, but I need to step carefully.
I have some mutual funds that I've held for a long time. They throw off a lot of capital gains distributions. I take those as cash, rather than additional shares. I'm slowly selling out of these funds.
I have only mutual funds and ETFs. Some are dividend investments because I want those sectors of the market. I'm saying that benefits are not beneficial to me as I don't need them.
This year I started my RMD from my IRA, and with SS, my AGI can get jacked up quickly.
I'll keep buying my dividend stocks. With money earned from paid off real estate.
My rents go up. Along with my quarterly dividend payments.
Does the same apply to dividend investing in a tax-free environment? I can understand getting taxed on your dividends greatly diminishes your returns, but does it also apply to earning dividends in a tax-free country?
The tax argument typically still applies in a tax free environment because countries often withhold tax on dividends paid to foreign investors, making domestic dividends more tax efficient.
How about the tax factor of paying no tax on 50k of eligible dividends and very low tax on anything below 100k?
Also the stability of the monthly income which comes from them when investing in solid consistently paying Canadian corporations (there are many who haven’t skipped a single payment in decades)?
Since "dividend investors are willing to pay premium for dividend cash flows above and beyond what a rational investor would", wouldn't avoiding dividend-paying stocks boost expected returns?
Stocks with good risk factor exposures, like market risk or profitability, may also pay dividends. So avoiding dividend-paying stocks would also avoid those good risk factors. No added benefit doesn't mean avoid, it means don't bias your selection, for or against. It's a "don't care" property of equities.
Taking dividends is like taking even money on a blackjack table when the dealer has a ace up. In the long run, you will loose as you are paying an edge to the house to take the money back. I have never seen anyone argue that dividend growth is better but I must be wrong since this video was made.
There are moments in life when you need to take the money. It is reasonable to build some income into your portfolio, using dividends, bonds, preferred shares. That is true even if you know in the end the index return will be superior. The problem is that not everyone builds up to 2M and then starts withdrawing with a 4%/5% cap strategy. You can build up a emergency fund from your salary, but you can also build up an emergency *income* mechanism with interest, dividends AND selling stocks (...and real estate, insurance, other private ventures) when life changes this can be useful. In short diversify your holdings, but also diversify your source of income.
Every penny I make is not assigned to the stock market with the sole purpose of getting into retirement as rich as mathematically possible. In my life, my situation, I need to setup additional sources of income and you can do that with the stock market (and many other things, like selling baseball cards on ebay). Some of my investments are made so I can take the money. Some of my investments track a market index for the purpose of retirement. There is no single approach and you must adapt to your needs. You can have many investment goals and methods going on at the same time. There is not only one way.
Total return and withdrawal amount are all that matter. Whether you take a $1K in dividends as cash or sell $1K in shares doesn't matter. You're still withdrawing $1K from your investments. As Ben says, dividends feel like free money, but they aren't.
If you invested $1 in stocks in 1824, and reinvested all dividends, you would have had $3.2 million by 2005. If no dividends were paid out or reinvested, you would have $374. If you had invested in growth stocks in the S&P that paid no dividend in the period between 2000-2012, your portfolio would have lost value over that 12 year period. According to Merrill Lynch, dividend paying stocks outperformed ones that did not pay dividends in the period 1990-2018. This guy's math doesn't even come close to working out. Pure growth investing is speculation. Total return investing is putting dollars to productive work, it isn't pulling money off the blackjack table, it is getting paid to stay in the casino
@@colinhiggins4779 Not sure what your point is. It's still not a reason to target dividend stocks specifically, esp since only about half of all global stocks pay dividends.
@@alankoslowski9473 I have a much longer answer above, but in short: investors should be looking at total return, and that includes dividends. Doesn't mean we should never invest in a company that doesn't pay one, or depend entirely upon them, but to completely ignore dividends is a losing strategy
@@colinhiggins4779 No it's not. Focusing on dividends reduces diversification and creates *uncompensated* risk. This isn't to say dividends should be avoided, but there's no reason to target them either.
If company deems it prudent to issue a dividend, that's fine. But sometimes companies feel pressured to issue one when it's imprudent since they know many shareholders want them under the delusional they're 'free money' when they aren't.
well your more advanced than i am. i always figured that dividends came out of free cashflow and would there for hurt the company's overall value. plus, the company pays tax on the dividend and then you pay tax on the dividend. and all of that leads to uncle sams compound taxs. but i am happy a more advanced investor has confirmed my bias.
High dividend stocks are typically strong in the value and quality factors. That’s probably the reason why they have an outperformance in many stock markets (like here in Switzerland) over the long run…
Not always the case tho, better to target the factors directly:
"... Using data from 1991 to 2012… Global portfolios of dividend payers and nonpayers have had similar average returns. By focusing on only dividend payers, however, an investor would exclude 35%-40% of firms. Investors should be aware of the diversification tradeoffs that result from pursuing a portfolio focused on dividend-paying stocks." - Global Dividend-Paying Stocks: A Recent History (2013) Dimensional Fund Advisors
People who like the payments from dividend stocks should learn about put/call selling. Then you can manage your risk while taking in yield.
Can you PLEASE do an episode on I-series bonds? I feel like I've been missing out, but are they too good to be true?
Hi Ben! I love your content, would you consider doing an episode on writing options? I would love to hear your thoughts on if retail investors should partake in something like that
I'm going to go out on a limb here and predict that Ben is not a fan. There would have to be legit research that shows why derivatives investing provides excess risk-adjusted returns, in the face of major obstacles, like excessive transaction costs (up front and hidden) and zero-sum competition for alpha.
@@PapaCharlie9 picking individual options I’m sure he’s against. I’m not sure what he would say about using options to leverage a position in an index etf however. There would be pros and cons.
Can you add automatic subtitles please? Thank you!
Time horizon?
It was not touched on in the video: but what about timing and drip? Seems like their are divided paying companies out their whose stocks falll drastically then the dividend continues making for something like a 10% + return which can be compounded through the next quarters until the stock gets back to its “ fair value” in which I suspect it’s time to move on. Especially in an environment like we are seeing today. Where the bulk of companies ( particularly small cap) have taken hits from fed raising interest rates.
Such a gem of a video. Dividend investors will not accept reality though.
As I watch your growth stocks hit their 52 week lows, day in and day out, while most of my portfolio has held up well.
And yes, I will add some of these growth stocks to my portfolio when they get low enough.
@@delinquense exposure to the value factor through value etfs would also help you hedge against market downturn if that's what you want, no need for dividend stocks
This is terrible advice. In 2022 YTD, the Value to Growth （long dividend paying, short non dividend paying stock) factor is up almost 30%. Whether to chase dividend is largely conditional on the level of Treasury Yield as well as Federal Reserve Action. The ultra-loose monetary policy regime from 2008 to 2021 may not come back in a decade and if so growth stocks that don't pay dividend would likely sevely under-perform. This auther basically have no idea what he's talking about. Most of his videos are either very basic financial knowledge or geared to a very specific Macro regime that may not come back ever.
@@sleepless2541 Yes, but value ETFs hold dividend stocks and pays a dividend......so what do you mean? If you mean avoid tax on dividend then try use total return swaps, which requires a lot more capital.
@@rz4039 i was saying that there isn't any need to focus specifically on dividend paying stocks, it's fine to hold dividend stocks too in ETFs as well as non-dividend paying stocks, i was just telling the other dude that there's no need to focus specifically on dividend paying companies, not talking about taxes nor total return swap either
The tax rate on qualified dividends did it for me
While chasing high dividends and thus paying a premium for them reduces expected future returns for new purchasers, couldn't that same tendency be a benefit for those already holding the dividend stock?
Yes, but at that point the dividend investor would want to sell their now lower expected return stock.
Instead, most are reinvesting back into the stock with the now lowered return expectations with the dividend.
As a recent retiree and having a portfolio 50/50 allocation at 1.7% fees at a financial institution, they’re paying me an annual income of approximately 4.3% of the portfolio value. Just since September last year the portfolio is down 10%. I could easily make a portfolio of blue chip stocks yielding 4% - 6% without any fees and use just dividends for income not having to sell any shares. It’s as simple as that. You don’t need any mathematical formulas to figure it out. What’s wrong with this strategy ???
It's TRUE that you could have gone with a dividend portfolio last year and beat the index this year's index with the dividends. But, this is only a small time frame of data. Investing is a multi decade endeavour. What If the following year stocks rally 30% and your dividend stocks only go up 15%? You lost out on the other 15% potential gain. Multiply the effect of winning some years and losing some years, produces a statistical likelyhood you will either match or underperfom the market with dividends. Furthermore, your portfolio had a higher concentration of unnecessary risk exposures for no added alpha.
Receiving a dividend is effectively no different than selling shares.
For example:
Position of $100. Receive $5 dividend: $95 position and $5 in your pocket
Position of $100. Sell $5 worth of shares: $95 position and $5 in your pocket.
It doesn’t matter which way you cut it
If you look at historical returns, the 50/50 broad index portfolio with no preference for dividends ends up having better risk-adjusted returns than a pure blue chip dividend stock portfolio. That 4-6% yield on the blue chips isn't going to help you if the stocks lose 16% vs. a 50/50 portfolio that lost 10%. Not to mention that some of the largest megacaps that drive broad index returns don't pay dividends. You'd basically be selecting against the growth potential of those non-dividend paying blue chips.
@@PapaCharlie9 It’s all really a big puzzle. For example XBAL 60/40 allocation over last year lost more than XEQT 100% stocks. The bonds are supposed to protect a portfolio in a market downturn, but it turns out that in this case they haven’t. When one is in a phase of living off a portfolio as in retirement setting up a portfolio of quality dividend stocks and using just dividends for income is not a bad idea. That way you’re never going to run out of money and value of stocks most likely is also going to increase.
@@naidnarnya9448 Maybe so, but every time you sell shares you have to pay commission and that can add up. Buy and hold strategy and using just dividends for income you’re never going to run out of money in retirement not to mention it’s way less stressful .
How to find a good financial planner in Canada??
Hi Ben. Can you do a video about buybacks and their relevance?
Would like to see this too but I would think the conclusion would be the same, are dividends and buybacks are a symptom and not a cause of company's long-term growth and success.
Hi Ben, can you make a video speaking about the impacts of quantitative tightening and the unwinding of balance sheets by central banks?
I second that , it would be an interesting video.
I would like to continue investing in broad market ETFs, but also avoid politically biased and morally repugnant ESG peddlers, like Vanguard. Am I doomed to picking single stocks or is there a solution for this? This has been troubling me for a while. I switched to buying single stocks, as I could no longer stomach ESG. At this point I would even consider buying a reverse of ESG if that existed, if only to help stop this evil.
Thank you for what you're doing! I love watching your videos and how you're grounded in reality, evidence and data. Thank you.
Many cryptocurrencies and platforms offer high yields ("locking") often paid in the same currency ("staking" or similar). With varying successes... Kind of related, since it didn't happen two years ago but now it's everywhere; dragging investors in with offers of high yield
Dividend funds returns are entirely determined by factors. Dividend disconnect paper 2019 shows behavioral demand for dividends.
Thanks 😎
As a value investor , I believe reinvesting dividends is a winning strategy , not spending dividends
If you own non-dividend paying stocks that grew the same amount as your reinvested yield, what's the difference? Apart from the negative difference of tax drag?
@@PapaCharlie9 The dividend gives you flexibility in terms of deciding where you want to invest it in (i.e. in the same company or other companies). The non-dividend paying stock doesn't provide that flexibility, the growth could possibly be on paper only, and the supposedly tax benefit is just a matter of timing difference.
@@uberboiz It's a bit surprising to see "flexibility" attributed to dividends, since they are the opposite of flexible. They are a liquidation of your equity on an arbitrary schedule you have no control over. And a dollar of cash generated by selling shares can also be invested in any way you like, there is no difference whatsoever in that respect. Actually, there is one difference -- if you decide to reinvest in the same shares, only dividends are taxable. Deciding not to sell shares will never be taxable.
@@PapaCharlie9 That's not quite right. Dividend is not a liquidation of your equity, it's a distribution of the after-tax profit of the underlying company - it's surprising many people are oblivious to such a basic concept. When you receive dividends, the number of shares you hold remain the same. On the other hand, if you sell your shares for whatever reason (e.g. re-allocating the capital, paying kids' tuition, etc.), you essentially part ways with it (in exchange for cash) and any future upside it may have - not to mention the capital gains tax implications.
My point on 'flexibility' is related to what the shareholder can do with the dividends they receive. If you say the management's decision to distribute the profits as dividends is beyond the shareholder's control, it is no different to the management's decision to reinvest the profit - not only it's outside your control, there's no guarantee it necessarily translates to a higher return in the future.
@@uberboiz What's the functional difference? If your $100/share stock pays $5 in dividends, the stock price falls to $95/share. You don't lose shares, but you lose equity, which is what I said. If that stock had not distributed profits, the share price should have risen, increasing your equity. Granted, selling a non-dividend paying stock reduces your number of shares and there is a theoretical point where the equivalence breaks down, but in practice that is mitigated by stock splits. As for the flexibility, it's not that management is just as arbitrary if profits are reinvested, rather, it is that management leaves the decision up to the shareholder. Consider a situation where a shareholder wants to draw cash from their equity on a monthly basis. How many stocks pay dividends monthly? Not very many. And if the shareholder wants bi-weekly or weekly income? Almost none. Using dividends alone to convert your equity into spendable cash locks you into an arbitrary schedule.
Inefficiency is a trade off not necessarily a downside?
Can you make a video about Private Equity returns?
What are your thoughts on writing covered calls on dividend stocks?
I'm investing a bit more defensive right now with the current market volatility. So for the short to medium term investing I'm putting a lot of my money in high yield EFTs (Bonds mostly), but I still am contributing to a 401k so I'm not too worried about it since I still am putting money towards growth based Funds.
Ben, still trying to make friends with dividend investors everywhere 😉
That's nice, Ben. We'll take it from here.
Look, there's absolutely nothing wrong with buying a diversified basket of dividend-paying stocks and using the capital distributions to pay bills, especially for a retiree. It's convenient, and it may just be better to let the company boards decide when it's best to distribute capital via dividends than for an untrained individual investor try to figure out when to do it via selling shares. The latter may have all kinds of emotional reactions included in the decision, and it may be easier for a retiree to stay the course (speaking for myself), if that decision is made for him. Using dividend stocks also doesn't have to be an all-or-nothing proposition. A bit of a tilt to fit one's needs shouldn't be too harmful if done for the reasons above.
Hi Ben, can you please turn down the volume on the entro please? The volume difference between it and your voice recording is rather large. Thanks