Why Income Investing Will Not Give You Income | Common Sense Investing
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- Опубликовано: 30 май 2024
- Today I want to tell you why focusing on investing to generate income is a flawed strategy altogether, and why a total return approach to investing will lead to a more reliable outcome.
In my last two videos, I talked about high yield bonds and preferred shares. These are two alternative asset classes that investors venture into when they are seeking higher income yields. I told you why you might want to avoid those asset classes here:
Why You Should Think Twice About High Yield Bonds:
• Why You Should Think T...
Why I Prefer to Avoid Preferred Shares:
• Why I Prefer to Avoid ...
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I'm just beginning my investing journey and this guy always shuts down everything I think I've just learned elsewhere 😂
🤣
This is a refreshing coincidence, I am investing with Frank and it has been good business for me too.
@@patriguijarro5011 I was about to say the same LOOOOOOOOOOOOOOOOOOOOOOOOL
It’s your money. Do what YOU want with it.
He is well worth listening to. I have read lots of investing books and been an active investor for many years. He knows the facts and has never said anything in his videos that I can disagree with.
This guy seems so devoid of emotion I would feel my money is safe in his hands
lmfaoo
😂😂😂😂😂same
There are no feelings in investing.. he's not talking about love
We finally found him! The Rational Actor.
Devoid of feeling when loses or makes you 💰 🤑
It's cool to see how much your presentation skills have improved in just a couple years.
Totally agreed!
Also got rid of the associate I noticed. Good for him.
Sorry, what's the difference. I have seen most of his never videos. Then stumbled upon this, now 3 year old video.
I think this is so spot on it can be.
Nice short. A lot of information in the short time.
What's the improvements in the new videos? :-)
@@sund5 in new videos he is more lively and natural. He smiles more. In this he is more monotone and looks a bit stiff like he’s more nervous. It’s still a great video, he’s just certainly improved. It’s a good thing
@@sund5 looks less like an automata and more like a real person, while still being a cool and calm guy properly explaining things, so no exaggeration
I personally have amassed sufficient capital to live off a six-figure dividend portfolio
Having said that, I did utilized leverage and the prevalent low interest rate environment, as well as benefited from being a tax resident in a very tax-efficient jurisdiction
I think the biggest pitfall to "chasing div" is to fall into value traps, where div is high because price had dropped for legitimate negative reasons
What is your portfolio value? What are the annual dividends?
Great video, Ben!
I'm new to your channel. I enjoyed your straight talking, non sensationalist approach to detailing the long term differences between dividend and non-dividend paying stocks.
As an average Joe with little investment experience, I found it clear, concise and helpful.
I think that most dividend investors already realize this and do it in spite of the minimal volatility in price. It does give you income, it just does not give increased share value. Thats the point actually, to buy companies that are already established and have excess cash, its less risky than a new tech start up and hoping their share price increases. Dividend stocks can go up too. More risk more reward, less risk less reward, doesn't mean no reward at all.
@Jon H. Leading up to the dividend the share price tends to raise about equivalent to the dividend being paid, then after the dividend is paid it dips back down. If it was just shares falling in value the ones who've paid dividends for decades wouldn't be worth anything.
but if the company did not issue the dividend, then the book value would go up, which would push up the stock price. it's the same exact amount of risk. issuing the dividend isn't some magical thing that reduces the risk. all it does is create a taxable event
Thats a good point. Youve made the case for why people invest in Dividend Stocks and what Ben seems to have completely missed. Its a different mix of growth and income. You can get some growth but also more income. You dont have to sell shares in a market crash for income, which is the big problem with growth only share selling. I also take issue with the idea that dividend stocks do not have decreased volatility.
I personally know people who in fact live off of their dividends. This doesn't have to be a dichotomous choice. There are plenty of companies that pay a solid dividend and also have good growth potential in their underlying share value.
Starbucks...just to name one. I manage dividend portfolio that often beats the s&p 500 .
And that dividend just gets taken off the share price.
sheeiiittt yeah, but that doesn’t mean that huawei that doesn’t pay a dividend will outperform apple that does. You don’t have the choice between a starbucks stock with dividend and one without. There is only one apple stock, and it pays a dividend. Likewise there is only one google and it does not pay a dividend.
Just buy great stocks at a fair value. And, in all fairness, a stock that raised its dividend every year for a decade or two and still has a low payout ratio... that’s fairly likely a great stock, with good management a decent moat and a future ahead of it. If dividend paying companies are so bad, why do people like Warren Buffett like them so much? His biggest positions where and are dividend payers.
if they didnt pay they would have more underlying value
Ricardo Restrepo what’s your point? They don’t pay, you have to buy an entirely different company with different moat, patents, sector, customer base etc if you want a company that reinvests everything.
And then you risk buying a looser, which is much worse than loosing some small part to taxes on dividend reinvestment.
Picking a winner is more important than picking the most tax efficient vehicle. And sometimes a winner happens to pay a dividend.
This was super awesome! Well worth the watch, the knowledge and production value were great! Thank you! :)
Just discovered that channel. I am VERY impressed. This is solid stuff.
"Dividend investing is more of a lifestyle then..." So true!
The principles of dividend growth investing are the same as growth investing: purchasing quality companies at fair or better valuations consistently over time. The dividend is irrelevant in that it should be reinvested to offset the concerns of the dividend irrelevance theory. Well-known companies that consistently grow their dividend in a well-diversified portfolio are icing on my cake. Dividend growth companies give investors options at retirement and partial retirement, and not everyone has the knowledge or time to determine which assets to sell for income. I appreciate this discussion, by the way. We need to know this information to continue to grow as investors.
Well said!
@Luís Andrade exactly
"The dividend is irrelevant in that it should be reinvested to offset the concerns of the dividend irrelevance theory." yeah and you get taxed on this dividend before you reinvest it.
@@alexkwilliams
Even if it's in an Roth IRA, where dividends / gains are basically free and clear of taxes, since you contributed your original "contribution" funds on an after-tax basis? My understanding is "not," unless there's some other "tax" you're referring to that applies to stocks / dividends in a Roth IRA, which is supposed to be tax advantaged for just this kind of purpose (growing your money, and reinvesting dividends, without having worry about being taxed on your gains / proceeds).
I agree with your argument (At 43) but as a long-term investor,( now at 83 ), and liking to travel First Class , I would like to hear your thoughts on Age-Related investing, (Or Spending).
Great Video Ben! Awesome Job.
Thanks man. I now feel so much better in my investments for growth with no dividend. But I do like re-investing my dividends.
enjoy the no franking credits!
Devil's Advocate here, I allocate 20-30% of my portfolio to 'fixed income'. I hold a mix of dividend stocks, closed-end funds, reits, bdcs, preferred shares, mlps, covered-call etfs and other income funds.. with a preference for those that pay out monthly.
I measure the success of that allocation based on the $/month it generates. Every month I take what I receive, reinvest and increase my $'s/month.
I keep about 20-30% in the major indexes (s&p, nasdaq, russell) and another 20-30% in individual growth/value stocks.
It works for me.
I actually have more in OTC and Nasdaq, but am trying to catch up with my dividend stocks, ETF's etc. About maybe 30% dividends right now..
I think the part most people don’t grasp is that dividends aren’t a free lunch - they come out of the net asset value.
Many people in the comments are taking the wrong message. He is not saying to stay away from dividend stocks or that dividend stocks don't grow as much. His point is simply that pursuing stocks solely on the merits of the dividends is a flawed approach because it does not necessarily give you more money, it limits your diversification, and makes you somewhat less tax efficient. Staying away from dividend stocks would also reduce your diversification. I'm sure Felix would include a few dividend stocks in your portfolio should you ever seek his advice.
THANK YOU for understanding!
Really well-researched and informative video. Thank you Ben 🙏
Finally someone with actual research
Wholeheartedly agree. However, in Australia, we have franked dividends, which means dividend stocks may be more tax advantageous than non-dividend stocks.
In Canada, we have something similar called the dividend tax credit, which means that Canadian dividend paying stocks are more tax efficient for Canadian investors to own.
ben what platform do you recommend to trade on? looking to possibly start an account with weathsimple any feedback?
Well said sir. Short sweet to the point. You put words to what I had a hunch about. Thank you. Liked, shared, subscribed you earned it.
Thought: It is a lifestyle choice. Dividend stocks has the potential to provide recurring income without the requirement to sell the asset. You *can* sell if needed, but you can hold as well, and still obtain income stream. This can be appealing for some who do not want to sell an asset in order to obtain income.
Exactly.
Taking dividends as cash is the same as selling assets. Divs are not free money.
@@joelthorne7434 How do you figure? The amount of shares you own does not change after the issuance of a dividend?
@@jimcetnar3130 B/c the total value of the company went down by an amount equal to the dividend payment. You have the same amount of shares but the're worth less.
@@buttmanjenkins3972 However, the fundamental flaw with this argument is the actual value of a company doesn't necessarily equate to investors' perceived value in a company (stock price).
Vanguards high yield etf, VYM, pays a quarterly dividend that is 100% QDI. Meaning that its dividend payments are taxed at 0% up to $39,375, under the US 2020 tax brackets. That’s enough incentive for me. And there are plenty more options on the market that are 100% QDI as well, vym is just one example. Can’t beat completely tax free passive income if you ask me.
What he's saying is that you could generate that same "tax free income" by selling off some shares from your diversified portfolio. For example, if you have your money in something like VTI instead of QDI, you could sell off some of the shares to generate income. You'd pay long terms capital gains tax on the income - which is taxed at the same 0% up to $39,375 just like it is for QDI.
That being said, one of the reasons he suggests diversifying is to make sure you include small stocks, which typically have higher long term returns. But if you're already near retirement and are trying to live off the generated income, I can see it making sense to hold more of the less volatile, large dividend-paying stocks... Also, like he mentioned, it can be easier on the mind to live off payments instead of having to choose when and what to sell.
@@gregholland11 Exactly, most people dont have the time or the desire to monitor their positions for exits to generate income.
Thank you for your videos. It is the best investment RUclips channel , far ahead of the others in terms of quality.
I have recently moved to Canada and it’s difficult to find content that is specific to Canada rather than the US.
Great channel and content, please keep it coming and more advise specific to Canada, Canada market, TFSA AND RRSP (ooo also, which should someone have out of the two, or is both better) would be appreciated content.
Hi Ben, what software do you use to make your videos? Specifically, how do you make the animations in the background?
Some good points made here for sure but don't be too hasty to feel sour about dividends. There have been very strong arguments made about how it is not very beneficial to investors for some companies to be sitting on billions mabe even hundreds of billions in cash especially if they have low debt and have a strong hold in the market place and perhaps limited room to grow in that particular sector. Many cases of companies increasing dividends every year while increasing cash on their own books and share price climbing big time and if you reinvest thats a pretty good recipe if you ask me. And the point about less diversification with dividend paying stocks can be flipped as well as you have the option to use the money to invest in anything you like so it could mean MORE diversification :) Of course you must always consider tax implications. But again solid points here and many companies of course should not be spending their money on dividends.
Cheers
Thanks Neil. I agree with you 100%. I am in no way saying that dividend paying companies should be avoided in a portfolio. Dividends make up a huge portion of capital market returns - avoiding them would not be advisable! I also agree that from a corporate finance perspective dividend policy is extremely important. What I am saying is that a *focus* on dividend paying companies in a portfolio is probably not optimal.
It depends if investments are in registered or non-registered accounts. For example, in a Canadian TFSA account, it only makes sense to do dividend investing. more reasons: 1- Solid dividend paying companies are always in demand and that alone is a reason for share price appreciation. 2- With dividends, you take your profits during the years and invest or spend as income, if the company goes down, you still have your chunk of the profits, when growth stocks get hammered, you share the pain.
You miss the point of the entire video
Finally. Finally. Finally. Keep talking about this. There needs to be more attention to this as the general public including professional advisers and investors either have forgotten this or don't understand it! Who cares about the income!? It doesn't make a lick of difference, other than tax outcomes (in Australia we have franking credits). But the public and professionals all continue to talk about dividends and income as if they matter. Rediculous. Thank you Ben Felix, the world needs more people like you standing up and spreading this fundamental idea.
Thanks Michael. In Canada we have a similar system called the dividend tax credit. I agree with you there is a lot of misinformation out there regarding income investing!
Dividends and interest are a part of the total return, they are not some separate entity. It's like saying it's only the car that matters, not the tires. Total portfolio return includes appreciation (capital gains), dividends and interest. The parts work together to reach the total, no single part should be dismissed, all parts should be considered and accounted for.
@@Zeric1 yes of course it ends up forming part of the total return. The point is though that because dividends effectively detract from your capital growth, your total return is in actual fact fully made up by capital growth. For example if a company trading at $100 pays a dividend of $5, the share price will immediately decline by $5 to $95 due to market participants recognising the loss of value (this has been shown to be true by many studies). If that company then ends up at the end of the year with a share price of $95, it's total return is 0%. Sure you've received a $5 dividend but you've lost $5 in capital. It's not until the share price moves that you get a negative or positive total return. That's the point.
You still would add the dividend in the equation to calculate total return yes, it's just important to remember what it means when a dividend is paid because it's not free money and focusing on a portfolio of higher dividend paying stocks is simply not a well constructed portfolio as it would cause you to exclude some companies and miss good opportunities.
Zeric E I think the basis of this whole discussion is not that dividends are bad, it is that they are not inherently good or helpful. Of course we need dividends as part of the total return. We also do not need to focus on dividends. Based on our other discussion I think we are in agreement there.
During the long accumulation period, the dividends are normally reinvested, so it's a wash (assuming a tax deferred account which is the primary vehicle for most people), however it's a bit more complicated as on drills down. I think we can agree that what we as investors want, is for management to make the best use of earnings. For a company during a high growth phase, the best use of earnings is generally to re-invest it back into the business to continue growing it. Older mature companies, however often exist in a saturated market and have no obvious way to grow the business. In this second scenario, if earnings are not paid as dividends, they either sit there as an accumulating cash pile (a poor use of earnings), or are used in such a way that does not really bring significant value to the business (doesn't help growth). Companies can try to branch out into new lines of business beyond their core competency, sometimes this works, often not. This is why many of the dividend payers tend to be companies in established markets. Even though they still reinvest a certain portion of earning back into the business, their earnings are often more than what they feel they can competently grow the business with. In this case it's better for them to pay out a portion of earnings to the investor so the investor can invest them in some other business that has more growth potential.
When one is just using index funds and doesn't purchase any individual securities, then the dividends don't matter much and it's best just to reinvest them. With index funds, one can use the dividends to help keep the portfolio balance reducing the amount of shares that need to be sold, however this isn't really a significant factor these days when the cost of selling an index fund in many cases does not incur a transaction fee.
Great videos. Really smart and helpful. Thanks
Currently I am focusing on income investing because my income is very low. Once I hit my income target I will switch to a total return approach but doing that now and selling assets when I need cash seems much more time intensive and stressful
No question there is a behavioral advantage to income investing.
@@BenFelixCSI lol but not a financial one! Canadians are SO polite ❤️
@@jillybe1873behavioral and financial are not opposites.
But you can hold a stock or etf/cef/etn and ride out the fluctuations take the income as you ride it out nd hopefully sell your stock/fund for more than you bought it for as you look for other high yield income fund buying opportunities
I thought I was potentially wrong investing in companies without dividends. But I was adamant that this was a good approach long term. I needed to hear this video to sure myself up. Thank you.
I don't think dividend vs. not dividend paying should play too much of a role in investment decisions. Other than the tax implications the investment implications of dividends can be ignored. There are more robust criteria to arrive at a good investment decision.
The benifit in Australia is a lot of companies give you a 30% tax rate reduction on dividends.
Not quite right mate! Aussie companies "pay" franking credits (corporate tax already paid). Your effective PERSONAL tax reduction (up to 30% max) will depend on your tax bracket for that financial year.
Wow, well I see your videos since January, and I got curious now to see older videos, what a difference man on communication! Good job😎
Wow old ben had no emotion lol
I have a family office and a trading portfolio. I literally generate seven figures of income a year, but according to this guy, the better strategy is to try to time the market and liquidate certain investments when I need income. Additionally, must stay working for others and don't retire with income assets is what this guy is saying. Our approach has been to have a certain percentage allocated to growth and certain allocated to income. For the latter, there are many tax efficient vehicles you can use for income and not rely on unqualified dividends.
It can be called the "free dividend fallacy". What he said put another way: the day a dividend is payed out, the exchanges reduce the value of the stock by the same amount at close.
Thanks for your channel. Love the videos.
Can you speak to this... in a case where a company has tons of free cash flow, and likely letting it sit in an account, would it not make sense to pay some of that cash out in dividends (it opens the company up to a larger investor profile) while using leverage to partially finance any growth instead? Assuming management is making strong decisions? One could also re-invest the dividend in the company (some give you a discount) and have longer term higher returns?
I noticed several comments describing how investors value dividend paying stocks over non-dividend paying stocks; does this have any meaningful affect on market efficiency? Would this mean dividend paying stocks are over-valued price wise?
In New Zealand we have no Capital Gains tax on Real Estate kept longer than 10 years. It's very hard to beat that compounding return when any excess rental cashflow is rolled back into borrowing on more real estate. And real Estate is essentially income investing.
Does this assume that the market always prices shares perfectly according to their fundamentals and that there are no underpriced or overpriced shares? If so, is there evidence that that is, in fact, the case?
No it doesn't. But the evidence for effecient markets are pretty robust so even if that was an assumption it's not a problem.
It doesn't assume that the market is efficient because the dividends are proportionally subtracted from the price of the share in any case, whether the market is efficient or inefficient.
Thank you for the great videos! I'm curious, what do you think about the following strategy, which is similar to dividend capture, but without necessarily selling right after the ex-dividend date. Buy dividend-paying stocks from companies with good financials/fundamentals. If the stock price goes down, just keep collecting the dividends (hopefully the company keeps paying them). If the stock price goes up by an arbitrary amount, sell the stocks for profit. Then buy stocks from another company, which has the ex-dividend date in the near future (next few days, a couple of weeks maybe). Then repeat. This way, one can combine receiving dividends with gaining profit, given that the stock prices don't stay below purchase price for extended periods of time, like years. In a reasonably diversified portfolio, there should be opportunities like this several times a month, but that's just my wild guess. I haven't experimented extensively with this approach, and also, I'm not a professional in this domain. Your insight would be much appreciated. Thank you!
This is a fantastic video. I would like to qualify that there is a difference in the title and the content of this video. in the title, income investing is used, but the content indicates stock dividend investing... With that said, the content is excellent, however there is an update in the area of income investing, which I call high dividend ETFs. Examples are HNDL and RYLD and JEPI. I use these for cash holds to replace bonds. They are consistent and some have downward protection. It would be nice if you could give us your thoughts Ben.
In New Zealand we have no Capital Gains tax on Real Estate kept longer than 5 years. It's very hard to beat that compounding return when any excess rental cashflow is rolled back into borrowing on more real estate. So the real Estate is essentially tax free income investing.
Distinguish between dividend paying common stock and dividend focused stock portfolio is key part of this video. THANKS and Regard.
Hi Ben, thanks for the video!
If this is the case, then what would you recommend for a retiree? To hold a portfolio with 80/20 global bond ETF/global stock ETF? If I wanted to decrease volatility as much as possible and have a comfortable income, what should I do?
Thank you!
Hi Felix.
Indeed, in some countries ( like Belgium :) ) you do not pay 1 cent in taxes on capital gains, however taxes on Dividends are super high.
From that perspective, it makes absolute sense to go with an index fund that does re-invest the dividends (and does not distribute them).
Just imagine the compound effect after a couple of decades :)
Aa yes, accumulating ETFs
No capital gains tax in Belgium? Not even at a certain threshold? I need to move there!
Andrei Jikh saw Ben's videos and quit dividend investing... 🤣
Dividends are also good for reinvesting capital the way you want to. However, a lot of beginners salivate at high yields without realizing that it might result in a net negative return.
If you are ok with the capital going down but having consistent dividends, why is this an issue?
@@Got2Learn An investor is better off in bonds if income is their goal. Once purchased a bond never fluctuates in value if held to maturity and it always pays out the same lest the company default and lose its credit rating. This is why they are referred to as "fixed income" investments.
By contrast stocks are not fixed. Their purpose is to share in the equity and profits of a company which can fluctuate. Dividends are a tangible slice of that but they are fixed, involuntary, and they come out of net earnings in the form of the capital dropping by the amount paid out. Dividends can grow, be cut, or be suspended. Dividends can result in net negative growth of a stock - the company peeled off its own market cap and handed you a taxable event. You have cash in hand but you actually have less money than you started with. A company that is losing money is not long for this world and deservedly so.
In a world where fractional shares are commonplace and bonds already exist dividends are simply unnecessary. Optimal stock investing focuses on capital appreciation exceeding dividend payments (if any). When money is needed the stock investor can sell for however much they need when they need to. If they want less volatile income sources bonds are superior.
Do you still need to pay tax on dividends if you reinvest them almost as soon as you can get them or if you just leave them in your account until you have enough money to invest?
So I am from Sweden and here we have an investmentaccount that's called ISK:IinvesteringSsparKonto. An ISK account is taxed with a low standard tax on the total amount on the account. Earnings, losses and dividends are ignored for taxation sake, only the total amount on the account is taxed. The good, you can earn an extreme amount and you don't have to pay any taxes on your earnings or dividends. The bad, you can lose alot of money and still need to pay taxes on the total amount on your account.
On an account like this I feel that the dividend strategy is attractive.
But I will say that including small cap stocks in my portfolio will only do me good, so thank you for the tip.
Whats your view on buying dividend and value stocks and assets in your home nation to avoid withholding tax out side your home country in my case the UK and then focusing on growth stocks in the rest of the world.
Also having an increased weight of stocks who's performance is positively correlated with the price of assets you might want to have in future such as REIT's if you rent and utility company's to reflect your power and water bills all generally being dividend or value investments. Using this to reduce life style volatility?
Ben, the reality is that people are irrational. While taxes on dividend income is one disadvantage, I consider that this extra tax a "fee" I pay to continue being consistent and growing my INCOME. At the end of the day cash flow is king. I'll stick to my dividend investing strategy and continue getting deep sleep each night thank you very much
That’s great. At least you know how irrational you’re being now!
@@BenFelixCSI Haha love the response
What about having growth stocks and dividend stocks in a Roth IRA
Your argument against dividends is aligned with those who don't need income, but for those who do, dividends is income without selling stocks. There are investors who invest solely for income (without selling stocks), and your channel seems to be geared for those who invest purely for growth.
Is that true regardless of the investing time horizon? Would people close to or in retirement still be better off with a total return approach than an income approach?
Best investment advice channal on youtube. Well presented and provides great value!
Thnx!
Its nice to get a dividend when times are tough
@reshi p Debatable depends on what companies you are in
Some people got paid through quarantine and are still fine
@reshi p Could have said the same thing during the dotcom bubble
Is it better to only use growth funds with low dividend yields? Or use blended funds like Total Stock Market, even with higher dividend yields? This is for a taxable account.
Hi Ben, you've said in the comments that an investor is no better or worse if a company pays them a dividend. But you've also stated that dividends are an important part of market returns. Can you elaborate on the latter statement? Thank you
Two companies have a 5% return. One is all capital gains, the other is a 3% capital gain + a 2% dividend. An investor is indifferent (ignoring taxes) between the two investments. If the market index is made up of these two stocks, the 2% dividend is a really important part of the market's return. Real example: S&P/TSX total return from Feb 1969 - June 2018 = 8.94%; excluding dividends that drops to 5.63%. You should not have a *preference* for dividends, but that does not mean you do not want them.
Ben is super good looking so everything he says must be true. I did not know dividends lowered the price of the stock until I watched his dividend video. I’m glad I know this and continue to invest in growth stocks that make more money over the long term. Thanks Ben! Your videos are great.
My dividend growth portfolio matches the S&P (SCHD, DGRO) in terms of growth and total return. 🙌However, i will definitely consider adding more growth via small caps now thanks to this video.
heavily debated topic there are a few studies that state that 70% of market returns in the long term are attributed to dividends. This varies from 30-90% depending on the study and/or data set.
I mostly agree, a mix of some companies that pay dividends and some that don’t is often the best approach to take. (Especially if you're young)
Focus on creating a portfolio of stocks that you consider a good investment, irregardless of the company’s current stance on paying dividends.
*assuming rational actors* to buy a stock in the first place, you need expectation of dividends at some point in the future or expectation of future acquisition...
Thank You ! Thank You ! Thank You ! Finally, someone that understands Dividends.... "Everyone" seems to think they are Interest or "Free" Money...
I agree. The dividend bug is strong.
@@BenFelixCSI An example of the dividend “bug” that I have noticed… Many current “dividend videos” on RUclips recommend AT&T for it’s “high yield” of 6.7%... The problem is that even with the “high yield” dividends AT&T has only produced a 131.7% total return WITH dividends over 10 years (8.77 % annualized), 98.3% of that being dividends and 33.4% as price change - dividends… So while chasing after “high dividends” they forget about simple things like “just buy the S&P Index”… The S&P Index produced total returns of 393.22% (17.3 % annualized) over last 10 years. Or what about tech index VGT, it produced 604.4% (21.56 % annualized), over the last 10 years…
Ford is also a popular “high dividend” pick.. But it lost a total of -41.6% (-10.20% annualized) over the last 5 years WITH the dividends.
A study by Samuel Hartzmark states: “Investors caught up in the free-dividends fallacy mistakenly view dividend-paying stocks as bond coupons that produces small, stable gains over time.” And “The dividend disconnect applies to not only retail investors but also to a number of institutions and mutual funds,” and “Investors should be indifferent to sources of return, after accounting for frictions such as taxes and trading costs. A $1 dividend from a share of stock should be no more meaningful than selling $1 worth of shares, as the share price on average drops by the amount of the dividend when it is paid.”
Great points. Dividend investing definitely becomes a lifestyle for some to say the least.
Since people do have emotions and can't always be optimization machines, what are your thoughts on the dividend investing trend either getting people to invest more than they would have otherwise or start investing in the first place like a gateway drug into investing. I have been seeing these occurances. As folks strive for a specific amount of passive income that encourages investing more. I understand that it may be flawed but it is interesting and I personally think think that getting more folks to invest is definitely a net positive.
This is kind of what it is for me. I don't have a lot of money for investing, and have never really been able to wrap my head around it. The whole selling my investments to live off of them just doesn't make sense to me. I know that it is how it works, but I can't wrap my head around it. When I heard about dividend investing, that I could understand. I'm buying a paycheck. I pay $40 now, and make $0.15/mo forever. Do that enough times, and I can understand how that helps me. So while it may not mathematically be the best option, it is understandable to me, and so now I can bring myself to give up a few minor extras to grab one more $.15/mo. I would suspect that inefficient investing I'm excited about is better than not investing b/c it is too complicated.
Exactly!, I'm of the same thinking. Cause why would I strive so hard to only live like a king for the last 15 or maybe 20 years of my remaining life?. My problems are 'now'.
@@mboniledawson229That's an awful idea. If you spend the dividends rather than reinvesting them, you'll end up receiving far fewer dividends than investors who reinvested them. This is arithmetically proved, it is not a matter of opinion.
The paper missed the real reason folks like dividends over selling the stock. Its because they wanna maintain the asset. They dont want to have to sell shares and eventually sell them all. If they maintain the asset they can then pass them down to the next generation.
And your missing that if you withdrawal less than the stock returns per year you won’t run out of money eventually you would be withdrawing an extremely small fraction of a share and it would go on almost infinitely
Income and growth investing are different beliefs. Personally, I invested in income generating funds/stocks/payouts first to ensure my basic lifestyle expenses is covered, so that I’m able to use more of my active income for high growth investment. Having income from investments allows me to sleep through red days for my growth stocks. The returns from income investing is, in most times, more beneficial in terms of emotional benefits
but when the stock issues a dividend, it's not generating magical free money -- the stock you own falls in value that is in line with the size of th dividend. it's exactly the same as if you had simply sold a bit of the stock and converted it into cash. The only difference is the dividend is taxed much higher.
@@10010x0x0x01101XX0X1 nothing is guaranteed in life. If i have $100k in my bank to use, every $5k used is $5k gone. Income generating fluctuates but it hovers around there for a longer term.
great video. You make some solid points that when you really think about it, was right there in front of everyone. Another thing is dividends certainly don't stay the same and I wouldent count them as a stand alone income. Almost like over time at work. sure it's nice but it's kinda just a bonus and if it holds back growth it isent worth it in the long term.
Thanks Justin. I agree that companies have the discretion to cut their dividends, so they are not always going to be a reliable source of income.
Ben Felix, theoretically companies have a discretion to cancel dividends but practically once a company started paying dividends there is a tremendous pressure to continue paying them. The market often punishes the company if it decreases or cancels its dividends. Very informative video indeed.
@@rtashpulatov is it only the market that punishes them, or the large shareholders which are members of the board? After all it's the shareholders who are the owners of the company and they decide what to do with the earnings. So why do the shareholders want dividends to be payed out?
@@BenFelixCSI yes, but that would only be an issue if you have thrown all your eggs into that one basket. A diverse range of successful dividend paying companies in your portfolio is the key, in addition to your growth only stocks. You mention that paying the dividend is dropping your stock's value; don't companies only pay a portion of their profits as dividends and use another portion for growth and development? IF that company is smart and responsible with their profits, I then see it as a win win for both shareholder and company. And your dividends can be seen as 'free money' or 'interest as the company's assets are still intact and have hopefully been expanded. I'm relatively new to all of this but what I've explained above seems logical.
Thanks for your thought-provoking videos.
I agree that a company that pays out dividends value decreases the amount of the dividends paid, but investing in a company that doesn’t pay dividends is like funding a new company and not enjoying any of its profit. I just can’t get over the idea of spending $40,000 to start a construction company in the hopes of selling it in 10 years when it’s worth 500K, but being sued in year 8 and the company goes bust, thus losing my entire investment. Buying Stock for the mere hope of it increasing in price is speculative, but when the stock does increase in price, I must sell my share of the company to make a profit. If I bought into the construction company and it DID pay dividends, it might not reach a value of 500K until year 15, but when it went out of business in year 8, I may have already recouped $10,000 of my initial investment. I just can’t get over the idea of being part owner in a company and not getting paid for it, and if I did want to get paid I would have to sell my share of the company.
It goes both ways though.
Dividend paying companies with attractive yields and poor business models, will start paying out juicy dividends while their stock goes into the tank and their payout far exceeds 100%.
I do have both dividend and non-dividend portfolios and in my limited experience company choice is significantly more critical than whether they pay dividends or not.
I think I understand what you mean about not being paid without selling shares - but I would rather have to sell shares for a large profit than get underperformance from a poorly run company paying a dividend.
Do you think it’s ok to start with a dividend portfolio to get some income and then once you have enough capital you can then start to diversify into other companies
What about a covered call dividend ETF? You would end up with little long-term growth, but decent income.
You mentioned total market indexes at the end, which are weighted more to large cap stocks. Since small cap stocks historically have higher returns would it make sense to buy a small cap index instead if you are okay with the increased volatility?
Yes I totally agree. See here ruclips.net/video/2MVSsVi1_e4/видео.html
a tax sheltered (401k) dividend is not taxed until you pull it from the 401k. Then all is treated as income (in the US). Of course that's different from after tax money. Good video!
The problem with your “dividend irrelevance theory”: its a dominant market. Prices changes every second. Company can decrease in the dividend rate and the day after to go up and swallow this space. Actually, most of my profits from selling stocks, came from dividend stocks. Surprising ? Maybe you should stop blindly hate the div stocks. It’s great for huge amount of investors, meanwhile I know too many “growth investors” which got tired of waiting to their stock to grow if at all, and just lost tons of money.
Happy ex-dividend date!
Watch the video again at full this time, you have completely missed his point.
Game: Every time he says dividend, you have to drink.
I played this game and now I'm all out of spring water :/
SHOTS! SHOTS! SHOTSSHOTS! SHOTSSHOTS! SHOTS!
*EVERYBODY!*
Even better, every time you blink before he does, you have to drink
Part of my reason for investing in high quality dividend paying stocks is that (generally) they are the last ones to be sold off when the market corrects. So, in a correction, they offer a degree of perceived safety. When corrections turn into recessions, dividend stocks are certainly vulnerable for sure but I would submit that most div. stocks take less damage in a down market. Thoughts?
Hi Ben,
I've heard of an aggressive growth investing strategy where one invests in 100% stock index funds and as recessions come and go one simply sells to cash. Once the bear market is over and interest rates rise again the cash is reinvested. This way instead of losing money in a recession you "flat line".
Is this a viable stratagy? Or is it simply too difficult to time the market in this way? If so, what makes it so difficult? How is it better or worst than a buy and hold strategy?
I look forward to hearing from you. I love your RUclips videos they are excellent!
Hi MrWaterGud - great to know that you enjoy the videos! What you are describing sounds like a traditional market timing strategy. There is no evidence that market timing can consistently be done successfully. Successful market timing requires you to know exactly when to get in and out of the market . What makes it so difficult is that markets react to new information. Timing the market requires you to predict that information before the market can react. Predicting the future consistently is very hard to do! I think that market timing is less favorable than buy and hold because market timing adds an additional level of risk. Not only are you taking on market risk, but you are also taking on the risk that your market timing decisions will result in performance that trails the market. Market timing will also typically carry higher costs in the form of implicit and explicit transaction costs, and (for taxable investors) tax costs.
Market timing is a great strategy if you can predict the future! For those of us who do not have a crystal ball, maintaining risk appropriate exposure to the market at all times will usually be the best approach.
I also talked about market timing in this video ruclips.net/video/X1qzuPRvsM0/видео.html
I know this is an old video but I hope I can get an answer..
Is dividend/income investing still the weaker choice in a roth ira account where none of the gains are taxed??
Watch the video again.
Hi Brennen, I personally like taking the cash Dividend in my Roth IRA and purchasing whatever stocks I like. I do not take a dividend only approach.
Nice that they are not taxable within an IRA!
Ok.
1.An investor is wise to buy more shares with the dividends. That is key. 1 share can turn into a few down the line with this strategy. 1 non payer is still 1 later on.
2. All stocks drop hard in recessions but at least you have the dividends.
3. Having too much money on hand causes the board to have crazy ideas like mergers and bad acquisitions. Lean and mean is best. When you get funding through bonds or banks you know you have a need.
4. A stock is just a piece of paper. It does not give you anything. Your vote doesnt matter. You are a drop in the ocean. They are lottery tickets with a promise. You hope to sell to someone else before it drops. Dividends are true.
Ben I'm so glad to see you upload videos about the irrelevance of dividends. I'm an Investment Adviser and never understood the hyper-fascination of people focusing on dividends. As you mentioned it could really be a detriment in a non-qualified account. I'm glad to see I wasn't over thinking this.
Dividends are really a portion of profits, not of business value yet imho. It is the choice of management whether to retain the profits to fund business growth or to fund payments to shareholders via dividends or share buybacks. After all what is a business in business to do....make money of course. And as an owner of the company don't I deserve my portion of the profits? If the company keeps the profits to fund future growth, they should be saying they have profitable areas to invest in. If they dont have profitable areas to invest in, then companies tend to become bloated and wasteful. Dividends also keep management accountable to the board and shareholders to keep providing that dividend.
Ben you really improved your presentation skills since 2years ago! Any tips or resources you used?
Thanks! I don't like watching my older videos. I make one of these videos every two weeks and record a podcast every week. I don't do anything else to improve my speaking, so I'd say consistent practice goes a long way.
I recently jumped in MMM KHC ABBV CCL OXY at their lows - I do like the dividends and was lucky enough to buy at year lows or close to it. Book value of these stocks has been reached and so I wait and get my dividends and within a year or so the stocks will go higher. Why would I gamble with something with no dividend? I like your videos a lot but I see in an overbought market that this is the way to go for now.
Is the difference at 4:27 because of taxing?
what about dividend and Reit investment in accounts that have limited contributions, such as the ira family?
Great video, thank you for the content Ben. I agree with some of your points on tax treatment and diversification, but would you really defend the dividend irrelevance theory. Markets are extremely inefficient and are often based on people's emotion and stocks almost never trade at "book value". The dividend irrelevance theory is true in a theory but in the real world it doesn't seem to play out that way.
I completely disagree. I think that the challenge in the statements that you have made here is that they are empirically false. Every theory is flawed, but empirically testing a theory allows us to see how well the theory describes reality. In the cases of both dividend irrelevance and market efficiency, there are strong empirical cases to be made that the theories are pretty good descriptions of reality.
Take a hike bro. Dividends are great. Reinvested or not
Dividend paying stocks reward investors by sharing profits directly with investors. When and if these proceeds are reinvested I think you will find long term outcome may be better than non dividend approach. For those later in life when the market tanks there is a shift from growth the value. If you are on the value side this helps insulate the losses.
What about a portfolio style of cies who increase their dividend distribution
?
I think a lot of investors forget that depending on which country to live in there is a cut-off point at which you pay tax on your dividends which they don't think about when they see their dividends coming in quarterly or annually. For example, in the UK where I live you can only earn up to £2000 a year in dividends before you start to pay something like 7.5% tax on anything above £2000. Of course, if you were to just invest in stocks through a Stocks and Share ISA you only have to pay tax once you decide to draw upon the funds in retirement at which point I'd imagine whatever tax you pay will be drawfed by the accumulative effect of investing in a low cost index fund for years. I suppose investing in stock that gives dividends really depends on your lifestyle and personality. I mean, if you can live on very little then perhaps £2,000 a year in dividends alongside investing in a small cap ETF and a basic index fund invested via an ISA for the long term would make sense as you'd get the benefit of dividends throughout the year, while also benefit from the growth in your small cap investments and also in large companies through a low cost index fund. As for things like bonds, well if you contribute to a company pension the chances are you're already inversting in bonds indirectly anyway.
thanks for this
I allocate about 10% of my tax advantaged accounts Roth and Traditional IRA, 401K to dividend growth, appreciation, high yield funds and another 10% to REITs. I don't keep dividend producers in my taxable account. I'll shift more towards a dividend portfolio in these tax advantaged accounts as I approach retirement but only < 50% of my total equity allocation. Probably something like 30% bonds, 30% dividend producers, 40% growth but I have another 15 years or more to think about it.
Dividend investing intrigues me because I can reinvest those dividends into my portfolio which offers a compounding affect. Of course the taxes suck though.
That's true, but the dividend tax is lower than the stock selling tax. And at some point a person will withdraw the money and 10% out of whatever the profit is from growth will always be a higher tax that 5% on every dividend. It doesn't matter for how long you hold your position, if you earn more, you will pay more, so dividends are better if you take into consideration the taxes cumulated over a long period of time
That is more than likely false for most people. Discussed late in this video ruclips.net/video/f5j9v9dfinQ/видео.html
What do u think about selling options to generate income?
I am curious as to the approach of dividend supporters going forward, given that interest rates are rising which will impact many income producing funds in the shorter term. Or are these rate hikes acting like a cushion until the next recession hits, because now the feds have room to lower them again? I have read through most of the comments here and still have an unanswered question. If dividend paying stock (A) doesn't make anywhere near the returns as non dividend paying stock (B) what are the advantages beside decreased volatility? I have Canadian dividend payers in my portfolio coming from all the top dividend paying companies and have not been impressed with their performance, even in the downturn back in 2007-2008, when I saw a deep loss in my portfolio when these type of value stocks are suppose to buffer losses. Would love to hear more comments on this topic and the right strategy for using some income investing as it relates to the late business cycle we are in. Would the best approach be to keep allocations to bonds low ( how low) and at a shorter term? Thank you to Ben Felix for your insight.
Hi Lynn, there is no reason at all whatsoever to have a preference for dividend paying stocks. Well, maybe if you are in a low tax bracket the tax efficiency is attractive. Other than that there is nothing. Dividends are not one of the factors that explain returns. For example, if you had two stocks with the same market capitalization, same relative price, and same profitability, but one pays a dividend while the other does not, you would not expect them to have different returns.
I would not rely on any strategy that requires timing the business cycle. It is sensible to have an asset allocation that you are comfortable with in all markets, and stick to that allocation. Moving between various allocations based on external conditions is called tactical asset allocation. There is no evidence that this can be done successfully.
Can you please post the REITs video that you said you made? Or provide the link to it ... I can't find it. Thanks bud -
I can't remember which one I was thinking of when I said that, but here are my real estate investing videos:
ruclips.net/video/IzK5x3LlsUU/видео.html
ruclips.net/video/7rvY2rIxdsA/видео.html
According to Warren Buffet 40% of your retirement 401k is generated by dividends reinvested over time. That has been my anecdotal experience over the six years of my retirement as well. I have clearly out performed the banks by leaps and bounds. Now I jinxed it and will be broke tomorrow.
Ben, and you didn't mention that dividend paying companies are generally more established, so there is limited growth potential, while the downside risk is higher. If the downside risk materializes (e.g. sales decrease), the principal decreases and dividends will decrease subsequently.