The Irrelevance of Dividends
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- Опубликовано: 13 сен 2019
- Meet with PWL Capital: calendly.com/d/3vm-t2j-h3p
Even in a stock-picking environment, there is no reason to believe that dividends, or the growth of dividends, would be an indication of a good stock to own.
This is a follow-up to my Dividend Growth Investing video - • Dividend Growth Investing
Referenced in this video:
Dividend Policy, Growth, and the Valuation of Shares www2.bc.edu/thomas-chemmanur/...
A Five-Factor Asset Pricing Model papers.ssrn.com/sol3/papers.c...
Profitability, Growth, and Average Returns papers.ssrn.com/sol3/papers.c...
Catch up on the latest investing advice, insights and white papers here.
www.pwlcapital.com/teams/pass...
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#investing #dividends #investors
A lot of people misunderstanding what was said here... the takeaway: don’t just invest or stock pick based solely on the fact it’s a dividend payer. The end
Thank you for paying attention and not blindly yelling at me based on the title :)
True and he is also assuming you are planning on selling the stock at some point. Addition to that, he is not assuming you are planning to reinvest your dividends by purchasing additional shares. Therefore, in summary if you are planning on selling the stock at some point dividends are irrelevant. Personally, I love dividend stocks but I don't limit myself to just them. Meaning the dividends are irrelevant to me IF I PLAN TO SELL THE STOCK! Some shares such as utility companies I won't sell. Unless someone invents a way for us human beings to live without water.
@@kaseywoody4951 actually whether or not you sell doesn't matter either. Did you listen to his argument?
@@CW-up7xv Yes I did and you absolutely have to sell to make a difference. You don't have anything until you sell. If you buy a share for $10 and it goes to a $400. Doesn't mean you have $400 until the transaction is completed and is sold to another buyer. However, if the stocked paid a dividend and you have been receiving dividend payments that cannot be taken away. They can stop or reduce it but they cannot go back and get back what they paid you. The dividend payout will reduce the money the company has and therefore (ceteris paribus) slow down the growth of company (because the retained earnings would be less) compared to company that doesn't payout the dividend again ceteris paribus. But until you sell your share you don't have the captured gain.
@@kaseywoody4951 well if you reinvest the dividends, as most people do, then it wouldn't matter. That's true about cashing out on dividends, but ultimately, to recoup the money invested you'll have to sell at some point. That said, Ben never even mentioned research showing dividend investing actually being a sub-optimal way to invest. Check out Meb Faber's white papers on it:
mebfaber.com/2017/01/09/high-dividend-stocks-worst/
Me: He's right
Also me: Uhh nice 5% div
loool! haha
@Gemein Hardd where you gettin dat
Simplified Crypto
Probably out of his butt 😂
Also hes not right. He is nitpicking a specific type of dividend company. He doesnt understand the value of returns. Plenty of growth stocks that will flounder and do nothing while dividend payers not only share equity but it even attracts investors and increases demand.
@@imunfathomable he's basically making a case for ETFs with little or no dividends, so when one or two growth companies fail or fall inside the ETF, it the rest of the companies should be able to absorb the losses.
Forget the peer reviewed academic research and robust empirical evidence, let's hear that skincare routine.
word up
Right though
increase the contrast?
😂🤣
lol
Ben: “money can’t be created out of thin air”
The Fed: “hold my beer”
My thought exactly
HA yep now watch us all pay for that magic money.
Also, the market is definitely irreparably broken
This concept makes me doubt the entire interest system.
Well technically they did not. They added the total amount of cash, but the total value stays the same. It simply devalues other people cash.
In Brazil, dividends are not taxed, yet. But here we have SERIOUS problems to invest in ETFs: ETFs do NOT pay dividends and we have to pay tax over capital gains (15%) (and the dividends will be indirectly taxed when we sell the ETF, as part of the return came from dividends). Besides that, our index is super concentraded in some companies, and most companies in the index are commodities (oil, gas, etc). 1/3 of iBovespa is Commoditie, 1/3 Financials and 1/3 others.
I have heard this about Brazil. Very different environment.
Grande Fábio
meu herói
Didn't expect to see you here, haha. At the start of the video, when Ben talks about low cost index funds, I thought the exact same things you said here. Not a surprise, since I've been learning A LOT with your videos through the last year and half. Thanks for sharing your knowledge. Bora Fábio!
Dividends are taxed but there 2 scenarios. In some countries (like it was in India sometime back), companies pay dividends after paying their taxes. Then the share holders are not taxed for dividends (also also Dividend Distribution Tax (DDT)). Likewise in some other countries companies pay dividends before they pay the taxes. Then the individual has to pay tax on their dividend earnings based on the prevalent tax regulations.
In general countries where corporate tax rates are kept lower, government taxes the individuals on their dividend earnings and vice-versa.
Ben is an honest financial advisor. A rare find in this industry.
One important thing he fails to mention is the psychology behind dividend investing. The number 1 biggest reason people lose money in the stock market, is selling out during a recession. A dividend investing strategy changes the focus from capital gains to dividend income. During a crash while your capital gains may fall (as well as some dividends may be cut) you still have some money coming in which can alleviate the fear associated with a dropping portfolio. Regardless of which strategy you pick, time in the market is the most important thing, so choosing a strategy which most effectively manages fear for you, is worth infinitely more than deciding if strategy A has a 2% better annual return then strategy B. Yes, picking a stock solely based on yield or its dividends is a bad idea, but labelling dividends irrelevant is nonsense.
I had just created an M1Finance dividend portfolio when I first watched this. I had signed up for a trial of SimplySafe dividend filtering and chosen about 30 of the safest dividend payers, across most asset classes. But what you said here made perfect sense, and I liquidated those dividend stocks and turned my M1Finance portfolio into a diversification of domestic and international total stock market, large cap value, and small cap value index funds. Sure is nice not to have to worry about keeping an eye on individual stocks now.
Top 100 dividend paying stocks outperform the market in the long run.
U need a dividend portfolio becuz dividend matter 😀
Pick a strategy and stick to it. Whatever it may be. One video talked you out of your initial approach? Good luck to you.
@@michaelswami I sought confirmation after I watched this video and found that other financial experts I respect (e.g., Ramin Nakiska, Richard Coffin, Rob Berger) held the same view of dividend investing, and their arguments were reasonable and data based. The dividend portfolio I mentioned was less than a month old, after decades of simple index investing, and I already had a lot of misgivings about the stock picking aspect of it. If I recall correctly, I ditched technical chart analysis earlier in life after reading one book about index investing and I'm glad I didn't "stick to it". It became clear that dividend investing isn't a sound approach, so it would not have been wise to stick with that either. Sticking to a bad approach for the sake of sticking to an approach is not wise. Changing portfolios all the time isn't wise either, but that's not what I do. Evidence shows that index and factor total return investing is the best approach for someone like me. I'm glad I realized that before I was too far along the dividend stock picking path. Thanks for your well wishes. Same to you.
@@timelston4260 well done.
@@deepeshchetwani6250you are clearly not paying attention and do not know what you are talking about.
As someone who is relatively new to investing, I thought this was actually a fairly neutral viewpoint. He never implies to steer clear of dividends, only that we shouldnt prioritize for dividend bearing stocks specifically for that reason. Seems like sound advice.
This is only true if you watched the entire video. He's being misleading for the first half and using a title that can be interpreted in two different ways.
Most people have a low attention span.
The result: People who think that dividend investing is an entirely bad idea end up linking this video. The confirmation bias allows them to overlook the real point mostly made in the second half of the video.
@@mokahless Yeah...I was shunted over by the Boglehead crowd on Reddit who are huge fans of this philosophy. For them it's only one way...
Gosh I like it when you show scientific articles. You're the only finance channel that actually shoes scientific proof.
This is great! Thank you for this. I like the ideas that "they are an important component of returns" & "the idea of using dividends to pick winning stocks is egregious!"
Another outstanding video, Ben. You've got me convinced. I was thinking of adding a dividend or quality ETF to my portfolio, but now I think that if I am going to add anything to my core holdings in broad-market indices, it should be to explore factors. I very much appreciated your paper on factor ETFs for Canadian investors.
I love this channel! For someone like myself that is studying in finance, watching your videos is a great way to link and interpret what I saw in school so I can really understand every aspect of the concepts you develop here
One of my favorite channels...always sheds light on complex subjects for me. Thanks Ben!
Thanks!
Ben,
Thank you for creating this video. You have good data behind what you say. I think people will always feel better w tangible dividend returns in their account so they won’t ever agree with you. That’s a misjudgment for them unfortunately. Please keep up the good work.
Thanks for the very good points you make. I'm just at the beginning of my investment journey and I was leaning toward dividend stocks because of the cashflow. However I live in Switzerland where we do not pay taxes on capital gains. So if I'm honest with myself and think rationally I would lose out on gains when following a dividend strategy.
Thanks for making it easier to understand Ben. As a new investor I was wondering why there seems to be such a big pull to dividend only investing, but to me all I saw was that it cuts out half of the market and disregards great growing (non dividend) businesses with excellent financial fundamentals.
Your intuition was correct.
Doesn’t it cut out lots of crappy, poorly managed companies? You know, the kind that continue to get bids on their shares simply because the ticker symbol belongs to the index. No matter how awful they are, it will take years before they are disposed of by falling out of said index. Cluttering up the equity space with noise until their competitors finally gobble up their undue market share.
@@rokyericksonroks ehh sure but you do sometimes find the same thing: Boeing for example was borrowing to continue to pay out a dividend (a stupid move).
Literally you clarified this entire thing by 1:10. I would like to see a 10 episode series where you keep addressing this topic lol
The majority of Ben Felix's videos are shadows of one another - so, if you like what he has to say, you have plenty of opportunities to hear him say it again.
His straight face while being so savage confuses me.
Yes, i like his straight talking simple style
Lol
Canadian. Channeling the savage power of the Goose
It’s the Canadian way. Hahaha
The countenance of a serial killer...
In a previous video of yours, that I can no longer find, I had commented that I did not agree with you on that topic. It took me several years and a few investing mistakes to (finally) realize exactly how right you are on this ! Many books out there sound and look pretty convincing regarding dividends, some of them written by professional fund managers. Until you can check a few things from experience, and open your mind, it is very difficult to understand why this is a true fact. I have become a much better and more lucrative investor after I stopped chasing dividend growth stocks..... Keep up with the good work Ben !
Thank you for reaffirming my thinking, intermediate investor here and always wondered why anybody would use dividends as a investing stategy.
Well you miss out on free money
Ben, I would love to see the same tax analysis in Australia's case. We have franking, dividend imputation and franking credits are treated as a tax refund, not an offset. Retirees that pay no income tax receive a tax return equal to the company tax paid on the dividends they received (usually 30%!).
Probably explains why our index returns >4% dividends (>6% gross of tax) and companies have >90% payout ratios.
Hi Ben, What is the app you use for your videos to bring up the images while talking? Its a clean look, great videos as always
Great video, Ben. Dividends are great. Who doesn't love getting paid just for holding a stock?!? But you know what I don't love? Getting taxed on an ongoing basis when I spent the whole year buying. I'll stick to my portfolio of index ETFs and the occasional dalliance into sector investing based on the economic cycles.
Great video, I agree with everything you said, but I do have a comment regarding "real-life trading" so to speak.
Math aside. Do you think dividends can have a stabilizing effect on the price, as people are more likely to hold on to a dividend stock, with the expectation of getting paid in the future? People also like to reinvest the dividend putting buying pressure on the stock, pushing the price up. So even if the value of the company goes down with the paid dividend, as the company now got less money (Until the dividend is reinvested) the company might maintain or gain a higher valuation in other words, in reality, a strong dividend might mean that the market overvalues the company?
In other words, when the market goes down, people might sell a stock that relies on capital gain, and hold on to a stock which gains a realized most trough a dividend?
Good points. Also, Ben asserts that being in control of when to take cap gains is of value compared to receiving dividends on some (quarterly?) schedule. Why isn’t control of your capital (it is yours even if Buffett believes he can invest it better than BRK shareholders can) important in as much as you may need to deploy it in ways other than a reinvestment? It requires deeper analysis, but I like the dividend because it rewards accountability from managers who know they must be accountable. True, they can demand the CFO produce a dividend by shady means, but not for long.
Thank you for creating this video!
Hey ! Been watching a lot for investing channels. There is really a LOT of schools of thought on about everything. For example- the English really have a different world view of the entire system- that being said- I’ve really learned a LOT from your channel. A lot I didn’t know- Thanks
Just wanted to come here to say thanks for the videos and podcasts with Cameron. I'm mid-20s living in Australia and your vids/pods have been very helpful.
Thank you!
Great video Ben. At the end of the day if you are investing in individual stocks you are are a stock picker, whether they pay dividends or not, whether that is good or bad...and the only reason to be a stock picker is if you think you can outperform index funds.
Agreed on all accounts!
If dividend chasers (not investors) knew how to measure performance, they would index invest too.
@@sideout1999 you assume the price of every stock reflects a market that trades said stock based on entirely rational fundamentals analysis?
Wouldn’t another reason be to avoid market volatility? To forsake some market gain in order to have a smoother ride?
@@sideout1999 Absolutely spot on
5:45 best burn I've heard from you 💣 Great video!
Thanks!
Great video Ben, Thanks. A quick question: We do not have an index ETF in my country but the local stock exchange recently launched index futures. The brochure says that the futures price incorporates the cost of carry but not dividends. Some constituents of the index pay dividends. You mention that dividends form an important constituent of total returns. Since the index futures contract captures only the capital gain and strips out the dividend part, is it correct to conclude that the underlying stocks in the index will have a higher total return than the futures contract? (for argument's sake ignoring leverage, transaction costs and taxes). Thank you.
Except in Australia where you lose 30% on sale due to a capital gains tax. And then i can use those dividends to buy more shares at discounted rate …through shares purchase plan.
Hello Ben, I have a question! I watched all your videos several times and now I listen to podcasts. Thank you very much for your work, your advice helped me a lot, I used to buy individual shares. My question is about real estate. In my country there are no available mortgages (the rates are absurdly high). If someone wants a steady income, he buys the whole apartment for cash and rents it out, and he gets an income similar to dividends, but the volatility of the value of the apartment is much lower than the volatility of the stock market. What's the catch? :)
With only one apartment in one city, you are not diversified at all.
Great video.
Only one question -
How would you address the problem of 'running out of shares to sell' in a prolonged bear market vs the company keeps giving a dividend and the stock price falls to near zero.
However, if and when there is a recovery in stock prices; in the first case - you have no shares left! Whereas in the 2nd case your previously worthless shares pick up and now have some value again!
If you're relying on stocks for income then you would be an idiot if you didn't diversify into less volatile assets to weather market recessions. Aka, down markets won't bother if you you're properly diversified
Hi. I'm a new subscriber. Just watched with interest this video. Is there not an argument to be made for the retiree to shoot for a dividend based portfolio to reduce volatility?
I am new to your RUclips series and appreciate the effort to put it together and the great information. A question: If an investor is nearing retirement and is looking at generating income, would dividend-paying stocks be a strong option to consider? Do dividend-paying stock (companies) that pay dividends generally pay them in good as well as poor markets? It would seem that getting income in the form of a dividend payment, without selling shares, would be the optimum way to go. Certainly, municipal bonds pay dividends as well. So, would dividends be relevant in this situation, or do you see better ways to generate income by, as I say, selling the eggs, not the goose?
Yeah, but you have many geese (a.k.a. shares) to sell to make the money as much as you want to
Hi Ben, great content. Intuitively, I followed the logic which you generally recommend. I am equally monthly investing into 4 BlackRock’s ETFs: world, s&p 500, DAX and emerging markets (emi). Being 33, I am not currently thinking about diversifying into bonds. My questions: 1) can you see that I would be significantly missing out on any factor opportunity? I have also included DAX, because I am from Europe. 2) do you think that being with only one etf manager (BlackRock e.g.) brings any unnecessary risk? Thanks and best regards.
I am a dividend investor and I agree with what he is saying for the most part. But I do want the monthly cash. I don't want to sell my shares to get income and I want to give that income to my kids one day.
Exactly. I'd love to receive the income from dividends and give the shares to my family
So you prefer to pass on more shares of cheaper companies than less shares but at a higher price. That makes no sense. You can invest just as quickly as you can divest non-dividend shares.
Me too!
@@banana-dw3ez If the shares don't pay dividends I need to sell them to pay for my expenses in retirement and god forbid we have a recession that plunges the market 20% for a year in a 20+ year retirement that forces me to sell off a higher percentage of my portfolio for multiple years to keep up my standard of living
FidelCatto Completely correct. Dividend investing eliminates the need to sell shares barring a company completely going under but that is the same for both scenarios. With dividend investing you have a set income no matter the economic climate.
Hi Ben! Very well explained, thanks!
A suggestion for a video: with interest rates going down, and negative in Europe, some people recommend to temporarily sell bond positions, and go full cash in their portfolios. To me, this seems like timing the bond market, and hence, risky. But I don't have anything to backup my concerns. What is your opinion?
Bill Nygren has mentioned how with bond yields so low, some Americans are using dividend paying utility stocks as quasi-bonds. Utilities pay 2-4% dividends and are stock prices are relatively stable...
Might not apply to Europe but I thought it worth mentioning for your question
I *really* enjoy the quality and variety of educational videos on this channel. All I can say is *keep* *it* *coming* ! :)
Great video, as usual. One exception to this might be borrowing to invest. At least in Canada, investments must have a reasonable expectation to produce income in order for the interest on borrowing to be eligible for deduction. There may be some flex in terms of what counts as reasonable expectation or the amount of income CRA would need to see, but it's a consideration. Dividends may also be important for people to cash flow the borrowing costs, especially if they're using the approach as a way to pay down mortgage principle while borrowing against their home to invest. Not without risks, but it may be a niche exception to your great advice.
Summary: The fact that a stock pays a dividend does not give you any more information about a stock that cannot be explained by known factors ie (value, investment, beta, size, profitability).
Dividends are a consequence of a business, that doesn't tell you anything on whether it's a good or bad business... So yeah... Business first.
Dude, your videos are the best finance videos. I can't stand how so many financial RUclipsrs cherry pick their results and just go on their portfolio and show their dividends like "I got $1,237 last month for doing nothing". I think that the idea is attractive to people who are new to investing and then they see people picking stocks based off of dividend payout ratio and think they can do it too... Not to mention that the money these dividend investors make to invest largely comes from ad revenue paid from making videos on how dividend investing works. Can't argue with data and math, but I'm sure you face many who try.
Awesome stuff, Ben. How would you feel about dividend ETFs then? At the very least, perhaps they move away from just "stock picking."
Can dividend investing help protect against sequence of returns risk in retirement? I notice that the 'lows' of my dividend fund are less extreme during downturns. Assuming the average return of the fund is sufficient to meet a person's income needs in retirement, wouldn't this allow them to be more certain their nest-egg will last? In making retirement decisions, the top-end potential of a portfolio seems somewhat irrelevant and it's the risk of running out of money in the future that really determines when you can quit your job.
thank you for this video, always educational.
I love all of the things you have to say, I just wish there was an easy way to get robust factor exposure for small individual investors
Thanks for this important message on dividend, a lot people think that dividend stocks create more value for investors but the things are much more complexe that just pick stock who pays high dividend yield
What about the benefit of dividend stocks in a recession to bring about additional income in a tfsa? What if I don't want to reduce my units of the stocks and I just want the dividend to pay myself an income?
Big 5 Canadian bank stocks have never reduced or cut their dividend. So if their is a recession it's possible that while the stock price may drop, I can still get a tax free payout through dividend. If I sell a stock after it's fell 50 percent don't I lose more during a recession then holding a stock and taking the dividend?(assuming they do not cut dividend)
I only invested in dividend stocks until now, thank you for explaining it so well! Thanks to the Reddit community for bringing me here.
There is no one single strategy. You should be available to a variety of options and strategies...a hybrid solution.
Excellent video. Definitely enlightened me about dividends!
I have a question. The reason I believe that everything else being equals a dividends stock are worse than non dividend stock is the following. The return will be the same with our without dividends only if you can perform a DRIP to have a compounding effect on your dividend. But since you can't always buy fractional shares so you have to have enough money invested in the dividend stocks. Moreover you will always have some cash left over. Finally tax on dividend is less favorable than on capital gains. If I was TD CEO for example I would favour buybacks of shares. Am I correct?
This is the best investing video I have *ever* watched. The way to explain is so clear, so simple and accessible. You just made my day!
Wow. Thank you!
There's also this white paper from Vanguard, creators of the VIG ETF:
"An analysis of
dividend-oriented equity strategies"
personal.vanguard.com/pdf/ISGADOS.pdf
"Compared with other equities, the performance of these strategies has been time-period dependent and largely explained by their exposure to a handful of equity factors: value
and lower volatility for high-dividend-yielding equities and lower volatility and quality for dividend growth equities"
I watched these dividend irrelevance videos a little out of order, but this one I appreciated the most and made the most sense. So far, I've invested primarily for dividends because I wanted them to basically be another paycheck, passive income, etc., just like you said in one of your dividend irrelevance videos. After paying taxes so heavily for the first time (only been at this for a few years), I can appreciate the argument that growth stocks are more tax efficient viscerally. Until I ran into your videos, I thought such a high tax was essentially the cost of doing business, but now you've convinced me: growth stocks actually do have value instead of the dividend lens I was looking through before. Thank you!
Well “growth stocks” aren’t the right phrasing actually. In fact the opposite of growth stocks is what Ben recommends you tilt you portfolio towards, if your risk tolerance is appropriate for it, which are called “value stocks”. But this video is more saying that you shouldn’t care about if a company has dividends or not. If you needed income higher than the distributions from index investing, it’s more tax efficient to sell shares. If this makes sense to you.
As a dividend investor I can only thank you for this video, you are so right!
Oh boy. Can’t wait for the comments on this video (which was great as always).
😂
As you’d expect most people are dumber than a rock unfortunately
But we dont have access to the dimensional funds without spending on an expensive advisor. How do i get adequate factor exposure like VIG does without dividend etfs?
$DES, $DLS, $DGS (Wisdomtree). Or $AVUV and $AVDV (Avantis). Avantis was founded by previous executive team from DFA that were seeking to productive DFA's funds as ETFs (so more people could access them with an increased tax efficiency), so I highly recommend them. Can run a factor regression of all of those ETFs on Portfolio Visualizer.
Hey Ben! I love your channel and I would love to hear your take on a topic I have wondered about a lot: Is it smart to sell part of your portfolio in order to purchase a home, cash? Not for a down payment, but to buy the house outright. Ideally, compare this to taking on a 30 year mortgage for the same house. Wouldn't you save money by simply liquidating part of your portfolio versus paying mortgage interest? Or is this a stupid choice to make? Thanks Ben!!
Well now, that's a video title that will get some riled up ^_^ My thoughts on dividends are that on one hand they're pretty much a nice little "feel good" element when they come in, and on the other annoying because now I have extra cash sitting in my portfolio that I may or may not be able to reinvest right away. I'd rather the money just stay in the market and keep doing it's thing.
I love the reasoning behind the stance though, and how well it's explained!
Learning about investing has taught me the greatest threat to fucking up my future is me.
But man I get the pull of those dividend stocks. When my broad market ETFs payout their quarterly dividend it does feel like free money even though it's not.
I think you summed up both sides of the argument perfectly.
do u not just re invest them lol
Companies you own exist to make a profit and pay it out to you. That is the whole point of business.
I was wondering if you had any thoughts regarding Micheal Burry's recent comments that index funds were in a bubble comparable to CDO's in 2008
Jonathan Garneau I would love to see a video discussing this
I will cover this in a video.
I have had this question many times recently. I don't know why Michael Burry's opinion carries so much weight. He made the right call once and his story was told to the world. Does that give him credibility? I do not agree with his concerns. The main concerns, market integrity and liquidity, do not make sense.
Passive funds make up a tiny fraction of trading volume which kills the price discovery argument. A Vanguard paper estimated that passive funds only make up about 5% of trading volume despite their large asset flows. Active funds are still doing the vast majority of trading.
Similarly the vast majority of ETF trading occurs on the secondary market (ETF unit holds trading with each other) which kills the need for liquidity in the underlying securities. If literally everyone wanted to sell their ETF units at the same time it could be an issue, and even then if liquidity constraints pushed down the price of some securities it would create an arbitrage opportunity which would presumably be exploited relatively quickly to push prices back up.
This paper debunks a lot of what Burry said: personal.vanguard.com/pdf/ISGBEL.pdf
This comment from PWL research addresses the CDO comparison: www.pwlcapital.com/its-wrong-to-compare-etfs-with-cdos/
We talked about this briefly at the beginning of episode 62 of the Rational Reminder podcast rationalreminder.ca/podcast/62
Ben have you heard of Andre jikh a RUclips who is big proponent of dividend investing. What are your thoughts on him
Never heard of him.
@@BenFelixCSI If you can't understand why people are paying attention to someone who was popularized on mass media... I suspect you are not likely to understand that dividends have positive effects on both management and investor behavior. Particularly investor behavior. But maybe you do. I wonder if you understand that humans are not rational beings? I admire your attempt to make them more rational... but they are not and cannot be deterministic. That is a factor, no? I am sure you can show us research on the matter. Please do. I suspect human factors are going to have more impact on volatility, not less. Have you considered this?
Here in New Zealand we don't pay tax on long term capital gains, so I'll always remain a growth investor. However, there's something comforting with dividends in retirement. I'll be on fixed income and will be spending around half my dividend income on living expenses, leaving the rest to compound. Dividends definitely have their place, if for no other reason than to help me sleep at night.
PIcking dividend growth stocks and picking index funds are, of course, not mutually exclusive. For example, Vanguard's VIG ETF is simultaneously a play specifically on dividend growth stocks, AND is an index fund (i.e., it tracks the NASDAQ US Dividend Achievers Select index). The question of whether people should be picking individual stocks instead of an index is a different question from whether we should be choosing dividend growth stocks.
(I'm arguing with you from the perspective of someone who broadly agrees with you and, in any case, deeply admires your work).
share buybacks can create the same effect as dividends and does so more tax efficiently.
buybacks are a more recent phenomenon though
Index investing for life... After years of rebalancing individual stocks I learned my lesson.. Buy index, rebalance as per ur asset allocation and not listening to experts on tv has done me more good than picking stocks..
Same 😃
Schwab’s swegx rebalances the funds 4 U
@@lrac88510 I am from India brother.. We don't have it here.
irfan nadeem I agree. But this dude has a video on why to avoid index funds as well, which I have yet to watch
@Jennings you should watch it. It’s not what you think.
Super informative video Ben! Would the same principles apply for a stock dividend paying company?
This video just convinced me to keep buying dividend stocks. 😂 not sure that was your plan, but at $389 a month in divvys and rising. I think I’m good. Cheers bud!
Just to add to Ben's point, "Warren Buffett loves dividends and so should you" This is an Appeal to authority logical fallacy. Just because a prominent figure likes something does not mean whatever they like is true or the best. Also, while Buffett might like dividends, his company, Berkshire Hathaway doesn't pay dividends... hmmm 🤔🤔. If you want Warrens real take on dividends this is it: Companies should only pay dividends when they have nothing better to do with their capital, or if they cannot achieve a better return using said capital.
"A company's management should first examine reinvestment possibilities offered by its current business-projects to become more efficient, expand territorially, extend and improve product lines or to otherwise widen the economic moat separating the company from its competitors." - Warren Buffett
I mean the best way is to keep the money within the company ONLY if the company is able to invest it for its further business expansions on a proper way, but if not, then to give it to the shareholders as dividends or via buybacks.
This article explains pretty good what I think about dividend payments and stock buybacks.
www.fool.com/investing/warren-buffett-and-dividend-stocks.aspx
Berkshire Hathaway not paying dividends is irrelevant and doesn't add to this absurd take on investing. Matt's admiration for Ben clouds the fact that Ben loves companies that balance dividends with growth, and ignores the fact that this was clickbait. Index funds, huh?
I heard he bought suncor.
An appeal to authority fallacy is when Angelina Jolie says to go to college and get a degree in gender studies. Getting investment advice from Warren Buffet isn't the same thing. Not a fallacy since he's an expert in the particular field
Love how he always throws in empirically. Nice touch.
Hands down best financial RUclipsr!!
Ben this is a very interesting and incredibly laid argument with data and math. I'll be the first to admit its way over my head, because when I hear squared and investment in the same sentence I'm thinking its good. That aside, isn't dividend growth investment, the way I define that is taking the dividend and reinvesting back in to more shares of that company? Does that work out over time? I look for the most boring stocks with good value for just long term growth? I apologize for being so rudimentary here. Are you arguing against taking out the dividends? Wouldn't one need millions in dividend stocks to even make a dent in their month to month budget?
As both an index fund and dividend stock investor, I enjoyed the video. It's not difficult to find a dividend stock with poor total return so it makes sense whether something pays a dividend alone isn't best indicator of future returns.
The reason I do dividend investing is because I can reinvest the dividends into stocks without adding money into my account. I cant do that with growth unless I sell. I get what your saying from a shares perspective but dividends is the safest way to build passive income. And they offer defense from crashes and out preform the snp.
Hey Ben,
I am a relatively new listener. Would you dismiss the dividend discount pricing model as a platform for portfolio value stability? I agree with what you say about returns; however, I would suspect most dividend paying companies would have lower betas, and therefore be a better investment vehicle for somebody who wants a smooth ride through till retirement age?
Very good video and I love these "contrarian" esque videos that really get me to reevaluate my own investing strategy. (25% income 25% bond 50% smallcap value ETF.)
You're right about low beta, but if you want low beta go for low beta. There is no reason to select based on dividends. Low beta stocks with robust profitability and reasonably low prices have a good expected outcome, whether they pay dividends or not.
Ben Felix
I realized that what I was saying and what you were saying in the video were completely different topics. The emphasis on this video was returns alone. I rewatched this and realized I was just making an unrelated statement about dividends. Thanks for the information I’ll try to watch more videos and like.
Hey Ben, I know this is a bit unrelated to the topic but could you make a video regarding ETF in the consumer defensive sector? I have been playing around with factors recently, and I noticed that factors premium aren't the same in every industries. When I diversity between small cap values and consumer staples, I find myself generally getting higher compounded returns at about the same standard deviation as the S&P500.
For those curious, head to portfolio visualizer and toy with the following ETF: XLP, SPY, and SLYV
You’re awesome, great video Ben!
Thanks!
I’ve always gotten the feeling from the dividend crowd that they believe they’ve stumbled on the sacred texts in some investing ruins, a secret sauce we that they alone can know about, and forget that their dividends are seen by all market participants on the planet- it’s not a secret get rich payment. The replies here are hilarious Ben, keep up the good work!
It is, in fact, the religion of financial salvation; the answer to all of our problems.
Thanks!
Great video Ben! Such clarity and common sense, and a great resource for new investors trying to decide whether they should go with indexing or dividend investing. Now, wait for the imminent attack of the Dividend Ninjas!
Thanks as always Grant!
Ben, I understand everything you are saying. But for my info, what would you think of the following: a company priced at 100 a share makes 100 in revenue, 10 in earnings and pays 5 in dividends (a 5% div company). Then market panic strikes and the company is now priced at 50/share. But the company's business isn't affected and continues to make 100 rev, 10 earnings, 5 div (making it a 10% div company now). Wouldn't the higher dividend payment be a proxy of undervaluation? In other words, for the company books, the "drop in value" from the dividend payment is only 5%, not 10% as you mathematically would assume. Am I wrong?
It is important people understand dividends just one way to return value to shareholders. Buybacks and company using cash to reinvest are others. Tax treatment of each may differ based on your jurisdiction. Ben I think a good topic for future would be use of leverage eg leveraged ETFs.
Very true. Leveraged ETFs could be an interesting topic. I have a lot to cover before I get there, but I will add it to the list.
Dad is a big fan of dividends. The reason for it is that he holds most stocks forever. He only sells if there is a big change in the companies’ ownership. If a company has a good dividend at one point, the investor sees that it actually cares about the shareholder, so it’s a mindset. Especially in the last decade with low interest, and our countries’ lenience on capital gains tax, he did really well. His education as a banker made him a humble but great type of investor since 50 years.
@Ben Felix
I agree with what you said, just one question.
When picking (yes, picking individual stocks) one stock that pays dividends, over a second one that does that, and re-investing the dividends to buy more shares, doesn’t that compounding work in the investors favour long term?
In your example, the $10,000 cash from dividends in company A, the investor could buy 1,000 shares or possibly more in a down market. And the dividend next time would be more than $10k
Added to that, solid companies that tend to increase dividends, will reward reinvesting the dividends.
So wouldn’t the compounding factor work in the investors favour, long term, or is it again a risk priced in the stock itself?
I can't speak for Ben, but I think the argument is that reinvested capital gains from non-dividend stocks also compound, and all things being equal (i.e. comparing the same company with or without dividends) the compounding effects should be equivalent.
thanks for the great video Ben, learned a lot! I thought only 50% of capital gains is taxable though, wouldn't this make the taxed amount in your capital gain example even lower?
Yup
Andrei Jikh has left the chat
Andrei also accepts the fact that technically dividends are irrelevant. He looks at things from a cash flow POV. Just behavioral finance things.. Suboptimal but works for him..
Thank you, RUclips algorithm!!
for leading me to this channel... :)
Thank you so much for making these videos Ben. I really appreciate it.
What do you guys think of dividend investing in a tfsa using Henry Mah's tfsa compounder as a guide?
Wi agree wholeheartedly..... except if they are fully franked. As in Australia.
Thank you for this information. I'm leaning on dividends and this is the information that I need. Glad I didn't go with it 😁😁
? did you actually understand the message in the video
@@untitledC64, I'm fairly confident that the above comment was made with sarcasm.
Dividends are a perfectly valid way to generate income. Mature companies can either buy back stock or pay dividends. They are about equal.
Hi Ben.... I recently came across your channel and love it. I think you are missing 2 points about dividend paying companies. 1 - the discount rate should be lower since the investor has an more reliable income stream versus selling stock at a price that will be unknown. (uncertainty = higher discount rate). 2 - You touched on this point... Corporate behavior will have to be a bit different if you want to have consistent dividend payments. This could led to less volatile earnings in which you would have a tighter range of expected outcomes.
1 - This should be built into the share price. Suppose company X does not offer dividends, and you're willing to invest $100 for 2 years. You're saying that if X offered to pay $1 in dividends next year, then you would be willing to pay slightly more than $99 because the dividend income stream is more reliable. But if you valued the $1 of income that much, then surely you would have only been willing to invest $99 without the dividend! (Or maybe $99.9 if you only value the reliable income a little bit.)
2 - If this is the case, why not invest in good corporate behaviors rather than dividends? This is precisely the point of factor weighted index investing - you can capture the same behaviors that explain the returns of dividend stocks but with greater diversity.
This past year I felt more motivated investing in dividend ETFs due to the monthly and quarterly payouts that I wouldn't have been if they were non dividend paying. I do own the largest amount in small cap value with pays little dividends but I think it's good to have both options.
If it feels good and keeps you invested, the sub-optimal risk-adjusted returns may be worth it.
Someone at r/bogleheads pointed me to your channel. Unfortunately, now I will have to watch every video you have ever posted. Amazing content, thank you!
Great video as always. Our investment group just had a discussion about this a few days ago. People got upset when I said they were just stock pickers! I’ll be sharing this video to further poke the bear.
This is certainly a discussion that gets people upset.
Oh no lol
@@BenFelixCSI you see it a lot here on youtube
Because truth “facts” hurts that’s why..🤷🏼♂️
I don't understand though. how does the company paying me 1$ decrease the share value 1$? I'd rather have that 1$ then them pay it as bonuses or whatnot to their employees(as long as I'm not an employee). I understand that it's 1$ they could be investing into their future but that doesn't always increase the companies valuation, right? Or mean that they would invest it in their future.
Mr. Felix thank you for the video, I believe opinions ( especially those grounded in logical analysis) of opposition are very valuable to self reflection. Additionally, I will also point out the premises brought forth in argument are sound ( and correct).
- Dividend investing is less tax efficient than growth stocks
- Due to taxes ( that many, not all dividends ie.Municipal, negativity impacted)
- An aspect of control is siphoned from the investor.
- The value of two companies were all else is equal and the only difference that exists is the provision of a dividend the value is in fact the same.
But, a series of sound premises does not necessitate the conclusion to be correct.
Therefore I would like ask a few questions, purely from a stance of curiosity and professionalism.
The positive or negative growth of a stock so long as it has not been traded cannot be considered capture gains or losses. So therefore should this not mean that stocks at ofter dividends enable a function for an investor to capture a portion of their investment thereby reducing a measure of risk?
Furthermore, a growth investor could in fact mimic this affect with a lower tax liability but would that not also come at the cost of removing any future potential gains by the liquidation of those sold stock?
And finally compounding interest has been said to be the eighth wonder of the world, which I believe the compounding aspect in itself is a point ( allowing an account to feed itself). However my point is the nature of a durable dividend and if you would consider the versatility of choice for the investor to hold cash or to reinvest the money an asset ( i.e a measure of control)?
"An aspect of control is siphoned from the investor." It's the other way around. Dividends give you control of your cash.
@Ben Felix (or anyone I suppose)
One question: (I tend to agree with you, but I have been considering starting a dividend focused portfolio as well)
Lets say the market is down, you are retired and rely on your portfolio for living expenses:
Scenario 1: Your dividend portfolio pays its dividends, and your living expenses are covered.
Scenario 2: You sell enough of your portfolio to cover you living expenses.
You say both are the exact same, but in scenario 1 you still have the same number of shares, while in scenario 2 you have sold shares during a down market. I would think scenario 1 would be preferable in this case?
No. In the no-dividend case you have less shares but the shares are worth more.
Start with 100 shares worth $1 each for $100 total. If the shares pay a $0.10 dividend, you have 100 shares worth $0.90 each for a $90 portfolio. If you had not received a dividend and instead sold 10 shares to create a $10 cash flow you would have 90 shares worth $1 each for a $90 portfolio. If the portfolio rebounds 10% the gain is the same for both portfolios.
You are indifferent to the number of shares that you own.
Ben wearing the chefs hat and now stirring the pot on dividend bois
😁
I’d so marry Ben Felix if not for, you know, us both already being married and his liking girls. But otherwise, we’d just lie in bed and laugh at the bitcoiners, dividend bois, and gold hawks. 💜
@@robb0995 oh my!
Not really. We dont invest tye same way with the same ideologies. For regular investors you must sell your shares actively to get money. For dividend investors we get a paycheck. Some paychecks can be less than others but every month know im getting paid. And I'll handle the taxes with that money also. But in an emergency I cam liquidate the funds and take my gains also. But when ive invested enough to get a 3k paycheck every month why sell my shares? And why not just live comfortably. I can also have dividends pay me 4k a month. And set 1k send directly to the irs and possibly get a return back. Simple and easy. I share my wealth with my family my government and I go out and buy things all without needed to sell a single share. I simply check up on my companies periodically and see if I need to remove my influemce from their business and place my assets elsewhere. For example AT&T id move to Coke because they're over leveraged and in bad debt. However, im buying BofA increased rates. JPm isnt high up because they are innovating and seem to not have gone far. So i leave them sitting and paying me. I get taxed less on my dividends than i would for selling my shares. And I rarely would ever sell my shares.
Keith Burns This video is not refuting your idea at all. Your stance is that the convenience of dividends makes them a good fit for you. You have said nothing about choosing dividend stocks specifically because you think you’ll get higher returns over time, which is what this video is about. He didn’t say dividends were bad.
Ben, I have a few questions.
#1 You once told me that my portfolio return was an anecdote. My return as an individual proves nothing (compared to empiric studies). Fair point. However, you used a simple comparison of VIG vs a Fund (Dimensional) over a short period of time (~6 years). How this comparison isn't an anecdote? How does it fare with empirical studies? Funny enough, the fund beat the ETF on top of that (I thought this wasn't possible?).
#2 Since you like academic studies so much, how can you ignore Ned Davis research? Even if you make the switch from geometric indices to arithmetic indices, Ned Davis shows dividend growers returning 12.89%, all dividend stocks 12.83%, and equal weight S&P 500 12.35%! (All beginning in 1973.) (source article from Meb Faber Dividend Growth Myth). It's not a big difference (+0.54%), but it is still better. Invest 10K at 6% for 46 years or invest 10K at 6.54% for 46 years and you get $38.4K more (+26%) in your pocket. I'll take the dividend grower option, why don't you?
#3 At the end of your video you cite Buffett (which is clearly a stock picker and 15 of its 20 largest holdings are paying dividends) to prove your point. How the opinion of a stock picker (even if he's the world's best stock picker) proves your point that investors should not pick stocks? I thought an individual's performance was an anecdote. Why Buffett's matter, but not others?
Thank you for taking the time to answer back.
Cheers,
Mike
"How the opinion of a stock picker (even if he's the world's best stock picker) proves your point that investors should not pick stocks?"
He was pointing out the irony that dividend aficionados frequently cite Buffet, but Buffet himself is not a dividend investor, not that you should invest like Buffet. The video's entire thesis is that dividend investing is illogical - that's just another example of illogical behavior.
@@ianchissy, Funny enough, Buffett isn't a ETF investor either and Ben keeps referring to him after clearly stating that anybody beating the market is just pure luck. Therefore, what we find in his investment letter should also be the produce of luck, right?
You can't say that no investors can beat the market without luck and then, pick one (Buffett) and use his "wisdom" to prove your point. That doesn't make sense at all.
@@DividendGuy there is a reason everyone's referring to Buffet all the time and not some other genius investor: because it's so rare for an individual-stock-picker to succeed so much in the long term.
Even if you exclude luck as an explanation for the rarity of "successful individual stock pickers", you're left with the explanation that it's simply too difficult to do correctly.
and if people fail to do it as their JOB (active fund managers), what would make one think that they as a RETAIL investor could hope to do any better?
@@Klayhamn There are plenty of reasons why portfolio managers can't replicate individual retail investors' performance. But it seems that this is not reported by academic studies (since it's almost impossible to conduct such research). Most researches address fees and stop there. They forgot to consider the size of the fund. It's a lot easier for me to initiate a 5% (of my portfolio) position in Royal Bank vs a 5% of a $500M portfolio. Pro must meet their boss' expectation at the end of each quarter, I don't. I don't have to fear for my job, Pros do. When there is a panic on the market, I don't have to do anything. Pros need to save their job and do better than their peers.
I've been tracking my returns publicly since 2012 and I must be the luckiest guy on earth. Funny enough, I'm sure there are tons of retail investors in the same positions. All you have to do is to have a solid investment plan and stick to it. Markets create inefficiencies all the time (if markets are efficient, please explain how banks lost 50% of their value in 2008 and recover it all in 2009, or explain what happened between September 2018 and April 2019). It's actually quite easy to beat the market. But some people just can't (or don't know how) and this is why they do index investing.
@@PowerChannel88 #2 If he proves that dividend investing outperform the market overall, why he doesn't pick dividend ETFs in his portfolio to benefit from what he just found out? The DFA core equity (both Canadian and US) ETFs have greatly unperformed their benchmark for the past 1yr, 3yr, 5yr and 10 yr. It seems quite obvious that the DFA methodology has missed a point or two while doing their research to build their ETFs. How can you trail your benchmark by 1% to 2% annualized return over all these years? Just buy the XIU and SPY then.... why Dimensional Funds?
#3 Buffett is not a reason to do anything (dividend, etf, market timing, anything!), I agree with you. Then, why citing them in multiple videos?
Thanks for this. Too many people think dividend stocks are automatically good stocks.
In the US, Ordinary Dividends are taxed at the normal income tax rate. Qualified Dividends are taxed at the lower Capital Gains tax rate. So it's often better, tax-wise to not get dividends. REIT dividends, for example, are always taxed as ordinary dividends.
I like both dividends and non-dividend companies depending on the account it's in. As a Canadian, I prefer putting my eligible dividend paying stocks in a margin account but my growth stocks I pop in my TFSA. I get the best of both worlds this way and as far as I can tell it's a pretty tax efficient method of investing