Dividends are not investment returns. They are not free money, and do not offer downside protection.
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- Опубликовано: 5 окт 2023
- Dividends are not investment returns. They are not free money, and they do not offer any downside protection.
Professor Sam Hartzmark, who has studied this extensively, explains on the most recent episode of the Rational Reminder Podcast.
• Professor Samuel Hartz...
The Dividend Disconnect: doi.org/10.1111/jofi.12785
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Ben woke up today and chose violence.
But in a productive way! Thank you, your videos helped me very much to make financial descisions. Your videos are actually (very good) financial advice. So refreshing! :)
please make more short form easy to digest content. Im sick and tired of hearing my friends cosume tiktok financial advice and being taught garbage. THEY NEED YOU
How about telling your friends to actually have an attention span longer than a troglodyte instead
Agreed
It might be an easier fix for you to find different friends.
Agreed. Ben's long-form videos are exceptional, but the sad reality today is that he'd be able to get his message across to many more people if he created more content like this.
Taking a dollar out of your right pocket, paying taxes on it, and putting it back in your left pocket
So you don't use your investments and never sell? You save for following generations without inheritance tax?
@@f.n.6218 at least in the USA, long term capital gains are taxed more favorably than dividends, so it's actually worse to take money out via dividends.
@@f.n.6218 nobody talked about not selling
@@f.n.6218 The fact that you have the option to hold and not pay taxes is an advantage. With dividends you are forced to pay taxes and then choose whether to reinvest or not. With capital gains you are not taxed until you realize them, and that's more money working for you until you are ready to sell.
That's exactly what it is. Thank you.
Ben Felix giving us the redpill on dividends 👍
In my market, it makes a difference whether you get your investment returns as dividends taxable as income or as capital gains taxed as capital gains. If an individual company retains the money and it increases the stock price you benefit from lower capital gains tax. If a mutual fund offers accumulation units you still have to pay income tax on the ‘retained’ dividends and the base price for capital gains is increased accordingly. So saying dividends are irrelevant is confounded by tax considerations. In the U.K. there are ‘dividend heroes’ investment companies that have increased their dividends for 50 years or more. It’s marketing BS as it means many recipients will have paid higher taxes as a result (since income tax has generally been higher than capital gains tax. The lack of financial understanding, even among so called professional advisers, is astounding. Largely motivated by vested interests I think.
Do institutional investors also care about dividends or only retail investors?
As some already mentioned dividends have it's uses.
Personally my view is that:
- any decision I'll make will be sub optimal - gonna get screwed a bit or a lot.
- I have temptation to make all kinds of decisions - to "improve".
Dividend growth ETF eliminates one group of decisions related to selling. How much I can safely sell this year? Maybe Sell more/less this year due to market conditions? - All this leads to big mistakes, timing the market... With Dividend Growth ETF I can avoid all of this.
Is it less optimal? Probably! But me making decision about selling the stocks will be much more sub-optimal at the end.
This is a good take. If it helps you make better decisions, there is no real counter argument.
I'm very confused on the difference between a growth ETF and a dividend growth ETF. By Ben's logic, it would make no sense to find more value in the dividend ETF if we're admitting that it ultimately comes off the company books.
I'm going to get my popcorn and read the comments here
Dividends come directly off the balance sheet. It is not free money unlike what some advocates feel
My problem with this is… I’ve never once heard advocates say it’s free money. The logic for income investors is that the boards of dividend stock companies know best what to set the dividend expense to vs. an investor selling a portion of their stock every quarter for income.
@@jake9764If you’re building wealth, there’s no need to sell any stocks to generate income.
If you are retired and need the income, you can decide how much you want to sell based on how much you need (which can be more efficient) vs not having control over how much your stocks pay you in Dividends.
Dividends can get cut in market downturns too. That’s why you have strategies to protect yourself from being in a position where you have to sell during a downturn.
That being said, if Dividends do help you in that regard, then that’s great and there’s no need for any arguments against them as long as you understand where they’re coming from. The problem is that it’s really easy to get sucked into the “Dividends are free money” thinking that new investors end up doing.
@@jake9764How dare you and talk positively about dividends? Investors that hold their investments forever over generations and only use their dividends are bad people that have no idea how investing works.
Literally no one ever called them free money; it's probably the most famous straw man in investing to claim so.
@@jake9764 Calling it "income" implies you think it's free money
Hey there! So I'm just wondering about Dividends when purchasing them in a TFSA. Do you still pay taxes on the earnings? I'm trying to figure out the optimal way to save on taxes with my TFSA account. Thanks!
Accurate take. It took me a lot of time to realize this after investing over the years. When a company/ETF pays dividends the NAV of the asset falls
oh thats why Japan stock stonk. They focus on giving dividends before even paying their employees lol.
This is why that little flag of “reinvest dividends” when you purchase stocks/etfs is so important for the long-term investor.
Doesn't make sense to do that for an individual stock.
@@Raphael4722 It's generally imprudent for most investors to hold individual stocks.
So should you have it or not?
What's your opinion on "dividend capture" strategy. Some people will buy a stock to "capture" the quarterly dividend, and then attempt to sell the stock the next day for what they paid or close to what they paid.
Hi @Ben Felix,
I have one quick question about a dividend portfolio considering in CANADA we have Tax free saving account up to 90 000$, would you say that in this case, with a total tax free (dividends tax free too) it would make sense to invest only in dividends stocks ?
Or even considering the total tax free investment, it would be better to go with a core index like XEQT or VEQT ?
Thanks for answering !
No, it never makes sense to invest only in dividend stocks. This video explains exactly why.
Love the mix of formats to provide education!
Hey...what do think about the ishares brand new life path target date etf....how would the taxes work in an individual brokerage?
Yes, Modigliani and Miller have shown that in the absence of taxes, the dividends are irrelevant, at least in academia. However, there are empirical evidence that dividend paying companies have better cash flows and more consistent financial performance when the management has to pay them.
Those things may make them ‘good’ companies but they don’t make them good investments.
@@739jep normally, good companies are good value investments, no?
Well they kinda are a bad proxy for firms that have more than average exposure to the value and profitability factors. So dividends are just an inefficient proxy (dictated by corporate decisions) for factor investing.
Exactly!
My man Felix... still fighting the fight. I have been away from the RR community for a long time cause of life. Hopefully I will have more time in the future
Dividends are absolutely not irrelevant in that some companies should absolutely pay dividends as they literally have no better use for the cash, while other companies like Berkshire Hathaway or a young Amazon can more efficiently use the money for shareholders by retaining it.
Similar to buybacks, some companies mishandle this situation and therefore it is something worthwhile for an extremely savvy investor to think about.
Of course it you believe the market is totally efficient, you might choose to disregard the above.
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ADVICE:
If they can afford to, most people should substantially contribute year after year after year after year to their tax-efficient retirement account.. and please get your employer match if you can. Self-directed? Consider constantly buying things like Berkshire Hathaway or SPY.
If a company has no better use for the cash, why shouldn't they just do a stock buyback instead of issuing a dividend?
@@flamingspinachThe stock price may be too high
@@Nemi51500515 When a company buys back its own stock, the balance sheet is unaffected regardless of the price of one share. So that doesn't matter, despite what CEOs tell you on earnings calls to justify authorizing buybacks.
if the company doesn't have a better use for the cash, and the dividend is a poor cash allocation, maybe you could consider updating your portfolio
@@oubagi Of course. For an exceptional l savvy investor, not buying, or rebalancing might be reasonable things to think about.
Your content is so outstanding, well thought out, and clearly explained. I wish more financial channels on RUclips followed your lead, but instead put out a daily flow of "revolutionary" drivel that never varies, except for a tweaked, click bait inducing title. Thanks for your efforts.
I appreciate it!
Maybe consider that there is an area between clickbait nonsense and this type of blindingly obvious regurgitation of tedious and often inaccurate orthodox financial thinking.
Well said
What are some websites you recommend?
Love the chuckle at the end as you KNOW this will cause a 💩 storm with a certain crowd once again.
One thing I have a hard time getting my head around is what exactly makes the price of the stock change once the dividend is paid out.
The price of a stock doesn’t necessarily reflect the value of the company, the price is decided by the market buyers and sellers.
So does it mean, once the dividend gets paid, that a lot of people start selling that stock and therefore the price goes down?
Hedge funds buys the dividend stock at the right moment to get the dividend than sell the stock.
Its offer and demand always.
Dividend is garanteed money if the company is doing well and that is not garanteed.
Yes! That makes so much sense. The price level is not determined by the company but by the market.
Following the professor s words,
Can you(Ben) clarify How can a company essentially take value from the price level and use it as dividends? ("Moving money from the right to the left pocket")
More short content 👏
My question is based on splitting up investments and not adding to the same fund inside the same account comes down to does the order of withdraws matter? It's not about buying something with more dividends or less dividends. It's about experimental probability based on statistics if order matters or not when you withdraw in order for your money to last longer. The only person I know who studies this is at the University of Minnesota. That's where an expert is on this. But I don't know how the math works on this.
More of this format!
I was hoping they would talk about tax implications.
The way I understand it, I could theoretically make up to 50k in eligible CAD dividends without paying tax?
So for a random number example, if I made 25k in divs and another 25 from my tfsa this would mean a 50k retirement TAX FREE !!
This is why I’ve been curious about divs recently and wondering if this makes any sense or if it’s a worthwhile strategy?
@Ben Felix What about the tax advantage of qualified dividends? Surely this is advantageous over creating a synthetic dividend by selling shares.
Why? Don't qualified dividends have the same tax rate as long term capital gains? Wouldn't you rather choose whether/when to realize those gains?
The way i look at it, dividends are you getting your current share of the companies current profits today, vs the stock price reflects the value of the company today plus the expectected future returns, which people almost always over or under estimate. So generating income from dividends you are getting paid from actual profits, vs when selling shares to create income your returns are based on what people think the future returns of the company will be which is not always accurate to its actual value.
Ben, what is your view on share buybacks? Obviously, the are potentially more tax efficient than dividends, but do they actually provide any value in terms of improved returns? It seems to me that they should have no effect on returns, since the share count declines, but the cash also disappears from the company's books...
No effect on returns, but like dividends they can proxy for other favourable characteristics like strong profitability and conservative reinvestment.
Hey Ben, would love a video or comment on Alberta's idea of exiting the CPP. What makes sense financially for Alberta, and what doesn't? Seems to me that if Alberta were to get half the fund, then it's a no-brainer, but Alberta is not going to walk away with half of the fund. I also realize that there is much more at play than just a pension fund.
That’s a bigger question than my expertise can answer. It’s highly political and involves a lot of different stakeholders. CPP Investments has done a great job managing the CPP funds to date, even though their costs are on the high side relative to the amount they manage.
@@BenFelixCSI But you are THE expert, at least in my books! If you're not able to answer, how are Albertans going to answer this question? Politics and provincial relationships aside, what would the APP need to look like for it to be plausible? I can appreciate if you're hesitant to make any public statements about this, it is a HOT topic right now, but I think it could make an interesting video!
If not done already, you should do a video on covered call ETFs. It would be very timely, there seems to have been a dramatic recent rise in them
I did one. Maybe I should try a short one.
@@BenFelixCSI my brother is obsessed with them and keeps telling me about these ETFs yielding 10-18%, and even a new breed of them targeting 30-50% (YieldMax is the one that I remember best). This will obviously draw in a lot of not-so-savvy investors.
A short would definitely be a good PSA
It's not coming out of the price per say, like the company doesn't sell stock. They distribute assets, which lowers valuation. But that's not the whole story. The valuation goes down after a dividend mainly because there isn't an expected dividend from the stock in the mind of traders and hedge funds anymore, so the stock is sold to meet it's current worth. Correct?
The pocket analogy is a very intuitive one to explain dividends!
I think I do like the 'feel' of getting a dividend, even though its basically only a feeling. I also like accumulating dividends and then reinvesting in another index or stock, which i guess is really also just changing pockets, but I like that I don't have to be as active in selling to change pockets.
I agree. Generally the simpler the analogy the better. I've used the analogy of moving money between accounts, but the 'one-hand-to-another' is better.
@@alankoslowski9473 The analogy is still not going to stick with some people. I think the main issue is not so much which pocket you put the money in, but that the people aren't actually sure how much money is in the right pocket. So when $1 comes out of it, they can't tell. So our monkey brains just see money appearing out of thin air. It's like a toddler where you take a full cup of water, pour half of it into a second cup and they think it has magically grown.
But with dividend money I can choose where this money goes and if I need money I won't exclusively have to sell my stocks to obtain money because I have dividend income. Am I missin something?
How similar is it to buybacks?
To the shareholder, it's very similar, the only difference being that a dividend immediately incurs taxes today while decreasing the capital gains tax you'll pay later (because the NAV will drop), while a buyback does not have any tax consequences for you, the shareholder.
I don't understand this discussion. There is not one funds on this planet that doesn't pay the dividends of its holdings to the investors. Either they pay in cash or buy new shares. So what's the problem? Is this a question if the investor spends the money?
It's about investors who invest in companies specifically for their dividend yield, and not as a byproduct of a general investment.
I think the discussion revolves around more on dividends coming from stocks, rather than from funds.
@@higorcarvalho920Same thing.
@@aS9dxf869sdI don't think so.
@@f.n.6218 Well, people don't see stocks and funds like the same thing, and thus we have this kind of video.
I think dividend is relevant to required rate of return. Higher payout ratio should have a lower expected return since the capital return certainty is higher and you bear less management risk
Ben can you do new video on bonds. Reminder of LT vs ST in relation to rates, economic volatility etc. Also using GIC ladders with them for soon to be/ retirees. Bill Gross, Ackman etc in media on them. Thx.
Great video. I did a video on this topic recently and you should see some of the comments…people still think they are somehow magic money that comes in rain or shine. 👍👍
People do love magic.
Did you mean to post this as a short?
It was too long to be a short. I figured people would survive if I posted it as-is.
maybe, but if one is working with either a traditional ira or roth, there is only so much money that a person is allowed to add annually. wouldn't it be important to rely on dividends to work around the limit?
How do you mean they are not investment returns? It's one (of many) things a company can choose to do with their FCF after making a product or service people are willing to pay for, so it's a form of investment returns.
Any dividend payout will lead to a decline in the stock price by the amount of the dividend. In other words, if the stock price was $10, and a few days later, the company paid a dividend of $1, the stock would fall to $9 per share. As a result, holding the stock for the dividend achieves NO RETURN since the stock price adjusts lower for the same amount of the payout.
@@RacoonFighter That's basic MM (or you know, math), but has nothing to do with dividends being a form of investment return.
They are absolutely investment returns. This video is clickbait.
@@jvarszegi Nice arguments 🧌
Ben: This research is 100% correct. But understand what this is based on. It's based on UNREALIZED GAINS. It also doesn't matter if you split up your investments or buy only one fund. What I'm suggesting you look at is map out withdraws where you split up the investments using different funds every X amount of times where X can be per month, per year, or what ever. So if I invest in March 1979 and sell in March 2009, I'm selling what ever the original principal grew to plus the dividends only corresponding to that investment. The guy you interviewed doesn't appear to address that.
They r helpful when a company cant grow. Say coca cola- there is no real use for their excess cash besides dividends or buybacks- they cant go out and double production so its best to limit their balance sheet to boost their ROA
Yes, but why choose dividends over buybacks? The "dividend investor" seems not only to prefer companies that return extra cash to their shareholders generally, but to specifically prefer companies that return that cash in the form of dividends rather than in the form of buybacks.
Sadly for every rational explanation of what dividends actually are and why they are irrelevant to returns, there's 20 new finance-bro RUclipsrs making videos about their awesome "passive income" dividend portfolios.
From what I noticed looking at those "check my dividend returns for X month" channels, it is just a way to create constant easy content that is paid in premium by advertisements. I would bet most of those channels earn more from RUclips than their investments
Can you explain why Buffett seems like stocks with dividends?
Cashflow and he likes mature dominant companies.
He likes to hold things so if he has no plans to sell coca cola for the rest of his life he wants dividends to invest in other sectors and businesses.
Buffet is a value investor, and the majority of companies with that factor just happen to pay dividends.
I don't know Ben. The value of a stock comes from the perception of how profitable a company is.
It is not made clear as to how that (money changing pockets) happens.
What the prof seems to imply is that the company takes money from that perception of profitability and transforms it into dividends.
My words feel disingenuous, yes, but do companies sell part of their stock to provide dividends? or maybe dividends, as we all know, comes from corporate earnings?
Are you suggesting that corporate earnings equals value of the stock?
I don't really know. Can you clarify?
Sorry sorry, i guess a better more condensed question could be: how is it that dividends come out of the price level of stocks?
Ben, what about the introduction of agency risk? A dollar invested by management may not align with the dollar investment made by the investor.
Dividend irrelevance does not comment on the optimal dividend policy. All it says is that given investment policy, dividend policy is irrelevant to the valuation of shares. Your question is about investment policy, which is relevant to valuation, but dividend policy only tells you about investment policy in the special case where all financing is internal.
If dividends are irrelevant then it is just a matter of buying positions, holding them for long, them selling when the price is high?
that is the Ben Felix method, aka ponzi scheme
Price = underlying value + unpredictable market fluctuations
Amazon could not be valued north of a trillion dollars without years of business, digital and physical infrastructure, distribution networks, equipment, employees, and customers. The company evolved from Internet bookstore to global logistics, e-commerce, and web service hosting superpower.
"Price go up" is a dumb way to describe the meteoric expansion of a business empire.
@@ajrobbins368 what is the underlying value if the company never returns cash to shareholders? Imagine if cash is permanently held on balance sheet
I think for a lot of people the benefit with dividends is psychological, maybe people just want to look at any money they earn from investments as income and instead of just reinvesting all the money they get from investing, they just want to use that money as part of their income, so if they earn 5k from their job and 1k from their dividends, maybe they just put away like 20% of their entire income including the dividends and just keep growing their investments that way. I think the reason why that's good is that it builds a habit of spending that investment money wisely early on instead of being a big emotional block to overcome when your retirement approaches.
Well, maybe, but paying 15% tax in Lithuania is pretty brutal, considering low yield and no tax advantaged accounts like in US or UK.
@@MJ-uk6luI completely agree that it's not optimal, but if that's what motivates people to invest then it's better than nothing.
@@mantasvalciukas5734 But in the end all those dividends should be reinvested anyway, unless you are retiring. It's hardly motivating to have your income to be robbed by a tax, when you could just invest into Acc ETFs instead.
I guess that the tax isn't so bad if you are crafting a strategy to beat the market and invest in individual companies. Then dividend is inevitable, but also preferable (good companies pay dividends). i mean the whole stock market exists and is healthy, because it pays dividends and that's what all valuation are based on (either they pay now or are expected to pay at some point). That's also the main reason why it's not a massive Ponzi scheme as well.
The people who get upset by this generally confuse "dividend investing" with "stocks that pay dividends".
In general, it's an important component of market capitalism that unneeded capital is returned to provide new opportunities for capital allocation. Experienced investors just reinvest received dividends.
However "dividend investing" is the notion that somehow only buying companies that pay a high yield will lead to greater wealth accumulation. It won't.
Good clarification thank you for this
This clarification was much needed. I was so confused if they were talking about dividend yield or dividend growth. As this information I believe is for inexperienced audience, I find it necessary to clarify this point
Ben hears about a broad market ETF: "i sleep"
Ben hears the word dividend: "REAL SHIT?!"
But this doesn't explain what dividends are nor what they're not! Any help? Anyone?
Plz shoot me down if I'm being stupid, but as far as I can see, the argument "dividends are just the company giving you back you own money" only works if every dividend paying company's share price always decreased in value equivalent to the value of every dividend payment and then never went back up. You can never know for sure whether valuations will increase or decrease across any given timeframe, and valuations are based on many more factors that just available cash. If a company remains stable in share price or decreases, it matters massively whether they've been paying out dividends over that time. No?
If the company didn’t pay dividends at all the price would still go up or down just the same. It would just be a fixed offset from the dividend amount. E.g. instead of paying $1 div and price rising to $12 in a year, it would be a price level of $13.
In theory, your argument holds true. Nevertheless, my practical experience within several S&P 500 companies has led me to believe that opting for dividends is a more prudent choice. Most of these companies tend to squander their surplus cash flow on unproductive capital projects with minimal returns and a lack of oversight. Opting for dividends provides you with greater control over your money, allowing you to allocate it according to your preferences. The only downside lies in the tax implications, but these can be mitigated by holding dividend-oriented investments within tax-free savings or retirement accounts.
If you reinvest your dividends back they would still have cash to spend on unproductive ventures. Unless, of course, you take out your dividends to invest somewhere else, but does the tax and commission burden outweigh the benefits of the companies not spending money ineffectively? Not sure.
@@streettrialsandstuff if you reinvest your dividends. you simply increase the amount of that company stock you own. that money does not go to the company to spend on "unproductive ventures"
First I would like to acknowledge that I am not as educated as the professor on the podcast or Ben. But I have observed that companies that pay higher dividends tend to fall less in bear markets and that there are a number of highly educated people (Warren Buffet and Ben Graham, for example) who consider dividends carefully when choosing to invest in a stock. There are also people who invest in high-dividend-paying stocks because it helps motivate them to continue investing on a psychological level---seeing the money generated every month or quarter, and that amount growing steadily over time, can be very inspiring to somebody who might not otherwise be motivated to save, and that's free money in my book.
Ben has said often in his podcast that people who invest in dividend paying stocks expose themselves to the "value" factor which is a proven risk factor, and that he has nothing against people who invest in dividend paying stocks on a psychological level. But also, anyone coming to this channel for financial advice should be seeking evidence driven advice, not what feels better.
Don't dividend payout rates TEND to be higher for value index ETFs? Is this just a reflection that you are paying a lower price for a company's earnings?
What is the effect if dividends are reinvested?
You’re in the same position as if you didn’t receive the dividend, less any taxes.
@@BenFelixCSI Thanks makes sense. One thing that I don't understand is that why the market reacts so negatively when a company slashes it's dividend? If dividends don't matter, then why the "rational" investors react so negatively?
Trying to explain this to a dividend person is painful. That money comes off the books of the company in which you are invested, making your stake in that company worth that precise amount less than before they paid you the dividend. Furthermore, YOU pay taxes on that dividend upon receipt, so you definitively lose money during the transaction of moving the money from one pocket to the other.
You don’t pay money when you sell growth stocks or index funds?
@@NickOloteoYou do pay taxes when you sell, but you get to choose the timing, which might be far in future.
You do pay when you sell, but often at a lower rate. And more importantly, no one forces you to sell. @@NickOloteo
@@Cessna12365And this is a problem. Whenever the investor can choose, he or she usually makes a mistake. There is not one person on this planet that went bankrupt by only spending the dividends. There are a lot of people that have run out of money by selling regularly.
There have been studies showing most of the equity market returns come from dividends over long periods.
Yes , but that’s missing the point, and it doesn’t mean dividends are relevant.
Just because returns did come from dividends historically does not mean the same returns wouldn’t have occurred had companies decided to instead distribute capital via means other than dividends.
most of my stocks are dividend stocks and i never sell stocks, so my income each year is negative as the only thing i realize is taxes. feels batman
A dividend gives the individual investor authority over how to spend the corporate profit. These profits can be automatically reinvested, essentially giving an individual investor "stock buyback" choice. Alternatively, a dividend can be thought of as a forced selling of a partial share. You can accept the cash is return for a lower share price or you can reinvest the money to buy back the share. Perhaps dividends are a way to provide means to rebalancing a portfolio. One company's dividend may be used to buy back the share of another company's share at a better value.
I do the last thing you suggested. I use any dividends I receive for dynamic rebalancing.
This is more of a moderate (and wise) approach to understanding dividends. And I share this Idea. Correct, dividends are not "free money", but they are an excellent way to give you access to the capital to spend/reinvest as you see fit. Maybe there is a cost associated with it. Not sure of the value of that cost (maybe there is a study as this channel loves to use studies), but it's a cost I'm usually happy to pay.
@@BakersDelightSam
It's cheaper to sell amd gives you more control as you set the "dividend" rather than the company.
When selling, onlly the gain is taxed. For dividends, the whole dividend in its entirety is taxed.
They are no good because of taxes. The State takes a share of your dollar bill when you change it of pocket.
Capital gains are also taxed, so taxation of dividends is irrelevant.
@@aloneill6337 in my country, capital gains are taxed when realized, so you can compound then pay tax. But taxes are taxed when payed and there ain't rebate for reinvestment as it seems in other countries, according to my interpretation of some comments.
@@davidcherve, capital gains being taxed only when realized is standard. I don't know of any country that taxes unrealized gains outside of situations of deemed disposition upon emigration. My point is that whether you take the income as a dividend or a capital gain, your tax liability is not going to be affected. The only advantage of the capital gain over the dividend is that you can choose to defer realization, but the issuing corp determines when you get dividend income, so you have more tax planning flexibility without a dividend than with one.
@@aloneill6337 Try some math. Paying capital gains on about 2-4% of your portfolio annually, and again when you cash out is worse than paying capital gains once after decades of tax-free growth.
Spot on my man. Spread the knowledge!
Thank you for this! They're just taking money that would have been added to the stock price and forcing a payout out of it.
I sometimes PREFER to get my money out, so I can REINVEST it in my OWN WAY.
I don’t always believe that a certain company can SPEND the money better than I would do myself.
Yes dividends are irrelevant. Canadian dividends (in a taxable account) are at least taxed in a preferential way. So there is an advantage to Canadian dividends vs foreign dividends (in Canada) when it comes to tax.
A bit. You're getting credit for taxes paid by the company, which is better than not getting credit (like with foreign divs) but no different from earning interest (which is deductible to the company).
Curious, why aren’t they special? If I earn 50k in eligible dividends personally, I pay no tax on that. You can safely invest in Canadian dividend companies who’s never skipped a dividend in decades, hence generating safe income at no tax.
Curious why this wouldn’t be a good, safe, and stable investment option.
I disagree with this as one very important point is what happens in the weeks after the dividend has been paid out? The psychological effect of having a now lower share price puts more upward than downward pressure on the price, otherwise one could envisage a situation in the long term where the price tends to zero for a solid company!
The only downside protection with premium is covered calls and as you stated in another video all you're doing is skewing the distribution and cutting the tail off for the upside. No free lunch will always be no free lunch in the stock market. The only ways to get downside protection are puts, bear spread options, shorting, selling futures contracts, or negative correlating assets.
Ok I'm sold. Could you comment on total return ETFs (good, bad, other)? Horizon has a few. Thx
Yes. Should I do a short or a full video?
Personally prefer full videos. All your content rocks!
One advantage of dividends is that during times of low stock valuations you are able to reinvest the money to buy more shares without having to add more money. I actually prefer to invest in companies that have an outstanding share repurchase
In this case, buybacks would actually be better.
What you’re saying essentially is that you’re happy about money going from your left pocket to your right pocket just so you can put it back in your left pocket
@@739jep I like the analogy :). What I mean is that you are given a cash flow to reinvest during times of stock undervaluation. It will cause higher rates of return in the long run.
@@scottiebumich dividends are irrelevant to total returns , that doesn’t change during ‘times of undervaluation’
@@739jep most of these studies show non reinvestment of dividends and if they do include them they include them 100%. If you select to invest when the company/business cycle is in a low valuation (recession) your returns have shown (proven) to be significantly higher
No way to get into people's heads counterintuitive concepts. I think is likely due to "confirmation bias" to deep rooted. Doesn't matter how you logically document your statements ! (those who have thought about it with an open mind have already got there, those who don't want to do it will never get there) Thanks for the video !
I don't even understand what's counterintuitive about it. Maybe my brain just isn't normal. If a company is worth a million dollars and pays $100k out to investors, it's obviously worth only $900k now.
"Free Money"? There isn't such a thing as Free Money in this world
Really! Opened my eyes a little, I still like dividend stocks tho.
Sometimes I have a better use for some of the profits earned that quarter than whatever expedition the company wants to carry out with them.
But I guess with this logic I could've sold a % of my non-dividend paying stock proportional to the cash held before the company spent it. This would work that is, if the company price is reflecting its fair market value (which doesn't happen 100% of the time).
thank god someone else understands this. Also some dividend investors have never experienced a company reducing their dividend and what it does to their price
buying a six pack beer and i drink one, suddenly i feel hedged by alcohol
Thank you. It’s disturbing to see how (some) people continue to be so entrenched in their misconceptions about dividends that they don’t even want to hear you out when one explains what dividends real are (or I should probably say, what they are not). 😂
Can't argue with that, still they feel good!
Saying that dividends are not returns is just silly. If you are getting money back somehow is a return. Now the difference between market returns from price appreciation and dividends is that the dividends are independent of market sentiment on that particular time period. It's a different thing to say dividends are irrelevant and to say that they are not returns.
People always say stock is ownership of a business. Wouldnt you expect a business to earn money and pay you? How are dividends irrelevant?
If you’re the owner of the business - your income has already been earned by your business before a dividend is paid.
When a dividend is paid you’re taking money out of your business and putting it into your private bank account. Hence the pocket analogy. A dividend is not extra income , you have a claim to the assets on the businesses balance sheet as a part owner - so it’s irrelevant to your total return whether a dividend is paid or not. What’s relevant is the amount of money the business makes.
Could you please explain this to mr buffet who collects millions in dividends from his stock investments and other sophisticated investors as well like the uk prime minister and his wife who hold majority stake in the infosys company that the dividends are irrelevant,
How much in dividends his company Berkshire Hathaway pays for investors? 😌
Hi Ben. Thanks for the educational video! In my experience, dividend irrelevance is only true in theory. For example, you have a company such as Gravity (GRVY), which has consistent and growing earnings/free cash flow. The business currently trades at a 2x EV/Free Cash Flow, mainly on the basis that the management refuses to distribute cash to shareholders. Surely, if dividend irrelevance were true, then any business would be the present value of its future earnings/free cash flow, regardless of whether earnings are retained or distributed to shareholders. Then, Gravity would trade at a much higher multiple, comparable to the industry average ceteris paribus. It would be great to hear your take on this, because I've been struggling with how to navigate a situation like this. Regards.
Another great video, Ben. I actually hate dividends because they trigger a taxable event, robbing me of the opportunity to decide when I want to realise a gain - like in a low income year for example.
But they provide gains under all market conditions, regardless of share price. That's why they're prized for steady income. What about concentrating your dividends in non-taxable accounts?
You get the gains at the expense of the shareprice.@@jvarszegi
@@jvarszegi The video is only a minute long and the only point made in it is that reducing the share price by the dividend amount (moving money from one pocket to another) does not constitute a gain.
@@michaeldegrave5905 It's as if you didn't read the title of this clickbait video, or know of Ben's other misinformation on this same topic.
@sentfrom
Sell your stock BEFORE the dividend then. What’s the bid deal?
i feel like i need more context. whelp you pulled me in to listen to this podcast. ill give it a whirl.
It’s a great episode.
The part which I am still struggling to understand is the following: the price of a stock depends on how the market evaluates the stock, while the dividend is almost indipendent from that and depends only on earnings and payout ratio decided by management.
I might have a stock that no one believes will have any success and for which therefore the price will never go up substantially, but the company might pay consistent dividends and thanks to that I will actually earn something out of it.
So wouldnt that make the return on a dividend paying stock less dependent to market and therefore a better choice for people looking for a stable income regardless of the market evaluation?
Whoever believes that dividends are free money should not be investing without supervision. An x return without dividends is equal to an x return with dividends reinvested. While true, it is rather simplistic. Anything less than a 100% payout ratio is compulsory reinvestment. Sometimes the reinvestment can be beneficial to the shareholder, sometimes not. Dividends can play an important role in cash flow considerations when considered with other investments. So, dividends are a form of cashing out some of the income earned by the investment. Could you accomplish the same result with sales, sure, but so what? This all seems like much do to about nothing.
That would be true, except every dividend received outside of a retirement account is a taxable event. So you can expect to lose a small fraction of your investment to long term capital gains tax every year.
What's the point then? Does investing matter?
Yes! You don't need dividends to earn returns. Investing in a diversified portfolio has positive expected returns. There is just no reason to fixate on dividends.
@@BenFelixCSI So you are investing in an asset that provides no return other than what you can sell it to someone for. What is the fundamental value?
@@kevinswift8654Dude, the COMPANY is the fundamental value!
If you OWN a pizza restaurant and expand your business with the profits you make, you will own more store locations, equipment, product, contracts with distributors, and you will have a popular brand image attracting paying customers.
Your ownership of that BIGGER business inherently worth more. (AKA higher price)
is this meant to be a youtube short?
No. I made it for Twitter first, then realized I should post it here too. But it was too long to be a short.
I guess you could argue if there were significant fees when selling but not when receiving dividends it might not be irrelevant (assuming you wanted to sell), which i think has been the case for some retail investment accounts in my country
E.g. there was a roughly $25 cost to making any buy/sell order
But yes ignoring fees theyre irrelevant
In my case the break even point of min. fees and percentage of trade volume is at more than USD 60k. Dividend distributions don't carry a fee and that's the reason why I hold only distributing funds. So your reasoning is quite spot on
Imo, dividends can make sense for some retirees if they need the stable income. Definitely bad for long term investments.
Isn't the benefit to most retail investors that they can take an income from their investment without having the sell their capital. From a purely mathematical perspective it might not matter if you get paid a dividend or sell some assets that have otherwise gone up in value, but the physiological difference is huge. There's lot of unknowns and thus lots of stress around when to sell, whereas with dividends that decision is made for you. It's almost certainly not the optimal withdrawl strategy, but at least it's one that requires no active decision and thus no lying awake at night worrying if you just sold at the bottom of the market.
Yeah, just don’t assume it’s a hedged position or you can spend your dividends without affecting you capital growth.
Dividends are good if you know what you are doing with it.
Yes, if you're psychologically incapable of selling shares or it stresses you out so badly that you'd rather have a suboptimal portfolio than have to deal with selling shares, then maybe dividend investing is for you.
But you could say the same about many other things that take control away from you, the investor. For example, someone with this kind of psychology might be best served by hiring someone to manage their portfolio for them instead of doing it themselves. And that might actually be more optimal on the whole than DIY-ing a "dividend investing" strategy.
Continuing the crusade!⚔
Prices are not random. As an example, "price go up" is a dumb way to describe the meteoric expansion of a business empire.
Amazon could not be valued north of a trillion dollars without years of business, digital and physical infrastructure, distribution networks, equipment, employees, and customers. The company evolved from Internet bookstore to global logistics, e-commerce, and web service hosting superpower.
Price = underlying value + unpredictable market fluctuations
My question is, does it make sense to pay out a dividend to shareholders if the business has reached a point in maturity where they can’t easily allocate all of their free clash flow in a given period into a vector with obvious returns or should they always just hoard the cash? When is it wise and when is it wasteful to have $10b+ of excess cash on the balance sheet?
This question is only useful if you're the director of the company. As a minor shareholder, you have no control over that decision, and would better focus your energy on investment issues within your control.
Listen. Have you ever seen a business get bigger or more profitable?
That's what makes prices rise over the long term. You own a tiny slice of pie, but the pie gets bigger with time.
Thank you. More people need to hear this. A couple good things about dividends are that you are able to sell a partial share instead of a whole share and the company's handling of dividends can be a sign of how things are going or at least how they want to appear how things are going.
"A couple good things about dividends are that you are able to sell a partial share..." No, "you" are not selling that "partial share." The company decides when you sell, and thus also controling when you pay taxes on the earnings that already belong to you.
Also, if you really want to sell a partial share of a stock, several major brokerages will let you do that directly these days.
Dividends seem to be relevant in that they tend to be inferior to buy backs. Am I wrong?
They are equivalent without taxes and transaction costs (just buy it back yourself) and worse in the case that you have undeferred taxes owing on dividends. In theory, political winds could shift (buybacks recently became a bit of a boogeyman in financially illiterate circles) and it is possible that taxes could be introduced to make it even worse than dividends. I would like to think corporations would be smart enough to adjust strategies to bring money back to shareholders the best way possible.
@@geoffnaylor3734 I said that above mainly with taxes and transaction costs in mind. But with buybacks, investors will also naturally simulate a dividend that matches their spending needs by selling shares. Receiving an amount of cash determined without this in mind is an inconvenience.
So this is all under the implication that the stock price never rise? Because they can. And often have a tendency to do so over the long term.
Why does the price of a stock go up in the first place?