Free Dividend Fallacy--Why Dividends Don't Increase Your Wealth

Free Dividend Fallacy--Why Dividends Don't Increase Your Wealth
High dividend stocks are all the rage. With bond yields at historic lows, many tout the alleged benefits of stock dividends. What many fail to understand, however, is that dividends are not free. Dividends simply give back to investors what they already owned. In fact, the price of a stock, etf, or mutual fund is mechanically lowered by the exact amount of the dividend. A $1 dividend on a $100 stock will see the stock price lowered by the exchange to $99.
Low bond yields and interest rates cause some investors to move to high dividend paying stocks. This is particularly true for those in retirement. It scares us to sell shares to generate retirement income, particularly when the market is down. In this article we will cover the following concepts, all related to what is known as the Free Dividend Fallacy:
1. How stock dividends are fundamentally different than interest from bonds;
2. How dividends affect the price of a stock, ETF or mutual fund; and
3. Why Spending dividends in retirement does NOT protect us from sequence of returns risk
Resources mentioned in this video:
The Dividend Disconnect: poseidon01.ssrn.com/delivery....
An analysis of dividend-oriented equity strategies: www.vanguardcanada.ca/documen...
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4️⃣ Warren Buffett Portfolio: bit.ly/3pdI8mm
ABOUT ME
While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
I'm also the author of Retire Before Mom and Dad--The Simple Numbers Behind a Lifetime of Financial Freedom (amzn.to/3by10EE)
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DISCLAIMER: I am not a financial adviser. These videos are for educational purposes only. Investing of any kind involves risk. Your investment and other financial decisions are solely your responsibility. It is imperative that you conduct your own research and seek professional advice as necessary. I am merely sharing my opinions.
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[@Cwilly13ify]

Dividends don't increase your wealth, but investing in quality companies that pay them does

[@morganzoeclanthem2847]

Exactly.

[@linkbelt111]

Doesn’t re-invested dividends turning into additional shares increase your net worth? I have 1 stock that generally dividends me the equivalent of 50 shares, re-invested. Ya lost me….

[@ski999]

@@linkbelt111 Maybe another way to look at it: does a two for one stock split mean your net worth has increased? No. Why? Because if you own twice the shares that are now valued at half the price, your net worth is unchanged. A dividend payout works the same way, only with fractional numbers. Example: they give you a 1% dividend while reducing the share price 1%. You own more shares, but at a lower price.

[@mariobrown1533]

@@ski999 but you can use your dividends to dollar cost average down, so when it goes back up (Div stocks normally increase close to ex-dv date, just like the go down after ex-div date). So you can trade the excess for profit. I don't bank on divs, but I'm definitely not against them.

[@ski999]

@@mariobrown1533 Of course you can DRIP as a dollar cost in either direction. In a bull market it's up, in a bear it's down. You can also do that by making outright share purchases. Dividend stocks naturally attract increased interest on declaration day, but that's irrelevant to the price action of what happens with ex-dividend. ***Dividends DILUTE your share price*** More shares are created ex-dividend. So it may seem like there's a small rise in the share price, but it's for a mathematical reason. Everyone who DRIPs is getting more shares, so the per-share stock price tends to adjust upward to counter the loss in per-share-value. It balances out in the same way that share prices ALWAYS drop to adjust for the dividend payout. I love dividends. They're fun to track. But they're nothing more than repositioning your own money. Peace.

[@edgar_desouza]

Reinvesting dividends in good companies over the long-term does build wealth especially during down-markets when share prices are reduced and dividends buy more shares.

[@iwanchandra4877]

yes i agree sir...re invest deviden...at the same stock at lower price..for a long time...

[@vincef7487]

Exactly.👍🏽

[@iwanchandra4877]

it was compounding interest...😀

[@ivanbravomunoz1305]

Do "good companies" last and grow forever?

[@coconutsfor2963]

I live off my dividends for years now and as long as you diversify your portfolios and keep investing through good and bad cycles in great companies, you’ll be just fine .

[@rogueinvestor2375]

Do you manage your portfolio by yourself or have someone else manage it for you? Currently I manage my portfolio myself. I wonder if it's worth having a financial planner or a broker manage it for me.

[@coconutsfor2963]

@@rogueinvestor2375 my advice is to read and watch alot of videos on investing and over time your gaining the knowledge that financial planners have . Markets move differently every year but if you keep your research and knowledge while watching your risk management- you’ll be good.

[@mrbigglesworth375]

Good advice-- caution on financial planners. Many not all but many will not have the vested interest in your portfolio as you would. Unfortunately, financial literacy is lacking across the country and the "I have a guy" that does it for me is all too common.

[@Andrew21882]

Are you investing in single stocks or ETFs for income?

[@seinensenpai1787]

@@craig3613 There are growth and dividend stocks out there, two in one basically. You can have both without cutting your shares with the dividend. However, you lose the reinvestment opportunity to DRIP back into the shares if you live off your dividends. Growth is only half the equation.

[@miller1240]

I feel that you started with your conclusion and tried to select aspects of the dividend payout life cycle to support your argument rather than taking a holistic look at the value of dividend returns. One thing that needs to be considered is what is the alternative to receiving a dividend from the company. Is the company able to reinvest that capital and achieve a respectable IRR? In many cases, the answer is no. In these scenarios, it is better to return the capital to shareholder rather than eroding the returns from the core business.

[@irhumbled]

Absolutely. An investor should not prioritize dividends, they should prioritize total return. Dividend-paying companies tend to be less risky as they tend to be profitable to pay a dividend (looking at you Boeing, borrowing to pay a dividend).

[@kutykutyka]

That sounds like it defeats the purpose to put my money in a stock if they're not able to make a decent profit with it, and have to give my own money back to me to reinvest it somewhere else, and most of us have no clue how to do that ,when it's hard enough to find one investment that might give a decent 10 plus percent return :D Berkshire is starting to look better and better by the second :D

[@Andrew21882]

I think you may be right. In that case it’s probably not a bad idea to select a handful of solid individual dividend paying companies in addition to your portfolio which should be concentrated towards a total return capturing the entire stock market. And I also think it’s good to stay away from high yield covered call ETFs, because their high fees and monthly distributions are eroding capital appreciation.

[@REBELLIOUS513]

i dont argue with anyone anymore after the years of research before i put a dime into investing and what felt comfortable to me ...i just simply say.."dividend investing?..it isnt for everybody,just like when i say im focused on using wholelife insurance to exapnd my lil real estate portfolio..people sya im crazy..which is super offensive to me because its almost saying ..i never studied anything on where i place my money..im talking years before i purchased my 1st stock or property smh..my life is good so what i do isnt for everybody..some people like mixing ramen noodles with cat food ( canned tuna) Stay Dangerous!

[@wemustdissent]

Thats true. But you don't HAVE to invest in those companies. You can invest in companies that still have a solid foundation but are still in the process of active growth. I don't think his point is that those companies are foolish for issuing dividends. The point is more why prioritize those companies in your portfolio when instead you could prioritize growth balanced with bond yields?

[@dandan5817]

WOW !!! - I have been an avid investor since I was a kid and had no idea about this - I am almost embarrassed or mad at myself for not realizing this on my own - thank you very much for the education here. I do enjoy your videos. Dan

[@MarcPugh]

So with dividend investing you get to retain the amount of shares of your company and if you "drip" it buys it back at a lower price (win). You also didn't examine what happens when the market returns and you have retained the amount of shares you have in the company vs the non divided investor who has fewer shares. I think you are missing the boat. 75% of the SP500's growth 1980-2019 came from dividends.

[@MarcPugh]

@Jamie Walkerdine wouldn't it only be shared dilution if the company is creating more shares? If the user is dripping they are just buying shares on the open market.

[@ski999]

What Rob explained is not arguable, and yet people are arguing. BTW, DRIPs aren't discounted. A lower price? In fact, many companies historically charged to set to DRIPs. Best case scenario, DRIPs are a wash. Worst case, the company charges for turning them on/off (they are of course free at most brokerage firms these days), and you are incurring a forced taxable event if held in a taxable account. It's irrelevant how much an index has grown from dividends. The value of those companies would have grown exactly the same without paying dividends IF they were instead paying down debt, buying back shares, or expanding R&D. Dividends are just a tool of a mature company that's run out of ideas, to paraphrase Chamath Palihapitiya. PPCIAN's head would explode from this video, but it's accurate. Missed the boat? LOL Dude, calculators don't lie. It's all psychological. ExxonMobil slashed it's 401k in order to maintain its dividend last year. The rats would have jumped ship had they cut. ATT's greatest fear is how many shareholders will sell when the reduction comes. Hardcore dividend investors can lose 80% of their market cap value, but still be happy with a 1% div increase. It can appear cultish from the outside.

[@MarcPugh]

@@ski999 Qualified dividends paid are taxed at rates lower than the ordinary income tax rate-0% to 20%.1 Even during periods of recession, dividend stocks have historically shown growth. 75% of the returns from the S&P 500 from 1980 to 2019 came from dividends. While dividends may not outperform during a bull run over the long run, they do.

[@JohnSmith-hw3ef]

@Rob Berger, I think this video is a tad misleading in the sense that it is a one-sided view. You are looking at dividend payments after the declaration date. To be objective, you also need to examine the share price after dividends are declared. Companies pay dividends to redistribute profits to shareholders. Dividends are issued from a company’s retained earnings. After a stock/mutual fund goes ex-dividend, the share price typically drops by the amount of the dividend paid to reflect the fact that the new shareholders are not entitled to that payment. That said, there are other misconceptions about dividend stocks/mutual funds such as high dividend yield may not always be a good sign since the company is returning so much of its tax profits to investors rather than growing the company through additional investments.

[@ariefraiser140]

It's not misleading at all. The overall stock price is determine by many factors including cash on hand and reunvestment into the company. When a dividend is issued a company has reduced its asset versus a company that does not issue dividends and reinvest that cash. The stock price will reflect that cash the company paid out in dividends because it's no longer an asset found within the company.

[@robertarmer6060]

Well said ,

[@robertarmer6060]

John you are spot on look at AT&T used to have a high dividend yield huge amount of debt and never grew.

[@christiancenteno9724]

@@ariefraiser140 that is not what he said on the video

[@morganzoeclanthem2847]

@@ariefraiser140 Lol, that does not change the value of the company. It lowers the cash on hand but the future value of the company does not change, unless your balance sheet is shit.

[@same.7939]

This is a pretty important topic Rob. Thanks! I don’t think this video is necessarily a case against dividend stock investing, I actually see it as a case against *blind* dividend investing, or “chasing the yield.” If one invests in moderately or low dividend-paying *growth* companies (think MSFT), then one doesn’t have to worry about the watchouts that you’ve rightly pointed out. Why? Because when I turn my DRIP on for MSFT, I’m picking up more of those shares that have high future growth potential. Yes, DRIP can be a zero sum game that day or week you reinvested, but if this is a quality growing company, you’re good. This is the dividend investing done right - invest in high-quality growth companies that pay some dividend today and don’t chase high yield!

[@lbowsk]

Bingo. Dividend Aristocrats for example. Keep buying with those D's reinvested.

[@miri9600]

Even I knew about almost everything you said, you put it in so simple and logic way making me rethink my heavy dividend portfolio allocation. All that matters is total return.

[@loudoggmo]

Bologna. The government forces REIT’s to pay. If you own real estate you know how that works

[@kurdi98k]

Appreciate the video and I agree with the concept. However, I thought I'd introduce VIG's strong distribution history to support an argument that could be made about stability during bad times. The only year it cut its dividend was in 2009, following the great financial crisis in which we had almost lost our banking system. In 2008 it paid an annual amount of $1.026 and in 2009 it paid $0.979 . That is less than a 5% cut during one of the most difficult economic times in the history of the US.

[@MrKennypless]

Hello and thanks for the analysis. You noted quite often the “value” of the stock or the “price” of the stock (or ETF or mutual fund) goes down when a dividend is paid. I believe what goes down is the book value per share, often held to be meaningless. The book value per share has little if any connection to the “price”of the stock. When the price of a stock increases, the investor has u realized capital appreciation. When the investor receives a dividend, he or she realizes income. The sum of capital appreciation and income represents total return and is considered by many to be meaningful in evaluation an investment

[@mavissmith3]

Agree. Dividends reduce the price of the stock or fund, but just momentarily. The next trading day the price lands where it lands according to the free will of the market. I don’t sweat this and I know Mr. Berger doesn’t either. 😊

[@ariefraiser140]

Not true. When a company pays a dividend you've permanently reduced the price of the stock. Even if the next day it fluctuates up it will still be a lower stock value than if a dividend were not issued. There is no free lunch here. Also if you look at any of the high growth stocks you will see most issue little to no dividends. What they do is reinvest the money back into the company hence their higher stock price. Meanwhile stocks that issue relatively high dividends like AT&T show lower stock growth.

[@mavissmith3]

@@ariefraiser140 - “you've permanently reduced the price of the stock.” is not an accurate statement. I agree with you on the value impact, but price and value are two different things.

[@ariefraiser140]

@@mavissmith3 Would it make you feel better if I stated you've permanently reduced the potential value of the stock? The point is if the company is reducing its assets by paying out a dividend of $2 a share your stock is always going to be stock price + stock increase/decrease - $2. Even if the next day the stock goes up 20% it will still be $2 less than if a dividend were not issued.

[@mavissmith3]

@@ariefraiser140 - No need to be patronizing. Your good point is well thought out and well made. All good.

[@ariefraiser140]

@@mavissmith3 My apologies if I came off as patronizing.

[@Lagunabeachbikini]

Another thing I will point out is that with each dividend paid, Yahoo adjusts all the Adjusted Close numbers down by the latest dividend all the way back to the beginning of time. E.g. for Nov 20 , 2010, Close = 10.95 which is the actual close, but Adj Close = 9.26, a difference of $1.69, even though only a 0.01 dividend was paid on Dec 01, 2010 Adj Close is only a number that Yahoo calculates to adjust for dividends, splits, and capital gain distributions, to facilitate calculating return from one date to another date. It is not the price of any actual transaction.

[@michaelmartin9985]

Hi Rob, Great video (enjoy your other videos as well). I have the same view about dividends. I have discussions with others about this topic and most just do not understand or do not want to admit it. A few other points about dividends. I look at dividends as a withdrawal rate on my capital that is pre-determined by the company paying the dividend (I much rather have my own withdrawal rate). Also, most like to argue that the price adjustment somehow magically comes back immediately to make up the loss in value as a result of the dividend adjustment. My argument back is if that were true, then I could do the following: There are 250 trading days per year. I could just find a stock for each trading day of the year and capture the dividend. In other words, I could just roll my capital from stock to stock and capture the dividend for 250 days a year. In this scenario, if the average yield on a stock is 3%, then in theory I could make roughly 180% in profits (yes, $1 becomes $2.80) each year. However, dividend capture strategies have mixed results at best proving that the price does not make up for the price adjustment for the dividend.

[@ianwhitehead7247]

This was an utterly understandable and common sense way to describe pros and cons of capital gains vs dividends. Thanks!!

[@dotunfamakinwa]

I personally have a mix. Truth be told, you have mature businesses that are not in aggressive growth mode. They need to do something with retained earnings and thus pay shareholders a portion of retained earnings in the form of dividends. I hold dividend paying stocks with no intent to ever sell. It will allow me to retire early with dividends that provide a fairly stable cash flow. I also have my 401k, IRA and other investment vehicles - Dividend paying stocks is just one of the tools for me.

[@mrrscta]

I tell this to my friends for years and they still do not get the idea.

[@stephenmorin8554]

Are the monthly dividends paid by bond etfs and mutual funds in the same category as dividends paid by stocks, stock etfs, and stock mutual funds?

[@iamkerenlouise]

This is excellent information and a very different perspective on the topic. I had no idea regarding this fallacy regarding dividends. Thank you Sir for another great video.

[@brianholt7733]

Rob, I noticed that the majority of the adjusted close was different than the close price for the dates prior to your example dividend date. Do you have any insight why? What other factors effect "adjusted close"? Thank You for content!

[@turbofun998]

In the example you used, the div portfolio could improve their position easily by re-investing the div payout at the lower price. This would both increase their future payouts and lower their average share cost. This scenario seems highly favourable to the div portfolio.

[@rob_berger]

There's no question that if you aren't in retirement and can reinvest the dividend, you should. But that doesn't make you better off than if there were no dividend in the first place (unless of course management did something stupid with the cash). It's true that by reinvesting the dividend you have more shares, but the shares are now worth less b/c of the dividend. How much less? By the exact amount of the dividend.

[@elsemuller2460]

@@rob_berger But still: if you reinvest dividends even through fractional shares during declining markets doesn't that help you later - since you have more shares to profit from recovery? Does'nt that give you advantage in returns compared to the investor who has to reduce his amount of shares through withdrawels ?

[@jamesdarnell8568]

@@rob_berger You are assuming that the value of a stock is tied to the value of the company. It is not. Prices go up and prices go down and we are never sure of the reasons on any given day. Mr. Market is quite out of his mind many days. It seems to me rather than the current value of the company, the price is determined by everybody's estimate of future earnings. And today's dividend will have no impact on next year's earnings.

[@ryanconnolly6703]

@@elsemuller2460No, because there’s no difference between owning 11% of a company worth $100, and owning 10% of a company worth $110. That’s all that’s happening when a dividend is paid. You may own more shares, but it’s of a cheaper company; a dividend doesn’t come from nowhere.

[@bhenderson2137]

Nathan Pronk....you are correct in how you view this.

[@lindapatrick2676]

Don’t know if you’ll ever see this question cause it’s an older video, however in response to new to me info re dividends my question is: Is it better not to reinvest dividends back into individual stocks in a taxable account or does it matter? Thanks!

[@shprabin]

Rob, Thank you. I enjoyed your video. I think you gave more emphasis on the theory that the companies you invested in, will always be profitable and use the earnings for growth and further increase their value and hence your investment return. That's the best-case scenario for growth-based investment. If companies payout some earnings to investors in form of dividends, Investors can also make better use of the dividends for diversifying their investments. Hence minimizing the risk rather than risking the growth companies to re-invest all the company's earnings. Thank you again for some insights on tax thing.

[@44_max3]

Interesting and enlightening video, thank you! If folks are still enamored with ‘aristocrat companies’, that’s all well and good, but then you’re talking about stock-picking, which brings some element of risk into the equation, however small. Also, in the scenario you laid out, you were extremely generous with the dividend payout being exactly the same in a down market.

[@jimwheeler7277]

I've watched lots of your videos. They're all great. But this video was the most helpful, well articulated video yet! Thank you.

[@RafamSales]

As a beginner in investing I would like to thank you very much for the explanation and the examples. It is really easy to understand the way you explain things. The dividend hype and fake assumptions I had are more in control now and I am thankful I came across with this video, because I think the best way for anyone to invest is check the fact instead of letting emotions decide for you.

[@tommyforet8069]

Thanks impressive info that I didn't know. I am now a subscriber.

[@MyUnsecretIdentity]

I'm glad i found your channel, it's good info to point out since most people (including me) would just see dividends and interest earned as the same thing. Never would've found that significant detail about dividends payouts. As you say, it doesn't make dividend stocks bad, it's just details to be aware of.

[@accountlogin7684]

Non sono molto bravo in inglese ma vorrei comunque esprimere il mio pensiero a riguardo. Il contenuto che proponi è molto interessante, ci permette di vedere gli investimenti da un altro punto di vista. Ma ho una domanda sugli etf bond: se si dovesse ricevere ed utilizzare il dividendo dei bond Come fonte di reddito, il bond stesso non avrebbe alcuna crescita. È corretto?

[@donnafong2267]

Wow ….I never thought of it that way and I’ve been an investor since the 80’s! Good video! Keep up the good work!

[@brianlooksaround6125]

Thank you! I have been searching for this explanation for a long time. You’re the only one who has made it clear to me. Don’t know why it took me so long to grasp the concepts.

[@alessandrosavino1431]

In your portfolio examples, a difference I see is that the "dividend" portfolio would lower the cost basis per share, while the "non-dividend" portfolio would stay at the same cost basis. Wouldn't a lower cost basis put you in a better position for slightly higher returns in the long run? Admittedly, a nominal cost drop on a given share would slightly increase the appeal to buyers (moving, e.g., P/E) and increase the chances that the asset would recoup the loss. If that were the case, moving the money from stock valuation to dividend would have worked in your favour. Is there any obvious flaw in this argument?

[@365vacay]

Many companies have stopped paying dividends since the pandemic, too.

[@chrisheavens2812]

Hi Rob Even as a British investor I enjoy your videos. I would query your example of dividend v non dividend regarding sequence of returns risk because surely the point is that the dividend investor ends up with the same number of shares( even though they have lost more value) but importantly these shares can all then recover in value as the market eventually goes up.

[@Mrdest211]

If the share price regains 10%, it doesn't matter how many shares you have, that 10% applies to the total value of the position. You could have 10 shares or 100, your recovery is 10%.

[@teresasinchak8121]

Thanks, Rob, for enlightening me on the difference between the tax outcomes of dividend income and selling stock shares for a profit to create income for retirees. I never thought to compare the two. Receiving income sounds easier than selling stock but as you explain it, dividends create more taxes. Do you have a video on the best way to sell stocks in retirement?

[@wemustdissent]

So if you are going off the 4% rule for withdrawls in retrirement...should you be subtracting any dividend yield from that 4% to adjust? Otherwise wouldn't say with a 2% dividiend yield and 4% withdrawl you technically be withdrawing 6% at that point?

[@dougb8207]

If stocks are held over long periods of time, in many cases the dividend percentages slowly increase. So one may, for example start with a 1% dividend, and end up years later with a 4% dividend, including upon the increases in numbers of shares if the dividends were reinvested. Of course, dividends can decrease also. Nothing's certain; I keep some dividend stocks and some without for growth. Sometimes I trade one dividend stock for another that I think will perform better while still providing a decent dividend. It's a moving target. I think with dividend stocks, one hope their share price recovers in a reasonable amount of time, say 1 to 3 weeks. I guess than one might have to consider, well maybe the growth stock increased that much also? I've heard over decades, dividends contribute about 40% of S&P earnings. Interesting and thought-provoking discussion.

[@sbkpilot1]

I've backtested several high dividend strategies vs just investing in something like VTSAX and the high dividend strategy always ended up performing poorly over the long term. The high dividends come at the expense of growth and that can be a huge drag. So, yes, it's a huge myth that continues to live on due to a fundamental misunderstanding of how dividends work. Thanks for covering this topic.

[@ADK_Adventures]

Yeah, high dividend strategy isn't for people who want growth, but for people who are looking for income, now. I honestly don't care about principal growth at all in this strategy, just hopeful that it remains flat over time so I can have a constant dividend income stream.

[@marklydon435]

Who says anything about high dividends, you back test with dividend growth companies and take a look at those that increase their dividends year on year by 10 - 20%. We have companies in the UK that have done this for over 20 years. Those original 3% yields are now 20 - 30%.

[@fendermon]

@@marklydon435 Great comment. The purchase date yield and the later yield are two different animals.

[@tomj528]

I've been researching how to simplify our investments, generate income (when the time comes) and still remain tax free in retirement with another 20 years to go to full retirement age. While we're firmly in the 12% bracket so we have a 0% LTCG/QD rate, I'm also in the midst of a long term plan to convert ALL of our tax deferred investment to our Roth IRA account slowly over time and under taxable limits. Unfortunately, dividends interfere with this plan since I'm using the form 8880 retirement savers credit and I'd lose that with excessive dividend income. I also don't like how dividends greatly reduce or even eliminate capital appreciation. Currently I'm thinking that a S&P 500 index fund for our taxable investments with it's low dividend yield and reinvesting the dividends for now and then after I'm done with the Roth conversions re-evaluating. In retirement we'd have Social Security, some taxable interest, I could take the dividend income from the Index funds rather than re-investing it (if needed) and then take as much or as little (or none) from our Roth IRA accounts as we wish while still remaining completely tax free, even when there's only one of us left. I like the idea of still enjoying some capital appreciation while getting a little dividend income when/if needed that's easily "activated". No RMDs to deal with, ultimate flexibility and even some "headroom" in our tax bracket to "step up" the cost basis of our taxable investments just in case they change the LTCG/QD rates or if we need to sell a large portion of our taxable holdings, above our tax-free limits. It's a complex issue but with far-sighted tax planning it's possible to move mountains and find the best solutions.

[@kevinbarrett3706]

This vidoe is foolishness. Dividend stocks tend to have lower PE Ratios. Paying out a portion of earnings to shareholders. Most Growth stocks have high PE Rations and no earnings

[@rob_berger]

Kevin, absolutely true. Of course, as we've seen, a lower PE ratio doesn't always equate to better performance. Certainly we should look to buy companies at below market values, but that's not because the pay a dividend. I bought Apple before it began paying a dividend b/c it was a value stock at the time (many years ago).

[@ericjuli6576]

So use a PE ratio based inventment plan…. Not dividend centric

[@rob_berger]

@@ericjuli6576 The PE is certainly a factor I consider when investing in individual stocks, but it's only one of many.

[@michaeld4090]

I have looked at 100 charts comparing dividend funds verse growth funds. Dividend funds perform at least 10% worse. It is not worth the extra 1% 2% dividend.

[@dontmarkettomeimpoor2856]

how does a company with no earnings have a price to earnings ratio?

[@stevenobrien595]

Another stellar video Rob. This subject reminds me of when the so called Great Oz was exposed! So many tricks of the trade that the average investor is lead to believe on investing and supposedly so difficult to do and be successful by yourself. "Knowledge is the key."

[@biskit7]

Holy smokes.... all these years studying investing and i still learned something new! Thanks...

[@jamisonm5854]

I agree in that one shouldn't make a decision on buying a stock solely based on its dividend. However, most good companies worth owning pay a dividend, or will likely eventually pay a dividend, because they are companies that are earning cash profits to such an extent that they are giving those profits to shareholders when it makes sense to do so. When buying stocks, the criteria used should be centered around the quality of the business and its management.

[@stevenmorris2736]

So how does this compare to Reit dividend returns? Those are dividends too right?

[@rob_berger]

Yes, although in a taxable account they are taxed as ordinary income in most cases, which is why I own REITs in retirement accounts.

[@michaelwescott8064]

So the dividends on bond etf like BND is that an interest payment?

[@jonathonpriest]

Companies have a choice: reinvest profits (stock price goes up) or pay dividends (stock price stays the same - or dips by a trivial amount). Either way, wealth is being generated. You either get that wealth generation in the form of higher stock or in the form of a dividend, but the end result for the investor is the same.

[@carlhammill5774]

The main reason to invest with Company paying dividends is not the dividends themselves but that the Company is strong enough financially to do so. There is some trade-off of future growth by paying dividends but entire objective of investments is to reduce your risk. Your risk are lower by investing with Companies with strong free cash flow, consistent sales growth & dividends.

[@trulyanonymous7436]

Thank you very much for making this video and highlighting this very important aspect. I heard the stories and saw the videos of people living off their dividend portfolios. I was on the fence about considering the same until I watched this. I'm now content to just carry on with my total US & total international funds

[@eddenoy321]

Very well stated Rob. Sad that so many equate interest with dividends.

[@philmarsh7723]

Nice work and explanation! Thanks! Kind of reminds me conservation of energy and thermodynamics. There is no free lunch! Moreover, the investor pays taxes on dividends and no taxes on stock price increases - until they sell of course. Dividends can go down too - so much for "security".

[@blakegirouxphotography]

Myself I like dividend growth investing. Have a portfolio with both dividends and growth stocks and dividend growth stocks just so I can add to positions with good companies and still obtain that growth I’ve found that’s helped me a lot

[@briankelly7632]

Hi Rob. Love your videos. With regard to your examples of share price decreases on the ex-dividend date, is there data that shows anything about share price adjustments *after* dividend distributions? In other words, does the dividend amount *remain* reflected in the share price or do investors readjust the price based on what they see as the inherent value of the company (investors may not think the inherent value of the company has been reduced precisely by the amount of the distributed dividend)? Of course the dividend is a distribution of capital so there's that much less cash on the company's books, but there's more to a company's value than simply that. Just wondering if you know of any data on share price adjustments immediately-post dividend distribution. Thanks.

[@suprithAnCom]

I have the same question

[@mabuhayproductionltd3627]

the company should earn new money, so usaly the stock price will recover (also because stock prices increase on average 8-8,5% a year), if the company pays out 100% of the years profit?, then the stock price should be at least the same next year (same date before X-day)

[@tulsatom4307]

Appreciated this Tutorial; T-Shirt: Nice fitting - what Brand?

[@A528107]

The example you gave was correct, however you didn't show what would happen if you reinvested the dividends instead of spending them. Your long-term returns are enhanced because of the power of compounding. Your dividends buy more shares, which increases your dividend the next time, which lets you buy even more shares, and so on.The whole point of dividend investing.

[@rob_berger]

No question you should reinvest the dividends if you don't need the money. The point, however, is that reinvesting the dividends doesn't make you any better off compared to a company that doesn't pay the dividend in the first place, all things being equal.

[@A528107]

@@rob_berger You're talking about a single quarter's worth of dividends, but you're not taking into account reinvesting dividends in more shares thereby increasing dividends over long periods. Especially in a bear market where the dividend yield becomes larger. Investors who held onto their stocks after the '29 crash recovered much more quickly because of dividends which became a large part of their total return than share price alone.

[@rob_berger]

@@A528107 I don't think that changes things. You are absolutely right that reinvesting dividends is critical when you are a long-term investor (i.e., not spending them in retirement). But dividends in and of themselves don't generate more wealth. All other things being equal, we aren't better off than if the company had never paid the dividend in the first place (so long as they didn't do anything silly with the capital). Berkshire is a perfect example. No dividends yet arguably one of the best examples of compound returns.

[@elsemuller2460]

@@rob_berger But Warren Buffett likes dividend payments from other companies. At least thats what i read. Why is that ?

[@A528107]

@@rob_berger According to Wharton prof Jeremy Siegel, over the long term, 97% of after-inflation accumulation from stocks comes from reinvesting dividends. 3% from cap gains. The young people I see on youtube researching, buying and holding solid dividend stocks, increasing dividends and shares over time will be successful. If Warren Buffett was the typical manager rather than a rare one, I might agree with you, Rob. All too frequently, companies with large cash balances do not deploy it well and not in shareholders interest. Very often, a commitment to pay earnings back to shareholders via dividends reduces the possibility for management to squander shareholder wealth. BRK focuses on buying companies with large cash flows. Typically dividend paying companies and usually not those that consume earnings for more growth.

[@dominicbier1384]

Dividends are essentially forced selling which is bad in a bear market or when the market is down and gives people less control on when they are taxed on their investments.

[@davidp252]

The adjusted closing price is simply a tool that people can use if they choose for analysis reasons. It is not the value of the last transaction on the market that day, which is truly the market-driven closing price. The company did not reach into your portfolio account and pay you with your own money. Instead, they reached into the company's cash reserves and chose to pay you instead of using it for something else. They did not affect their own ability to produce free cash flow, which is what the shareholder is arguably holding.

[@AlanBram]

I would argue it's not quite true that the owner of the dividend fund has no control: she can choose to reinvest some or all of the dividend. That provides approximately the equivalent of the non-dividend fund holder's ability to decide on the timing and amount of selling shares. I do agree, though, that the dividend fund holder ends up with less control over the tax aspect. That said, thanks for another great video: very clear and useful!

[@earlwilliams5473]

I noticed that the day after the divided date the day starts off lower the the close of the prior day as well.

[@richardcarlin1332]

I'm living on dividends and the beauty is the number of shares I own has not decreased. I see dividends like water in a pot. The water is the equivalent of a stock price. As a company earns money, the water in the pot increases. When the company distributes some of those earnings, the water in the pot temporarily decreases. The water in the pot will refill as the company earns more money. As long as you don't sell all of the water, and the company continues to earn money, you will never run out of money if you just withdraw the dividend. If you start withdrawing entire shares, you could run out of money if the stock market drops too much and you sold too many shares.

[@jonnelson9760]

I will add something from my own experience. I once owned a company that paid a dividend. They were not doing well financially so the dividend was at 13% yield because of it. I thought ok it’s a big risk but I will take it until they turn things around and even if they reduced their dividend it would still be an acceptable amount. Well a new CEO came on board and eliminated the dividend. I sold right away @ $6.30 per share. Since then the price crashed and it’s now less than $1.00. In this case it seems the dividend actually increased the share price. Removing it should have increased the price if things are as you say.

[@jannorell6049]

Thanks for a very clear explanation of dividend stocks. I own a mix of dividend stocks, value stocks and a global index fund. I know that I wont get a super high value return since the dividend companys are mature and therefore don't grow in size. But I also think that my risk level is lower since these companys know what they are doing and how to make money. My comment is when the market turns up again after a crash, isn't it then an advantage to still own more stocks?

[@ArmageddonIsHere]

Please check your assumption that companies "know what they are doing and are therefore safe investments" against the following very large dividend paying companies: 1. JC Penney 2. Kodak 3. General Motors 4. RadioShack 5. Barnes and Noble to name just a few.

[@dustinjones8887]

Very informative! Thanks. fyi, this segment is much more articulated than your other segment on dividends. It may be just me and my comprehension.

[@Jay1971lion]

Portfolio to analyze… 20% FLCSX 45% FSKAX 15% FSPSX 5% FIKCX 8% FXNAX 7% FIQTX. Question, why would Warren Buffet select 10 short term gov versus total bond fund? Thanks!!!

[@landlordnation]

I like your explanation but I have one question. Let's say the value of my stock went from $50.00 to $45.00 dollars after the dividend came out and 1 week later that stock was back up to $50.00 wouldn't you have to say that the dividend in now pure profit?

[@antonpetkoff]

Thank you for explaining how dividends affect stock price, more specifically mentioning "adjusted closing price". However, IMHO your thesis about Non-Dividend Portfolio being a better performer than a Dividend Portfolio for retirement isn't well argumented. Here is why: If we continue to sell shares every year from the Non-Dividend Portfolio to get $40k, then after some years (20+) we will have 0 shares to sell leaving us without any retirement. While the Dividend Portfolio maintains the same number of shares (if we don't touch it) and it can continue doing that for much longer. Not to mention that when you are forced to sell shares in a bear market at a loss you are essentially cutting a branch from the tree that bears your retirement fruit, i.e. during a bear market with a -20% downturn you would be forced to sell even more shares, leaving you with less shares and a shorter lifespan of you portfolio.

[@chrisp3913]

I wonder how many people would have answered differently now than a year ago. Love my dividends in this economy

[@Pbuilder]

Does anyone know a good financial channel?

[@earlwilliams5473]

Thank you. I was about to go 100% SCHD because I too thought that dividends where extra money. Back to the drawing board.

[@eddenoy321]

You really learned something.

[@jtsdeals]

In bear markets growth (non-dividend) stocks usually lose much more value than value stocks. So while theoretically the dividend vs non-dividend case may not be different, in reality it's more complicated. The core idea here that paying dividends is basically the same as selling long term gains is important to be aware of, it's true that they are not "free."

[@obidamnkenobi]

But growth also goes up more in good times than value. And there is more good times than bad times.

[@DoomLegion83]

This Video should be named: If you are a Dividend-Investor, don't fall for chasing highest yields.

[@tlowensjr]

If any company discontinues dividend payments, there will be new nominees for the board of directors. There are exceptions to discontinue the dividends and most investors align with those particular exceptions. But a company sitting on large sum of money and all objectives are fully funded, investors will start applying pressure.

[@AlvaSudden]

19:25 "I heard dividends are, like, the BOMB." 🤣🤣🤣 But seriously, once I bought a super high-dividend REIT. It was a horrible experience since the share price went continually down. Now I have some idea what was happening.

[@HezekiahDomowski]

This is great! I figured this out on my own, but this video would have saved me a lot of time! Listening to Warren Buffet will help in this area. However, it is worth noting that so many traders ignore dividends, that "dividend capture" strategies do work, but they are risky because you can't find a good dividend company every day, plus taxes.

[@martyrosa5327]

All of Warren Buffet's investments pay dividends.

[@DavS827]

I had *no idea* about this! Thank you!

[@ynothnaitaneneb7113]

Direct quotes from Fidelity Dividends have accounted for 40% of stock market returns since 1930 and 54% during decades when inflation has been high1. When inflation has been high, the stocks that have increased their dividends the most have outperformed the overall market. Dividend payments may help make a stock's total return less volatile.

[@frankcelio5305]

Rob: The small reduction in share price due to dividends is only temporary . Unlike your bank account analogy where you permanently lost 100 dollars, the small reduction in share price will be quickly revalued by the market if the company is healthy. The investor will then have more shares or more cash in hand .

[@rob_berger]

Frank, that's certainly true in the short term. Just about anything can move the market. But over the long-term, I see it differently. A company can't give away billions in dividends each quarter without affecting its value. Sure, if it's a strong business, other factors will cause it to continue to grow. But dividends taken out do reduce its value, IMO.

[@hsinglu]

@@rob_berger Great video, Rob. You are definitely one of the smartest KZbinrs on the topic of investment. But I do sort of see Frank’s point. Let’s presume that we are not in an economic downturn, unlike the example in your video, then it seems like the price per share usually rebounds after a couple days pass the ex dividend date. That’s what I saw based on the data presented in the video. If we were to take a purely data driven approach, I wonder if we will see this quick price rebound effect for most dividend funds? Maybe that could be another video! 😉

[@pigsgobroke9889]

@@hsinglu Jerry we're in a bull market

[@michaelfenell3602]

@@hsinglu Economic downturn?

[@irhumbled]

@@hsinglu Most stocks rebound after a drop regardless of a dividend. Doubt the rebound is anything other than that.

[@marklydon435]

You are incorrect, if you by company that grows its divided year on year you initial 4% yield will increase year on year. Look at Mr Buffet, he is getting a 60% plus dividend on many of his original share purchases and that's before you factor in the capital appreciation. You are thinking short team as each dividend is paid, yes the share price drops after the ex div date closes. But you failed to take into account the normal share rise leading into the ex div date, plus the higher than average likely hood that the price retraces in the days that follow. Plus you still get paid when markets go down which cushions the capital hits you take. Another plus is you can take an increasing dividend throughout retirement and not have to sell a single share when the market could be down a lot to fund your life.

[@MrKevinwg]

The thing that he leaves out is when the company declares the next dividend, the share price will go back up by the amount. So his example of above is not completely correct. Also, up to $41,675 of qualified dividends for single filers is tax exempt at the federal level and double if married.

[@martinz5851]

Many thanks Rob. Very helpful. What if I wanted to produce income not relying on dividend? Sell stocks? - Can you explain what alternative options there are if dividends are not the solution to regular income from investments? Thank you.

[@eddenoy321]

There are 3 main safe options : Annuities, Treasuries, and CD's ....IF you are willing to accept low but stable returns. All major online brokers and banks have them. Do your homework if you want to avoid market risk.

[@SuperFEQMA]

This is such a thorough analysis that cuts through all of the emotion to highlight what dividends are, what they can do, and what they can’t do. I wish I would have watched this before I watched hours of pro-dividend strategy videos from other channels. Well done!

[@johnglatt3627]

Rob, my brain hurts with your whiteboard drawings BUT, it makes complete sense. Thanks for this.

[@normanwei529]

Thanks very much this is first time im hearing this and it changes my mind on dividends by quite a bit

[@ceciliajalmasco872]

Thank you Rob, I have been really learning to be more critical of investments because of you! I am a big fan of dividend investing (even as I am not yet retired) and re-investing it to gain more shares... question: does your video apply to REITS? Thanks again.

[@chirsbowman8041]

Great information!--a very astute and important observation; I would only add that many companies offer a discounted share price when one enrolls in their DRIP program, to perhaps help offset this devaluation cost. For myself, I would prefer to have more shares heading back up and into a bull market era.

[@mgcarr61camaro91]

So where & how do i replace my dividend paying stocks ??and generate the same return to live off each month !???

[@junsilver650]

Are you sure its the right way to go?

[@jayk2k31]

I'm glad you explained that to me.

[@thetradersam6157]

well!! I have used my DIV's to purchase and diversify my portfolio, and my wealth have grown quite substantially...

[@matthewharrigan3568]

I think a dividend is similar to a stock split with a forced sale. A 5% dividend is like getting 21 shares for every 20 you have. Then selling that share. Then paying tax. Then rebuying that share if reinvesting dividends.

[@Random-yq1wu]

You dont pay taxes on stock split.

[@matthewharrigan3568]

@@Random-yq1wu you pay tax when you sell

[@mabuhayproductionltd3627]

@@matthewharrigan3568 No, not all

[@matthewharrigan3568]

@@mabuhayproductionltd3627 what is the difference?

[@kylemiller1390]

Discounting shares by the dividend price isn't the end of the world when you consider the amount of reinvesting dividends have caused. I know it's been said but the growth of the s&p 500 is largely due to reinvested dividends. Honestly the idea that a company is transparent enough to subtract the loss of assets to their stock price is something that causes respect and is one of the reasons why great investors like Ben Graham have advized against the average investor buying companies that have not paid a dividend for atleast 10 years. He also specifically warned against growth stocks that pay no dividends because of lack of transparency and disconnect between price and earnings (look at tesla with a p/e ratio of over 600). You may be specifically worried about their investment paying them for "free" but there is a reason companies strive to pay dividends. It leads to more long term holding of stocks, better respect from investors, and more reinvestment into the company driving prices higher. In this respect the dividend causes the price to return to its previous levels meaning that for those who are retired and living off dividends it is essentially free money. I do agree that in a market crash dividends can cause stock prices to decrease faster, but a large disconnect between price and earnings like that which is found in growth stocks that don't pay dividends will go down even faster in a crash than a stock that has a quarterly discount that is ussually paid for by reinvestment... overall if there were a perfect investment strategy everyone would do it... There is always the question of opportunity cost when investing and when running a company on the stock market, I don't blame any one on KZbin for making a video that is misleading, but I do think it is important to remember people will make decisions based off of information you present so when you make finance videos it's good to present both sides as possible options, unless one is obviously terrible. Also people get emotional if you tell them that they have been investing wrong for a long time, as evidenced by this comment section hahaha.

[@charlesbyrne71]

Even worse on taxed dividends is that both the company and the investor pay taxes on dividends.

[@jeremysmith3142]

The S/P price index w negative 24% from 2000- 2010. The S/P price index minus dividends accounts for 40% of the S/P return over an average rolling 10 year period

[@caseyhartman7094]

Dividends are part of the total return. In your scenario, the dividend investor is in a better position because he or she can reinvest all or some of the dividends at a lower share price that will increase yield on cost. Share price dips from dividend payouts are only temporary and then resume the normal market volatility. When creating a dividend portfolio, dividend aristocrats and kings continued their dividends in the great recession and last year during the shutdown.

[@TheBoringLameInvestor]

Bingo. He doesn’t understand compound interest. Dividends are not stagnant. High quality companies constantly grow the dividend. You think Warren Buffett is losing sleep over a reduction of share price from his $300 million dollar quarterly dividends from Coke?

[@Random-yq1wu]

You pay taxes on every dividends distribution.

[@caseyhartman7094]

@@Random-yq1wu Not if it's in a tax-advantaged account.

[@bekind2047]

@@caseyhartman7094 for example? I am seriously interested.

[@jimlang7461]

@@bekind2047 for example a Roth IRA

[@Mr.Mister96]

What about the fact that dividends allow you to purchase more shares and thus have more votes whereas if you were to sell share to create your own dividend your amount of shares would decrease and you'd have less votes in the company

[@ShamileII]

Very interesting Rob. You know way more than I do but after the dividend is paid, the amount is replenished by earnings. In the savings example, the amount never goes back up to 100% because that's all you have...but the dividends are created by earnings. Please show me where I'm missing something. BTW, dividend growth investor here.

[@mrbigglesworth375]

You are so correct! Thanks for sharing! I don't know where the motivation to tarnish dividends is coming from? Its suspect.

[@alexgrant11]

Thank you for sharing your knowledge Rob.

[@hummerchine]

HUGELY important video! I’ve been investing and studying investing for decades, yet I only recently learned this important fact. Nobody talks about it, I honestly think most “experts” don’t even know. I also recently discovered your KZbin channel, GREAT JOB!!!

[@ramrod2298]

Great video! I was thinking of going all in on SCHD but this explanation totally changed my mind.

[@unpopularopinion149]

I mean a 10% YOY return is still a good reason to invest in SCHD. The whole point is to not just chase a yield.

[@fendermon]

To my understanding, most stock pickers could only dream of keeping up with SCHD. I would sleep good all in it.

[@michaelswami]

You improperly conflate price and value.

[@Pdub_Productions]

The stock market does not set prices based on the NAV of the stock. It is based on sentiment and expected future returns of the company. Most of what you do is great, but this makes me question your understanding on how stocks are priced