Is There a Downside to Dividend Investing?

[@jeremychua76]

I'm mostly a dividend investor, and understand this, but it's fantastic that you have explained all this in a simple-to-understand video for beginner investors I discuss this with.

[@milisha98]

I'm a dividend investor and love your content, Tracy. But as others have pointed out, the biggest issue is dividends come from the share price on ex-dividend date. And good companies have a return on employed capital >20% - a much better use of money than paying investors dividends. And finally, dividend stocks tend to have higher price to earning ratios - i.e. less bang for your buck. And despite all this I remain a dividend investor. Imagine you need $1000 to live off, and so you sell 10 shares of $100 in a growth stock. If there's a recession and that stock falls to $50, you need to sell 20 shares to get your $1000. But when the recession ends, you have fewer shares - less capital working for you - so less compounding effect especially over a long period of time (and most people live for 20-30 years in retirement). And this is actually how some pension funds have run out of money. Compare that to a dividend investor, where I don't lose a single share ex-dividend date. And Dividend stocks are seen as defensive assets - and dividends rarely drop as quickly as prices. And due to their high price to earnings ratios tend to hold their values far better during recession even if you are forced to sell.

[@dadinvestor]

For me (an accumulator who doesnt need the income) the downsides are missing out on growth. Case in point is that VHY total return is only 3.25% this calendar year whilst IVV or IOO are around 16%

[@uberboiz]

Comparing VHY to IVV / IOO (especially on a single year basis) to make a point against dividend investing is rather misguided IMO. Any informed investor (whether they favour income, capital growth or both) wouldn't just blindly chase the highest dividend yielding shares, which is what VHY is trying to achieve as its objective is to track FTSE Australia High Dividend Yield Index. A more meaningful comparison would be the 'total return' or 'accumulation' indices (which takes into account both price growth and dividends) of say ASX 200 vs S&P 500 over a number of years.

[@dadinvestor]

As a dividend investor though you're chasing high dividend yields though, aren't you? Even if you were to compare the ASX200 vs SP500 over the last 10 years, the former provided 5.19% in divs while SP500 had only 3.23% but had 10% more in capital growth. Depends on your situation but would rather my money double every 5 years than every 10

[@uberboiz]

@@dadinvestor Not necessarily - dividend investors (or at least the informed ones) would take into account various other factors/metrics in their investment decision (e.g. dividend growth, payout ratio, EPS and DPS, etc). As I said earlier, solely chasing dividend yield isn't wise (as unwise as blindly chasing 'growth'). After all, dividend yield is only an outcome of a mathematical formula. I don't know where you got your numbers from, but the 5.19% div on ASX 200 seems understated (and looks like it doesn't take into account franking credit), while the 3.23% div yield on S&P 500 looks overstated, especially if you are indeed talking about the last 10 years. In any case, dividends are real cash paid out of profits which can be _reinvested_ as the investor wishes (hence my earlier comment about 'accumulation' index) and it's not necessarily static - in other words, the 5.19% yield you mentioned is not an accurate representation of reality as dividends could grow overtime. On the other hand, a supposedly high annual average capital growth may be nice to observe, but isn't necessarily a reflection of sound underlying business/economy - in some cases, it could be a sign that the underlying business/stock market is overpriced, which means your paper gain may be wiped out easily if the market crashes. I'm not challenging your preference on where you want to put your money in - I was simply questioning the logic/reasoning behind your earlier conclusion on dividend investing which was backed by nothing more than a comparison of a one year data of a few ETFs which are fundamentally different. If we can comfortably predict our money will double every 5 year solely based on historical performance of S&P 500, we would all be rich now, but that's obviously not true.

[@knoxtfo]

Fully franked helps so much,I've been building for a while and your help is amazing!! Only downside for me is dividends in australia are mostly paid biannually 😅

[@audieladd2476]

Awesome Video! You'll never go wrong with the Big 4 Oz Banks or the 2 largest miners for dividends. They've been keeping me comfortable for decades.

[@let0atreides]

The downside is very simple and painful. Look at for example Apple share for the past 10 years. It’s up 850%. All stocks don’t do that, but when they do, it can be life changing. You don’t achieve that with stuff that yields 5% dividend. This is the reason why I like to mix both worlds.

[@uberboiz]

"Look at for example Apple share for the past 10 years. It’s up 850%. All stocks don’t do that, but _when_ they do, it can be life changing." It's a matter of _if_ , not _when_ - and it's a big 'if'. For every company that turns out to be like Apple, there are hundreds or thousands other that end up crashing and burning despite their early rapid 'growth'. If you are patient, you don't need 850% return anyway to be wealthy or financially independent.

[@let0atreides]

@@uberboiz It's not a matter of if. You can classify assets by risk/return ratio. Cash has the lowest risk and lowest return, then bonds, then dividend stocks, then growth stocks. Long term, which is key, cash is outperformed by bonds, bonds are outperformed by stocks and dividend stocks are outperformed by growth stocks. Apple is just an example, but the whole Nasdaq 100 did +470% in the past 10 years and another +260% 10 years prior to that. So if you are diversified and you have a long term horizon, your chances to outperform are simply better, as demonstrated. You can easily find dividend stocks that crashed and went bankrupt too. The question was what is the downside and this is it. You just don't have the risk profile for this and that's ok.

[@uberboiz]

@@let0atreides The risk/return ratio by different asset classes is a theory / conventional wisdom that isn't necessarily true. As Howard Marks once said, if a higher degree of risk _guarantees_ a higher return, then by definition it's not high risk. 🤷‍♂Also, it depends on what you are referring to by 'risk' - most people think volatility is a measure of risk, but the ultimate risk in investing is permanently losing your investments. I wouldn't be surprised if there are dividend paying companies that go belly up, _if_ their dividends are not sourced by genuine profits. But saying that you can _easily_ find such stocks is a bit of a stretch - in reality, most companies that pay dividends are those which have established profits/cash flow whose managements have decided it would be better to return the profits to the shareholders as dividends than blindly ploughing it back to the business for 'growth'. Also, these companies could grow their dividends overtime, even if their share price may not increase as rapidly as the so-called 'growth' stocks. I don't disagree with your points on diversification and having a long term horizon - in fact, the latter is exactly the point I am making in my earlier comment when I said you don't need an 850% return to be wealthy _if you have the patience_ (if you don't, that's okay - it just means you are the type of person who have the risk appetite but not necessarily the right temperament). People who focus on outperforming an index or an asset class (or even worse, outperforming other investors) are the ones who tend to get burnt. If you indeed have a long term focus, you'd be better off thinking about what your investment goal is and patiently work towards it than blindly assuming additional 'risk' in order to chase 'outperformance'.

[@20thCB]

I know dividends have major downsides but you can't beat that feeling when they drop into your bank account!

[@ProjectFrugal]

March/September and April/October are the best dividend months in NZ. January/February/August/November are weak - the rest (May/June/July/December) are ok-ish.

[@brendanquinn6894]

Good to hear a very frank discussion about Franking credits. Well done. You should sell covered Calls as well, they will generate 4 to 5 times more than just the dividends. FMG on the ASX has high dividends.

[@occamseraser]

Best finance channel! Thanks Tracey!!

[@bernhardaccola]

If you own a bank that pays at the start of July, then you could almost treat that as your ‘June’ dividend. The etfs pay at the back end of the month. Thanks heaps for your vids Tracey!

[@mandar998]

X'mas tree is up 🎄 Great summary!

[@raphaeltarazy3869]

Thank you for a comprehensive explanation. Your information was great and relevant.

[@t-townscratcher1880]

Thank u Tracy, 4 takin' the time 2 make this video. It's very enlightening, HAPPY HOLIDAYS & HAVE A HAPPY NEW 🎉YEAR, GOD BLESS 🙌 U🙏🏻👋

[@richardlove4287]

Great video Tracey, thanks. Would there be any chance at letting us have a glance at your portfolio? So we could copy it if we want to.

[@cheapsober]

Love your videos Tracey! Do you still choose the rental over ownership home option in Australia?

[@TraceyEdwards]

I'm still renting. I just moved into my dream apartment, yay! I prefer my money in the stock market than home ownership. But that's just me :)

[@helenasokolinski]

Thanks for this Tracey

[@Tim_in_Australia]

Nice job Tracey E.

[@adamwaz5615]

💯 i like to view it as a bonus 👌

[@pauobunyon9791]

A downside ? Imagine inheriting 6 figures at 25 and investing it into JEPI instead of VOO and flash forward 40 years and youll see the difference is HUGE cause you sacrificed growth for a quick paycheck and by then. Its too late because with JEPI youll have lost most of your money 😂😂

[@arigutman]

Great video, really enjoyed... I would love to invite you for a chat on Masters of the Market if you're up for it, Tracey!

[@ProjectFrugal]

If you ever want a Kiwi perspective as well then let me know. Just subbed to you and watched a couple of vids - am starting to invest in US stocks in the last 3 months. Looking like you know your stuff! :)

[@TraceyEdwards]

Thanks so much! Let's talk further.

[@prancer4743]

Banks are great dividends payers 😉😉💰💰💰🏠

[@jimmcintyre1966]

A couple of obvious downsides are that dividends aren't really free money because the price of the stock is adjusted down by the dividend amount on the ex-dividend date, so the worth of your investment drops by the amount of the dividend. Plus, as dadinvestor implied, money returned to investors through dividends is money that the company is not re-investing into itself to spur growth. Companies that pay dividends tend to grow less than companies that put money back into their businesses. There's nothing wrong with dividends, they can be a good indicator of a financially stable company, but it's always a good idea to take a step back and reassess whether investing in a company or fund just for the dividend is best for the individual investor.

[@uberboiz]

"Plus, as dadinvestor implied, money returned to investors through dividends is money that the company is not re-investing into itself to spur growth." The assumption that profits reinvested by a company back into the business (instead of being paid out as dividends to shareholders) would translate to 'growth' is not necessarily true - in fact, it's an over-simplistic assumption. Roger Montgomery recently floated the same theory, and it's been refuted eloquently by Chris Leithner.

[@joyherd-z4z]

I am in love with the stock $PNN (Power Minerals Ltd.) trading over ASX , The stock is trading at a reasonable price and less volatile .

[@monsterenergyaxe]

No.

[@Dodo-ck5tq]

yup, well explained.

[@paulmorgan8426]

The downside is it takes forever to make a living off it

[@ProjectFrugal]

Small bites of the elephant. We should make $6.2k this year - roughly able to increase our dividends by approx $2k a year which will exponentially grow down the track but you're right - it's the long game!