7 Costly Dividend Investing Myths

[@jim2404]

From reading the comments below, I think some misunderstand Rob's point in the video, assuming he is advocating non-dividend paying stocks over dividend stocks. That is not true. He says it is more beneficial to the investor to look at total return on investment, rather than just on the dividend payout of the companies. Let's look at some simplified (assume everything is equal except dividends and appreciation) portfolio examples: Portfolio A: Dividends at 4%. Capital appreciation at 3%. Total return at 7%. Portfolio B: Dividends at 2%. Capital appreciation at 6%. Total return at 8%. Portfolio C: Dividends at 0%. Capital appreciation at 7%. Total return at 7%. Now, the dividend investor would advocate for portfolio A, because of the great 4% dividend it pays. They would also steer clear of portfolio C, deeming it a real loser since it pays no dividends. You could then spend the dividends and, if it is enough to cover your cost, you can reinvest any excess. However, to the total return investor, there is no difference in the value of the these two portfolios. You get an equal return on your investment, namely 7%. It is portfolio B, with its mixture of dividend and non-dividend stocks, that gives the best return. If you need the money to live off, you can take the dividends out and sell 2% of your holding, giving you the same 4% cash you received in dividends in portfolio A, but leaving 4% in capital appreciation rather than the 3% you received in portfolio A. You would have the same cash in hand and your portfolio would be worth more. Now, if portfolio A had the same dividend payout of 4% but an appreciation of 5%, that would put the total return at 9%, beating out the other two options, so that would be the most beneficial, but not because it has the highest dividends. Likewise, if portfolio C had appreciation of 9%, it would now be the best choice as it outperforms the first two portfolios. Focusing solely on dividends (or capital appreciation, for that matter) could lead the investor away from the best investment mix

[@SKITTLELA]

Great explanation. Not sure how anyone can disagree with this.

[@carlbook2051]

You also need to look at your total after tax return. Dividends generate tax.

[@Cwilly13ify]

@@carlbook2051 Exactly. This makes a big difference in the taxable environment

[@philw3039]

@@carlbook2051 Equities also generate tax. The main difference is when you pay. Assuming the dividends are qualified dividends, they are basically treated as realized gains and taxed at the capital gains rate. You owe tax as soon as you are paid the dividend even if you reinvest it. However, you don't pay tax on stocks until the gains are realized when you sell the stock or receive a capital gains payout. Either way, you pay tax at some point.

[@carlbook2051]

@@philw3039 I agree, if you sell appreciated stock, you will incur capital gains tax. But you may be able to offset the gain with losses, if you invest as well as I do.

[@johntyy88]

This is why I start as a “dividend investor” and started leaning towards growth. I’m keeping most of my dividend stocks and reinvesting the dividends in the dividend stocks, but most of my new investments are growth stocks and funds. I am more invested in growth funds vs stocks at the moment, because I’m still learning to evaluate a growth stock. But my growth portfolio has out performed my dividend portfolio so far.

[@LazyWay-m1w]

Getting paid and then paying taxes on it and then buying more shares just seems silly. The only reason I'd want dividends is to pay my bills. Otherwise i'd prefer no dividends and no taxes owed until I choose to sell.

[@sbkpilot1]

thanks for covering this topic accurately... there are still so many people who claim to be investing pros yet haven't the basic clue of how dividends work. Not only are dividends are huge tax drag on a long term portfolio, they also hugely take away from long term growth.

[@notdoneyet7785]

does the tax drag conclusion depend on whether you have dividend payers in a trad ira vs in an after tax portfolio? it seems that dividends from an after tax account could give a very low tax rate if they are qualified dividends. particularly if you're a middle income sort of couple in retirement you could have 0% tax on those dividends if your income is in the 80k area. but if the earnings come from interest bearing accounts you'd be getting hit with your ordinary income tax rate.

[@franksatterfield9764]

Buffett loves dividends, he just doesn’t like paying them.

[@stevemyopinion423]

The one time they payed dividends. He said he was in the bathroom

[@DDavis0226]

I am really enjoying learning from watching your videos. Thank you for sharing your knowledge. You share knowledge by not only sharing how you see things like dividends, but also the reasoning behind your thoughts! Thank you!!! I am next going to find any videos you have made on the importance of dividends in retirement!

[@DSonBlue]

I really like your videos. Thanks for sharing, and in a way that people can understand.

[@papabear4066]

Rob, your videos are so interesting and useful. I had these questions in my mind for a while and today I came across your video and you answered them all. I am 100%VTI investor and believe in it totally.

[@robertpolk5406]

Well done. It’s hard to move the needle on entrenched divided bias.

[@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

[@randyeverson8296]

I really like the way you explain it here. As an accountant, I am aware of the adjustments made on the books when dividends are paid. I am shooting for more growth stocks but a small amount of dividend stocks. I don't trust the videos that are saying you can live off the dividends.

[@dougb8207]

Thanks for trying to clarify the matters!

[@georgesontag2192]

In my opinion, Rob is correct about dividends. Years ago, i targeted stocks that paid 4, 5, 6 % dividends. It was a mistake because i could not keep up with the sp500. The long term share price of the dividend stocks kept dropping over time. Look at the 10 year chart of a high dividend paying stock, they all drop. I now take the small 2 and 3% dividends and track the sp500. I should have done what this guy says.

[@hulenbryant5637]

I agree with a lot of what you said here, Rob. And I think some who have a longer time horizon should definitely look at overall returns over dividend yield. That being said, when entering into retirement, this is where I disagree with you. I do want stocks/ETF’s that pay higher dividends due to ‘sequence of return’. You made a statement about the 2008-2009 market when dividends dropped 23%. It took the market approx. 2+ years to recover. Stock prices fell approx. 51% (more than twice what the dividends did). So if someone is using the sale of stocks to supplement their retirement, imagine the cash that would be needed to wait out that 2+ year market down turn. In addition, many of the dividend stocks I own, and are owned in my dividend ETF’s , are dividend aristocrats or kings. So those stocks have been increasing their dividends for the past 25 or 50 years respectively. In other words, their dividends did not drop in 99-00, 07-08, 15, 18 or 2020, when the price (value) of most stocks and the overall markets did drop.

[@jpturner171]

As always thank you very much for your insight! Semper Fi

[@739jep]

Don’t worry about the comments Rob , what you’re saying makes perfect sense and is backed up by most - if not all of the academic literature. There are of course some behavioural issues related to dividends but there’s no clear way in the data an investor can exploit it. Some people just have a really hard time letting go of their strongly held beliefs no matter the evidence. Take the comments as a compliment.

[@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

[@739jep]

@@Mr.Mister96 what about it ? This video addressed 7 costly dividend myths. Retaining common stock voting rights wasn’t one of them.

[@ianboyd9723]

I have both, it’s nice for some cash to hit your account, especially if the value of your growth stocks has been hit my the macro economic head winds, which will turn around, but the dividend cash is just a little boost to the ego, and keeps you going.

[@Mr.Mister96]

@11:20 I'd rather own 100% of a nine million dollar company rather than 90% of a 10 million dollar company because all things being equal I would have greater authority/control/say-so

[@jw8578]

Rob, 29 minutes into your video you make the most important point, a company's book value decreases by the amount of the dividend payout which reduces it's share price.

[@Because4545]

You receive the dividend and you can reinvest that money at a lower price. Compound interest

[@MrNodeee]

There is not an absolute on this. For investors who are looking to more established companies with lower risk, dividend stocks are great. If you are looking toward growth companies, then yes- dividend stocks are not the best bet. Good examples are McDonalds, Proctor&Gamble, Intel, etc. If you are looking into company growth and value, then you really should be looking into Market Cap just as much as the issue with dividends.

[@nvt6781]

Rob, you did a great job presenting your argument! I finally saw the big picture…

[@koufax174]

Are dividend ETFs (VIG or SCHD) less volatile than VTi or VOO? Another KZbinr said that. Thank you

[@BryanColliver]

Do you know who says he is not a fan of dividends but is a huge fan Warren Buffet the cash flow from just about every company he invested in is what gives him so much cash to spend. Kevin Oleary said it best I want the company's I invest in to return capital for me to redeploy. so for me they are very important it talks to the health of the company.

[@rob_berger]

It's funny. Warren Buffett loves his dividend paying stocks yet refused to pay a dividend. I actually that's 100% consistent. He loves great companies at good prices, and these types of companies tend to pay a dividend. His 2012 letter to shareholders is really worth a read.

[@BryanColliver]

One of the best things I ever read on him was do as he does not as he says.

[@Bluponi]

Would you apply the same philosophy to dividends that are paid by REIT's ??? I'm trying to decide if its better to own rental houses or REIT's

[@johngass1441]

Thanks

[@northerncaptain855]

As a late 60’s new retiree, I see a need for regular cash flow. Given the choice between buying an immediate annuity throwing off about 5% per year with no residual value on death or hanging on to my old Chevron stock throwing off about the same 5%, I’m pretty comfortable spending the dividends and with any luck leaving the stock to my children and grandkids.

[@mgcarr61camaro91]

This guy doesn't need money from his investments like us !

[@travis1240]

Not a bad idea, though I think it's likely there will be shrinkage in the oil industry over the next 30 years.

[@franksatterfield9764]

@@travis1240 I would think a well run company will transition. Doesn’t Chevron own solar farms, etc.

[@jmcm152]

I like the analogy 👍

[@Eisbaerch]

I am missing a psychological aspect in this debate (total return vs. dividend payout). I think in a bear market or crash people who receive a dividend from a stock are less likely to sell this stock than when they dont.

[@rob_berger]

Agreed. And these psychological considerations are important.

[@frankofva8803]

You are really awesome, Rob. I am learning so much.

[@Porkchop259]

A good, profitable, well run company is a good, profitable, well run company, growth or dividend is a distant second as long as you pick stocks that cover the first part the rest will take care of itself.

[@TheSmartLawyer]

I like a nice mix of stocks and bonds.

[@davidbrooks8809]

Bonds are trash

[@victorvale8391]

your appl example is true but most of the dividends paid did go back to the company in the form of reinvestment

[@rob_berger]

Reinvested dividends don't go back to the company. They are used to purchase shares from other investors on the secondary market.

[@junsilver650]

Does this also apply to REITS?

[@cindymcdonald8244]

Hi Rob, I'm also headed for retirement and when it comes to retirement accounts/IRAs, we'll be coming to an age where we will be required to withdraw certain amounts every year. Wouldn't it be better to take those RMD's from dividends that were earned from our investments in aristocrat stocks? We have no pensions and social security is well... not that secure. Our retirement accounts have to be tipped towards stocks in order to sustain any kind of growth or even keep up with inflation. So doesn't it make sense to invest in some of these rock-solid aristocrats and kings that have been around forever - like some of the bank stocks up here in Canada - BMO Bank of Montreal has been paying dividends since the 1800's. Although some of the percentages are small, we can accumulate these dividends over time and use them for our annual withdrawals without drawing down our actual investments. The hope being to sustain ourselves longer with an income source that is more predictable and reliable than stock values. As some other friend bloggers have said -- "eating the apples without chopping down the tree." Look forward to your comments when you do your video on dividends in retirement accounts. Love your blogs! Thank you!!!

[@rob_berger]

Because RMDs come out of traditional retirement accounts, I don't see how taking the distribution from dividends changes anything. It's all taxed as ordinary income. And there's no designation of the withdrawals as coming from contributions, gains, or dividends.

[@tommybahamas40]

Can some one tell whether Mr Buffet invented any item and became who he is today or just like the amazing owners of Amazon owner/ Apple owner or Elan musk. They all created a product and sold it to the world and built their empire. I see Mr. Buffet had been buying other companies from his wealth and managed to profit from it. Like to get some thoughts about this. Thanks.

[@jparrott1981]

Great analogy. Finally clicked

[@canpin]

Like anything i diversify. I have dividend investments and growth 50/50 actually

[@snowfirel7108]

Dividend stocks are fun!

[@jdgolf499]

Your Berkshire example is flawed in many ways. While what he wrote in his letter is correct, let's look at it closer. As he stated earlier in his letter, he LOVES dividend paying companies, which is why he buys so many of them, and we buy for the same reason. They make money! As for Warren, using him as an example for anything investing, is a joke. I love Warren, although not his politics, but he is very unique. When he buys shares in a company, it comes out in the news, and everyone buys that stock, and he immediately makes money.

[@bentobox7788]

The source of the reinvestment matters for the dividend investors who are also value investors, which is often the case. The intrinsic value of a $1 dividend is very different from the intrinsic value of a $1 of shares. If the investor believes he can buy $1 worth of assets for $0.80, he can do that with dividends. A $1 dividend is worth $1, but $1 inside the business may be worth $0.80 through the share price when stocks are out of favor. This is assuming that you agree the market can be inefficient in the short to medium term. If the market sentiment is negative, I'd much rather receive a $1 dividend coming from the company's cash flow, which is unaffected by the market sentiment. On the other hand, selling $1 worth of shares is not worth it because I'm giving up more than $1 of intrinsic value.

[@JackCasablanca-painter]

Rob, everything you say is true, wise and sensible - for people who share with you the same age, net worth, debt and temperament. That's why you're losing people. The quality of a stock is not intrinsic. One stock could be great for one investor and awful for another. I think it's best to just lay out the facts minus how the stock works or doesn't work for YOUR life in particular.

[@SKITTLELA]

Except stocks have the same total value regardless of the investor's age. Actually, I would want as little dividends in taxable as possible because they're a tax drag (although they're a "necessary evil"--strong emphasis on quotation marks; don't hurt me.) Then value/dividend funds would make more sense in tax-advantaged accounts because they're...not taxed. I get that there's a psychological component to receiving dividends and being more likely to hold onto a stock. But if investors can look past that, I think they'll perform better in the long run.

[@lusmas99]

But wouldn't Buffet be better off if he still had the 712 million shares. Perhaps the value of those share would not have the same value IF Berkshire paid a small dividend, but I would bet it would (like Apple, JNJ, CAT, etc). I won't convince you there is a difference and you won't convince me there isn't. My view of Dividends is "Cash flow". Sure there is risk of cutting or eliminating dividends, but good companies increase more often then Black Swan events that cause cutting/eliminating.

[@jasonhobbs2405]

Loved the opening example of buying a company!

[@johnbrown1851]

I'll take the SCHD over the Voo dividend... I can gradually fill my cash bucket without selling shares whether the market is up or down. I hold growth ETFs for further into the future.

[@ncooty]

Strictly speaking, compounding doesn't happen without iteration. Unrealized capital gains aren't iterations. A straight-alpha strategy is pure speculation with only 2 relevant prices: buy and sell. Everything in between is imaginary. Also, in the business-buying example, you left out a lot of the irrationality of market pricing, such as current, huge hype premia (e.g., "meme" stocks, Tesla). The capital side of markets is extremely frothy. If you think otherwise (e.g., that a valuation is just fixed assets + working capital), I've got an NFT of a bridge to sell you.

[@jefals2000]

Also, stock prices tend to rise between the declaration and the ex date. So, if you want to suggest that the dividend reduces your value - you must concede that dividend increased your value before it reduced it. 😉

[@rob_berger]

My focus is on value, not price. The price changes for many reasons in the short-term. That said, I'm still surprised at the reaction to these videos on dividends. If you remove $100 million in cash from any enterprise, it lowers its value. That doesn't seem controversial to me.

[@jefals2000]

@@rob_berger it could be controversial, tho. It could be argued that divs- at least from well run companies - come from excess earnings - and therefore do not reduce intrinsic value...

[@rob_berger]

@@jefals2000 You make an interesting point. I guess the idea is that the excess cash would just sit there earning next to nothing. And if paying the dividend doesn't hurt future earnings, how could it lower intrinsic value? Well, certainly earnings are a huge part of value, but so of course is book value, which goes down dollar for dollar with a dividend. But certainly worth further study.

[@jefals2000]

@@rob_berger as for the book value, this will have gone up during the quarter as those earnings come in. Then down with the div, then back up again next quarter. Some might also point out (I won't do it, but some folks might 😉), that companies with excess cash on the books have been known to sometimes spend it foolishly. Reducing the value by way more than the dividend...😬

[@jefals2000]

@@rob_berger sorry: one more thing. You said you're focused on value, not price. But you're focused on THE COMPANY'S value - not the investor's value. As an investor, I'm concerned with my value. Shares times price. I get dividends PLUS I can sell my stock for more than I paid for it several years ago. I leave the company's value to management.

[@stan4d1969]

The people who think this information is wrong/inaccurate lack a basic understanding of the subject matter. However, it can seem a bit misleading/incomplete in spots. I used to be focused on growth stocks but the concept of "total return" (growth + dividend) makes perfect sense. As for me, I like the idea of living off the dividend yield in retirement and not touching "the principal". Three reasons: 1) Your original nest egg remains in case you *really* need it. 2) You leave behind a nice legacy for building generational wealth. 3) Less stress/worry around having to periodically sell assets (maybe at a loss).

[@Magdalene777]

No matter if the stock price is up or down you get a dividend and if you reinvest when the market is down you can increase your worth when it goes back up.

[@canpin]

Some rather invest in "orchards" and pick the fruits for life...than choppig down the trees everytime you need money.

[@rob_berger]

And that analogy is a perfect example of how people misunderstand dividends.