boanerges1989
New member
This is a very interesting video from The Plain Bagel addressing a recent video Ben Felix released. There's a lot of issues addressed in this video that you don't normally see in other videos.
Dividends Are Irrelevant (Sort Of...)
- Thread starter boanerges1989
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@boanerges1989 The basic principle behind dividend irrelevance is your total wealth would have remained constant:
The same reasoning applies to choosing dividend stocks. It doesn't matter how frequently a company distributes its free cash flow, but rather the reliability/size of that underlying business activity that matters. Picking stocks just because that cash is distributed at some arbitrary schedule is not predictive of your total returns.
- If you invested in those companies and they paid the regular monthly/quarterly dividend, which you reinvested into more shares, or
- If you invested in those SAME companies and they just kept the cash as retained earnings on the balance sheet
The same reasoning applies to choosing dividend stocks. It doesn't matter how frequently a company distributes its free cash flow, but rather the reliability/size of that underlying business activity that matters. Picking stocks just because that cash is distributed at some arbitrary schedule is not predictive of your total returns.
momof3littleloves
New member
@herlings The benefit of dividend paying stocks to me is that you can diversify with the dividends. So an extremely broad ETF with dividends might not be as useful because it's already diversified, but when Coca Cola pays out their dividends, I can buy something different with that money. Not just own more Coca Cola. It's good for when you're starting out imo, and for when you don't necessarily have the means to add money yourself as regularly as you'd prefer. Because I don't want to have to always sell to realize a gain, I'd like some of them to be giving me that gain now so that I can use it for other stocks I'm interested in.
@boanerges1989 I love dividends.
It is true that in terms of returns, disregarding taxes, dividends or not make no difference. After all, money isn't created, dividends are just a way to return part of the profits to shareholders. So if $1 leaves the company and goes into your pocked, there's $1 less in the company.
When you take taxation into account, one can become a bit advantageous in terms of taxation, with capital gains being better than dividends in most case with the current tax rules.
However that is only purely theoretical and focused on returns. Human beings are often vulnerable to emotions. If the market crashes, it can be hard for some people to see all their gains disappear. Dividends can help in those moments with a stream of constant and predictable cashflow.
The predictable cashflow and payments is what is most interesting to me. I like knowing that no matters what happens, as long as the company is doing ok in terms of balance sheet and cashflow, the stock price is irrelevant to me since I only care about the cashflow. It also allows for some strategies like margin investing, using the dividends to pay back the line of credit (assuming the company doesn't cut and continues paying).
The last aspect is the difference between mature companies and growing companies. Sometimes, companies don't need as much cash as they are generated since they matured in their industry. If they don't invest the money they make, there's no point in keeping it since it won't make the company grow.
So dividend or not is not important in terms of returns in general. Dividend investor usually simply prefer the investing style of looking for predictable and stable cashflow.
It is true that in terms of returns, disregarding taxes, dividends or not make no difference. After all, money isn't created, dividends are just a way to return part of the profits to shareholders. So if $1 leaves the company and goes into your pocked, there's $1 less in the company.
When you take taxation into account, one can become a bit advantageous in terms of taxation, with capital gains being better than dividends in most case with the current tax rules.
However that is only purely theoretical and focused on returns. Human beings are often vulnerable to emotions. If the market crashes, it can be hard for some people to see all their gains disappear. Dividends can help in those moments with a stream of constant and predictable cashflow.
The predictable cashflow and payments is what is most interesting to me. I like knowing that no matters what happens, as long as the company is doing ok in terms of balance sheet and cashflow, the stock price is irrelevant to me since I only care about the cashflow. It also allows for some strategies like margin investing, using the dividends to pay back the line of credit (assuming the company doesn't cut and continues paying).
The last aspect is the difference between mature companies and growing companies. Sometimes, companies don't need as much cash as they are generated since they matured in their industry. If they don't invest the money they make, there's no point in keeping it since it won't make the company grow.
So dividend or not is not important in terms of returns in general. Dividend investor usually simply prefer the investing style of looking for predictable and stable cashflow.
sharifa0725
New member
ezekielanon
New member
@sharifa0725 Depends what you own. Canadian banks? You’ve generally experienced a continuous (rising) income holding them.
In smaller REITs or energy/mining? Yea not so stable.
In smaller REITs or energy/mining? Yea not so stable.
@ezekielanon
I think this is a good point. When people are discussing the irrelevance of dividends, it is usually in a vacuum.
Of course, that also leads to a conversation of home bias and lower diversification (if someone were to limit their investments to Canadian dividend payer with a long track record).
My own investments: I count my individually selected dividend payers as "stable and predictable" but indexes and others as not.
At the end of the day, dividends and their individual sustainability is an extra layer of analysis that may be done.
I think this is a good point. When people are discussing the irrelevance of dividends, it is usually in a vacuum.
Of course, that also leads to a conversation of home bias and lower diversification (if someone were to limit their investments to Canadian dividend payer with a long track record).
My own investments: I count my individually selected dividend payers as "stable and predictable" but indexes and others as not.
At the end of the day, dividends and their individual sustainability is an extra layer of analysis that may be done.
@boanerges1989 Dividends guarantee shareholders get paid. Many companies mismanage and spend that cash flow from income and the company goes bankrupt and you get nothing. Equity can change based on how income is spent. Dividends are money back in your pocket you don’t have to return.
These armchair YouTubers don’t understand.
If it was a private company you had shares in I can assure you as an investor you would want a dividend to guarantee a return on your investment.
These armchair YouTubers don’t understand.
If it was a private company you had shares in I can assure you as an investor you would want a dividend to guarantee a return on your investment.
1astrokid1
New member
@rickram Yep. Once upon a time I owned shares in a company called CML Healthcare. They did medical lab testing, and paid a nice dividend. Then, management got the bright idea to try and expand into the US, which turned out to be disastrous. They ran the company into the ground, even though it has risen from the ashes as LifeLabs, which is not publically traded.
resjudicata
New member
@boanerges1989 Value does beat growth in the long run, but tossing everything into high dividend nowadays is turning towards a value trap.
@resjudicata Yep
You need to apply the exact same thing as you do for growth.
You buy good companies, not just ones with a strong trait. Don't buy a growth company growing very fast if it doesn't have a moat. Don't buy a dividend company because it has a high yield.
Buy a company because it is a good company, not because it is currently growing fast or currently has a high yield
You need to apply the exact same thing as you do for growth.
You buy good companies, not just ones with a strong trait. Don't buy a growth company growing very fast if it doesn't have a moat. Don't buy a dividend company because it has a high yield.
Buy a company because it is a good company, not because it is currently growing fast or currently has a high yield
resjudicata
New member
resjudicata
New member
@boanerges1989 Aside from the preferential taxation (i.e. the fact that you don't pay any income tax on the first ~$53,000 of dividend income in Ontario provided you have no other source of income), dividends are also generally produced by certain types of companies which have a predictable income stream. As such, they tend to have a lower beta as compared to growth stocks and may be more suitable for an individual seeking an income stream. Of course, many new investors don't understand that the value of a stock depreciates when a dividend is paid out, so it's akin to a partial disposition of your holdings.
Being very close to retirement at a young age, I'm mostly in growth oriented ETFs but I have a variety of Canadian div stocks which produce a predictable income stream which is more than enough to cover all fixed costs. I hope that it will allow me to weather market volatility (even though dividends are of course not guaranteed and may be decreased/paused in an difficult economic climate)
Being very close to retirement at a young age, I'm mostly in growth oriented ETFs but I have a variety of Canadian div stocks which produce a predictable income stream which is more than enough to cover all fixed costs. I hope that it will allow me to weather market volatility (even though dividends are of course not guaranteed and may be decreased/paused in an difficult economic climate)
@resjudicata Exactly.
If you want to invest in a bank, you're going to get dividends no matter what.
You'd be an idiot if your math told you that a bank is a good investment, but you didn't go for it simply because 'dividends are bad '
If you want to invest in a bank, you're going to get dividends no matter what.
You'd be an idiot if your math told you that a bank is a good investment, but you didn't go for it simply because 'dividends are bad '
@boanerges1989 Dividends are irrelevant in the US but in Canada they are not.
hundreddays
New member
@boanerges1989 Theory is nice and all, but l was curious what happened in real life. Using portfolio visualizer to back test performance of a TSX index ETF vs a 2 dividend stock portfolio for simplicity over a 24 year period. XIU has been around since 1999, and TD and Royal Bank for comparison (XEQT is too new). I used a starting portfolio of 100k, end results:
XIU $239k, 3.74% CAGR, dividends not reinvested
XIU $444k, 6.48% CAGR, dividends reinvested
TD & RY $588k, 7.75% CAGR, dividends not reinvested
TD & RY $1.37 mil, 11.6% CAGR, dividends reinvested
Reinvested dividends clearly boosts total returns and the simple 2 dividend stock portfolio clearly beat the ETF index by more than triple from 1999 to today. Wow, I did not expect this result to be so dramatic.
XIU has a current yield of 3.6%, the banks about 5%. So someone retiring today would receive $16k from XIU, or $68k from the bank portfolio. Dividends seem pretty relevant to me in real life vs the theory from those 2 channels.
Edit : a better comparison would be 2 identical stocks, same market cap, same starting share price, one that doesn't have a dividend and one that does, then see the results over a 20yr period. This is likely impossible to find in real life.
XIU $239k, 3.74% CAGR, dividends not reinvested
XIU $444k, 6.48% CAGR, dividends reinvested
TD & RY $588k, 7.75% CAGR, dividends not reinvested
TD & RY $1.37 mil, 11.6% CAGR, dividends reinvested
Reinvested dividends clearly boosts total returns and the simple 2 dividend stock portfolio clearly beat the ETF index by more than triple from 1999 to today. Wow, I did not expect this result to be so dramatic.
XIU has a current yield of 3.6%, the banks about 5%. So someone retiring today would receive $16k from XIU, or $68k from the bank portfolio. Dividends seem pretty relevant to me in real life vs the theory from those 2 channels.
Edit : a better comparison would be 2 identical stocks, same market cap, same starting share price, one that doesn't have a dividend and one that does, then see the results over a 20yr period. This is likely impossible to find in real life.
@hundreddays If you pick the two largest companies in the tsx 60, then backtest them against the whole tsx 60, of course theyre going to come out ahead lol. Its like backtesting the last 20 years of the S&P 500 versus only Apple and Amazon (not exactly dividend companies lol).
1astrokid1
New member
@hundreddays TSX is pretty concentrated. You could buy six dividend stocks in different sectors and be almost as diversified: a bank, railroad, REIT, telco, pipeline, and utility would suffice. I actually hold a similar basket of stocks in my taxable (with Brookfield Corp. in place of the REIT) and it seems to move in step with the index. Pays me enough in dividends to fund my TFSA in full each year, too.
wretched1909
New member
@hundreddays You could view this as an argument against dividends. If someone takes the dividend cash and doesn't immediately reinvest it then they come out behind. The key is keeping that capital invested in stocks, and the dividend payout is merely a shuffle of cash back and forth.