In this insightful video I go over the dividend fallacy theory, which helps explain why dividends are NOT free money.
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0:00 Intro
0:30 The Free Dividends Fallacy TLDR
1:16 Caterpillar dividend impact on price
2:40 How the ex-dividend price drop is sometimes countered
2:56 Dividend yield Net (or Shield)
3:29 A key point the Dividend Fallacy authors are wrong about (aka why dividends are better than share price appreciation)
4:40 Investors are less likely to sell stocks that pay dividends
5:10 Dividend Stocks have tended to outperform non-dividend stocks
5:30 Some dividend investors don’t pay appreciation to stock price appreciation (or only on yield)
6:02 Some investors only focus on total returns
6:22 Dividend demand is higher when interest rates are low
6:50 Total return should be a key factor in what you do
7:36 Demand for dividend stocks goes up if they are more stable
7:47 Demand for divs are lower when recent market returns are higher
8:13 Chasing dividends at the wrong time can cause you to underperform
9:00 Dividends are not guaranteed
9:18 Dividends can come at a company’s opportunity cost
9:37 Investors tend to hold div paying stocks longer regardless of performance
10:00 Some investors don’t factor in dividends when looking at returns
10:20 Some famous finance professors are big dividend advocates: Dr. Jeremy Siegel
11:05 Invest being aware of your own biases
11:13 A Fidelity paper pumping up dividend stocks
12:00 Most investors don’t drip into the same stock (which actually pumps up non-div stocks)
12:10 How the majority of returns come from reinvested dividends
12:50 Other things I love about dividends
13:15 Everything has pros/cons. Just invest intelligently.
13:25 Dr. Siegel explaining how stocks outperform other asset classes
14:35 Thus dividends are not free money, but are still awesome 😊
15:09 Shoutout/Outro
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Dividends are often touted as “free money” by investors, but this is a fallacy that can lead to poor investment decisions. The reality is that dividends are not free money and should not be the sole reason for investing in a particular stock.
The Dividend Fallacy
Dividends are a portion of a company’s profits that are distributed to its shareholders. By receiving dividends, investors can earn a steady stream of income from their stock holdings. However, some investors view dividends as free money that is paid out to them, regardless of the performance of the underlying company.
This is a fallacy because dividends are not free money. The money that is paid out as dividends comes from the company’s profits, which could have been used to reinvest in the company to drive future growth. By paying out dividends, the company is essentially signaling that it is not able to identify any growth opportunities that would provide a higher return on investment than distributing profits to shareholders.
The Risks of the Dividend Fallacy
The dividend fallacy can lead investors to make poor investment decisions. For example, if investors are solely focused on receiving high dividend payments, they may invest in companies that have high dividend yields but weak financial fundamentals. These companies may be at risk of cutting or suspending their dividend payments if their financial performance deteriorates.
Furthermore, companies that prioritize dividend payments over reinvesting profits in their business may stagnate over time. They may struggle to grow and innovate, which could lead to declining stock prices and reduced earnings for investors.
Investing for Total Returns
Rather than focusing solely on dividends, investors should consider the total return of their investments. Total return includes both capital appreciation (the increase in stock price) and dividend payments. Some companies may have low dividend yields but strong growth prospects, which could result in higher total returns over the long term.
Investors should also evaluate a company’s financial health, including its profitability, cash flow, and debt levels. By investing in financially healthy companies with strong growth prospects, investors may be able to achieve higher total returns over time.
Conclusion
Dividends are not free money and should not be the sole reason for investing in a particular stock. By falling into the dividend fallacy, investors may make poor investment decisions and miss out on higher total returns. Instead, investors should focus on the financial health and growth prospects of companies to make informed investment decisions.
In this insightful video I go over the dividend fallacy theory, which helps explain why dividends are NOT free money.
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Ben Felix stated that years ago on his YouTube channel and the dividend investor cult members attacked him….
Not much people paid attention in math classes in high school.
The argument from those that discount dividend stocks because the stock price drops by the dividend amount, is all BS! In theory, they are correct, but in reality, they are wrong. Stock prices move up and down based on many things, and quite often, the stock price goes UP on the day dividends are paid. While I have many stocks that I could use, I love using LMT as my example of dividend paying stocks. I have several hundred shares, starting my purchases in 2013 at around $100, and buying more throughout the years between $100 and $200. My shares are currently at $457.50. The first dividends I got were $4.60, which I have reinvested. Current dividend is $12.00 a share. The yield on my first shares are returning 12%! Now, as I move into retirement next year, I will stop reinvesting, and they will become income.
The dividend vs capital gain question boils down to: do I prefer to cash in "money that's not free, right now" (dividends) or do I prefer to cash in "maybe a gain, maybe a loss, for a fully impredictable amount and I have no clue when" (capital gain/loss) :-).
One more big difference to the advantage of dividends is they can't go below zero… at least I believe we've never seen so far a company asking their dividends back!
I always here people say they loves living off of dividends like its Free money..what a joke..lol
I’m honestly curious who thinks dividends are “free” money… it’s passive income at the expense of growth/appreciation
Free is the most costly price tag of all…always is
I’ve watched this video four times. I find it chocked full of information and got something out of it each time. So we’ll done.
For me, from a tax standpoint, dividends increase my taxes, so they are not free. And being I drip them I never see the cash to begin with.
I drip dividends, so if the price drops by the amount of dividend, then I would be buying more shares. So to me there is a trade off.
I’ve thought to get cash for my dividends and buy another position. I think I would build to big of an inventory of stocks and feel I eventually would have too many. So I keep the ones I have and just drip the dividend.
This was an exceptional video. Awesome. I will leave you with this…So has Mr Ex ever made a cameo and waved to the audience?
Jeremy siegel… now im doubting dividends entirely lol
They are not free money, but, i like to get them.
What is the jazzy music in the video? It sounds nice
Share price is related to annual earnings or cash flows, not to how much of these are retained vs paid out. So a stock will hover around its typical PE ratio and grow as earnings grow. Following those experts saying that the stock will keep decreasing with each dividend payout, the stock price should reach zero after payouts over time equal the original stock price. Nonsense. Go dividends!
I mostly agree with the dividend fallacy theory. I would advise younger investors to steer away from stocks paying a high yield. Especially high income savers that are reinvesting. They are better off with low dividend index funds for long term capital appreciation. But, for older investors or investors that would need to be selling stock anyway, dividends are a good choice.
However, even when I was younger, my best performing investments have been high quality dividend stocks. Some of my stocks are now paying 20% and more yield on cost. That may be a mathematically useless number but psychologically it is pretty cool.
Yes, dividends are not free money. The main benefit of dividends is that they represent management opinion of how much cash flow can be distributed without adversely impacting the financial health of the company. Spending dividends in retirement is a much less arbitrary policy than following "the 4% rule".
Do you have Tesla stock?
I know the trade-off. I've always known the trade off. Just as I know the trade-off of selling a property vs renting and the associated costs of owning a rental. Those small gains from dividends from established businesses, when reinvested also help with the growth of a person's portfolio via compounded growth.
While divs are part of the NAV having to sell if you are in an income age of your life is the real diff. Age not even mentioned.
This was a great one, GenEx. Dr. Siegel is a straight genius.
Great video see you again here next week I hope.
I liked your analysis. I often note that few people understand the relation between dividend and stock price. I buy mine at the lowest price possible, because that makes for a larger dividend in proportion to my expenditure. As my accounts grew, I was able to buy higher priced stocks and still get along nicely. I monitor capital gains and look at the whole picture.
I really enjoy these kind of videos, pros and cons are a reality with any kind of investing but i am convinced dividends and cash flow strategies are the best approach for me and most importantly provide peace of mind. Selling shares approaches tend to be more difficult b/c the average person can’t time it right or need to sell in declining markets. As always, I really appreciate your videos and I’m really enjoying seeking alpha so thanks again for the link.
Most quality dividend paying companies also invest profits back into the company as well as pay down debt, if applicable. As for dividends versus stock buyback, both cause a reduction in book value as cash disappears. When I receive a dividend payment I compute every cent as one cent of value returned on my investment. It is not necessarily true that a share buyback will result in the same level of value returned to me. Furthermore as a retiree, that dividend doesn't require me to reduce my share count. Also, if I don't need the money, I am free to reinvest the dividend, potentially into a higher yielding stock/ETF.
If a company never returns profits to shareholders via dividends, and someone holds a stock throughout the life of the company, then isn’t that ownership in actuality completely worthless, returning 0%?
I'm curious if dividend paying stocks gain back some of their share price on the day the dividend is paid. Assuming some people are using drip
You could look at them as a fluctuation of the stock price that you get paid for without having to sell the stock.
Dividend focused investors will win in the long run. That's not to say there won't be some bumps a long the way but long term if you're putting your money into good companies that pay a reliable dividend, you'll end up just fine. The same can't be said for traders or anyone trying to make a fast buck in the market.
Dividends don't impact long term price appreciation. A scheduled dividend adds a premium to the price discounted back to today. On the ex-date this premium returns to 0. This premium happens because the cash on the company's balance sheet is not priced into the stock price. Only the cash that's soon to be available to investors gets priced in (ie. the dividend).
When your dividends coming in monthly . Then automatically go straight to your checking account
Your channel is just like the stocks you own: High quality, and plenty of long term, steady growth ahead. Nice job!
I still have a few gold and silver coins from 1979 when I first started investing. Yeah baby I'm making money now that it's 1980 all over again….lol And that was my longest buy and hold of anything.. According to your long term chart SPY or QQQ would have been the best hold.. Live and learn. My father did buy QQQ at the 2003 low @25 and he never sells..And held MSFT from 1998..both beat the pants off gold and most everything else and now MSFT is hot again.
The "Dividend Disconnect" authors are typical academic fools. This means they either ignore or do not understand the difference between simplifications made for analysis and predictions versus to the complexity of the real world. Academia thrives on such simplifications in their quest to be published, and financial academia has exemplified this since the 1950s.
Dividends being subtracted from the share price is an adjustment made by the exchange as just such a simplification. It is artificial – an adjustment outside of normal trading – and meaningless in the vast majority of cases, with the rare exception being a company paying such a large dividend it has an actual effect on the future value of a company. The simplification is in treating everything the same. In normal dividends with normal companies the company value is based on its future potential, not the value of their bank account. This is made obvious by the trading between ex-div and pay date. What lasting impact was made by subtracting the dividend from the share price?
Dividend reinvestment is the only true compounding in the stock market, as you increase your shares, thus increasing your future dividends, thus increasing your shares even more. The future builds on the past. This is compounding. Share price changes are not compounding. Price changes come and go but do not build on the previous change as the previous change has no bearing on the future change. If you look back over time you can calculate the compounding equivalent to the change, but that is simply a calculated equivalent as if compounding had happened.
Trust the academic fools and their simplifications only if you fully understand them. Better to trust practitioners who actually make investment choices and succeed at managing investments over the decades. These practitioners may be famous figures like Peter Lynch and Warren Buffett or your aunt who never made much money but she invested and now lives on her portfolio (probably dividends) or the former coworker who used a target date fund and now has 50% in stocks and 50% in bonds to avoid selling stocks when they are down. That works because the long-term trend of the market is up. Why is the long-term trend up? Because the market discards failures, and the successful mature to pay dividends.
I'll take dividends as my way to avoid selling, with almost everything riding that upward trend instead of lending out 50% into bonds which are mathematically designed to barely beat inflation.
Since 2021 my dividends pie in M1, has performed way better than my value or indexed fund strategies (not even mention my growth one). And that's including the ATT blackhole,
Anyone paying attention and in the stock market during 2020 saw that several dividend paying stocks ceased and stopped their dividends during that period. Disney hasn't reinstated their dividends yet and AT&T for example, while they did reinstate their dividends, it is currently not as high as before.
While we can expect a dividend with dividend paying stocks, they are not guaranteed and that's a new piece of info, people need to be aware of and why you need to check your portfolio to make sure it's still doing well. Because if something else like 2020 comes along, it will upend what was the "norm."
But if the price of the stock lowers, you can use that as a buying opportunity to get even more dividend income. Dividend income is free money because you don't have to sell the stock to get it; you can have both.
It would be interesting to do a deep educational video on share buybacks. The basic mechanisms are simple but really all of the intricacies over the historical long run for div payers as a whole but also for individual companies. Who has done the most historically, timing, outcome. Research papers with interesting insights like todays. I take my dividends and buy other div payers that are currently down. Have about 5,000 shares of tsla id like to sell covered calls but wont dare to. Accumulating small positions in low cost div payers to figure out the mechanics of covered calls.
I don't check my portfolio constantly like I use to when I first started off. I loaded my portfolio with high quality moat heavy companies, and will continue adding on dips and any opportunities going forward. Currently beating the S&P by 2% on the year, so I'm very happy thus far.
One added benefit of dividends is that they usually help foster a culture of discipline on management. Management has the dividend top of mind which makes them more cost conscious and prudent with their cash. Management works for us the shareholders. They are reminded of that every time a dividend is due.
Not sure who would think spending $213 to receive $1.20 quarterly is "free", lol. You paid a lot of money for that dollar.
Is there a youtube link to the interview you were using clicks from?
Look at companies like the old Twitter how they had meditation rooms, game rooms, it was like a theme park instead of work.
Companies who don't pay their shareholders often just waste it.
Big respect for this video. One of the only dividend investors I’ve seen cohesively explain why dividend investing may not be entirely optimal from a returns perspective, but has personal/psychological benefits for some people.
Thank you for this video, my cousin and I love watching all your videos. The "regardless of Performance, which isnt necessarily prudent" is very true, but like my Ford stock, I have held through the highs and lows, but in just a few short years the reinvestments have given me over 400 more shares now paying dividends, so yeah I didnt sell at $25 a share, but I am looking just for long term stock reinvestment, which is working nicely for me. Thank you again for always keeping us motivated investing! You are the only true dividend person on Youtube actually living the dream we want! So thank you for sharing!
One day I hope to build my channel like yours GenEx! Thanks for the the consistent entertainment! Hope all is well with you brother!