Page 1 of 2

Explain to me why dividends aren't real money

Posted: Mon Feb 10, 2020 9:48 pm
by justsomeguy2018
I feel like I have seen it said on here that dividends/ETF capital gains distros "aren't a free lunch" because they just lower the NAV.

I kind of follow, but I guess at the same time I don't follow.

If I own a high yield fund paying 5% vs a fund paying 0%, how am I not making money? If that is the case what is the point of receiving dividends at all?

Re: Explain to me why dividends aren't real money

Posted: Mon Feb 10, 2020 9:49 pm
by aristotelian
They are real money, but so are capital gains. Both are part of total return. Capital gains are advantageous because you can choose when to realize them and pay tax, whereas you are forced to pay tax on dividends as they are paid.

Re: Explain to me why dividends aren't real money

Posted: Mon Feb 10, 2020 9:50 pm
by manatee2005
justsomeguy2018 wrote:
Mon Feb 10, 2020 9:48 pm
I feel like I have seen it said on here that dividends/ETF capital gains distros "aren't a free lunch" because they just lower the NAV.

I kind of follow, but I guess at the same time I don't follow.

If I own a high yield fund paying 5% vs a fund paying 0%, how am I not making money? If that is the case what is the point of receiving dividends at all?
We had the same discussion few weeks ago
viewtopic.php?f=10&t=301911

Re: Explain to me why dividends aren't real money

Posted: Mon Feb 10, 2020 10:06 pm
by JoMoney
It is "real money", but it doesn't do anything special.
When you own a stock, you own a proportional share of the companies assets. When a dividend is paid, the bottom line of what you own hasn't really changed. You just moved the cash from the companies balance sheet to your personal one, and created a taxable event in the process.

Re: Explain to me why dividends aren't real money

Posted: Mon Feb 10, 2020 10:22 pm
by CoastalWinds
Dividends are simply a form of distribution that is outside of your control...and it creates ongoing tax drag. For example, if you have 2% QDI and pay 15% QDI tax, that’s the tax equivalent of an expense ratio of 0.3%.

Re: Explain to me why dividends aren't real money

Posted: Mon Feb 10, 2020 10:27 pm
by UpperNwGuy
Dividends are real money, but they're not real additional money. It's like moving some coins from your right pocket to your left pocket. The coins are definitely real, but you haven't gained anything my switching pockets.

Re: Explain to me why dividends aren't real money

Posted: Mon Feb 10, 2020 10:32 pm
by Wiggums
UpperNwGuy wrote:
Mon Feb 10, 2020 10:27 pm
Dividends are real money, but they're not real additional money. It's like moving some coins from your right pocket to your left pocket. The coins are definitely real, but you haven't gained anything my switching pockets.
And as the previous response stated, its a tax drag even when the distribution is reinvest automatically.

Re: Explain to me why dividends aren't real money

Posted: Mon Feb 10, 2020 10:38 pm
by MIretired
If you own your own business, and besides earning a salary that is part of the business costs of operations; if you also, once a quarter, take out a sum of money that is not considered as salary, it's just because it's your business; that should be called an owner draw down. That would be the same as a dividend, I guess.
Also, I prefer to call the rest of mutual funds returns capital appreciation.

Re: Explain to me why dividends aren't real money

Posted: Mon Feb 10, 2020 10:48 pm
by JonnyB
Wiggums wrote:
Mon Feb 10, 2020 10:32 pm
And as the previous response stated, its a tax drag even when the distribution is reinvest automatically.
It's a tax drag only if it is in a taxable account.

Re: Explain to me why dividends aren't real money

Posted: Mon Feb 10, 2020 11:13 pm
by jabberwockOG
UpperNwGuy wrote:
Mon Feb 10, 2020 10:27 pm
Dividends are real money, but they're not real additional money. It's like moving some coins from your right pocket to your left pocket. The coins are definitely real, but you haven't gained anything my switching pockets.
That is theoretically correct but in actuality solid long term dividend growth companies tend to also increase their share price at a better than average rate. Dividend growth companies especially when held in tax advantaged accounts, have been a very productive investment for me.

Re: Explain to me why dividends aren't real money

Posted: Mon Feb 10, 2020 11:18 pm
by HawkeyePierce
jabberwockOG wrote:
Mon Feb 10, 2020 11:13 pm
UpperNwGuy wrote:
Mon Feb 10, 2020 10:27 pm
Dividends are real money, but they're not real additional money. It's like moving some coins from your right pocket to your left pocket. The coins are definitely real, but you haven't gained anything my switching pockets.
That is theoretically correct but in actuality solid long term dividend growth companies tend to also increase their share price at a better than average rate. Dividend growth companies especially when held in tax advantaged accounts, have been a very productive investment for me.
Since the inception of Vanguard's dividend growth fund (VDIGX), it has underperformed the S&P500.

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Re: Explain to me why dividends aren't real money

Posted: Mon Feb 10, 2020 11:26 pm
by Finridge
Dividends are real money.

In non-tax advantaged accounts, they are also a good way to rebalance without selling shares and realizing capital gains. Instead of having the dividends reinvested into the mutual fund they originate from, invest them in the mutual funds you need to rebalance into.

Re: Explain to me why dividends aren't real money

Posted: Mon Feb 10, 2020 11:27 pm
by rchmx1
I'm new to investing as well, and while I'd say I've gotten to the point where my head is firmly wrapped around the fact that a dividend payout doesn't leave your with anything more than what you started with, I feel like I still have a bit of cognitive dissonance with something else that's frequently brought up when the topic of dividends arises. I will often come across statements to the effect that the value of a stock is based largely upon expected future dividend payouts. There seems to be a bit of inconsistency here. Dividends don't provide anything more than what you had before the ex-div date, and yet expected future dividends play a big role in stock valuations? I know I'm missing something (and I would expect it to be something like, "future expected dividend payouts" stands for "if we think a company will become stable and profitable enough to pay consistent dividends in the future, that serves as a good reason to grant them this estimated current value"), but I was wondering if any of the brighter minds than mine here could offer their insight on this aspect of the dividend topic.

Re: Explain to me why dividends aren't real money

Posted: Mon Feb 10, 2020 11:37 pm
by mayhapbh
justsomeguy2018 wrote:
Mon Feb 10, 2020 9:48 pm
I feel like I have seen it said on here that dividends/ETF capital gains distros "aren't a free lunch" because they just lower the NAV.

I kind of follow, but I guess at the same time I don't follow.

If I own a high yield fund paying 5% vs a fund paying 0%, how am I not making money? If that is the case what is the point of receiving dividends at all?
Imagine a company worth $100, which has issued 10 shares (each worth $10).

You own 1 share of that company ($10), or 10% of the company as a whole.

The company increases in value and is now worth $200. Your 10% stake is now worth $20.

The company decides to declare a dividend. It will pay $1/share for each of its $10 shares outstanding; $10 total.

Where does the dividend come from? Well, it comes from the $200 company. And if you’re worth $200, and then give away $10, you’re now worth $190, all else equal.

So, what do you have now? You own 10% of a company worth $190 ($19), plus the dividend ($1). The same $20 you had before the dividend ($200 * 10%). Except now you may owe taxes, too.

Re: Explain to me why dividends aren't real money

Posted: Mon Feb 10, 2020 11:39 pm
by venkman
jabberwockOG wrote:
Mon Feb 10, 2020 11:13 pm
That is theoretically correct but in actuality solid long term dividend growth companies tend to also increase their share price at a better than average rate. Dividend growth companies especially when held in tax advantaged accounts, have been a very productive investment for me.
But is that a cause or an effect?

A company that consistently raised its dividend every year for the past 20 years might have outperformed the market over that time, But did it outperform because it raised its dividend and investors flocked to it; or did it outperform because it was just a really good company, and being able to raise the dividend was just a side effect of that superior performance?

Re: Explain to me why dividends aren't real money

Posted: Mon Feb 10, 2020 11:43 pm
by Cubicle
Real money, just not dollar for dollar due to the aforementioned tax drag.

Re: Explain to me why dividends aren't real money

Posted: Mon Feb 10, 2020 11:49 pm
by Unladen_Swallow
It is real money.

It isn't extra or special.

You may or may not find use for it. Or you might not care.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 12:16 am
by whodidntante
Dividends are like having the same threads over and over again. Nothing new is made; it's just pushing the same capital/knowledge around.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 12:21 am
by 02nz
Of course dividends are real money, no one said they weren't. But they aren't free money, which is what many dividend-chasers seem to think they are.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 12:51 am
by AlohaJoe
JonnyB wrote:
Mon Feb 10, 2020 10:48 pm
Wiggums wrote:
Mon Feb 10, 2020 10:32 pm
And as the previous response stated, its a tax drag even when the distribution is reinvest automatically.
It's a tax drag only if it is in a taxable account.
This isn't true, at least not as a general statement. And it is wrong enough that it affects where certain assets should be held, so it isn't just nit picking.

For instance, every non-US stock will have dividend withholding tax applied that you'll never be able to claim back if held in a Roth/IRA/etc.

It also isn't true in the many tax jurisdictions around the world that don't have any kind of tax-deferred accounts or that have special look-through provisions for dividends or that do divided franking or....

It is safest to start with the assumption that dividends are always and everywhere a tax drag. And then look at specific tax policies in your jurisdiction that may alleviate (partially or wholly) that tax drag.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 1:19 am
by JonnyB
For U.S. stocks, only about 25% of shares are held in taxable accounts. High income or wealthy shareholders having large taxable accounts are a small minority of shareholders.

Image

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 2:51 am
by rossington
rchmx1 wrote:
Mon Feb 10, 2020 11:27 pm
I'm new to investing as well, and while I'd say I've gotten to the point where my head is firmly wrapped around the fact that a dividend payout doesn't leave your with anything more than what you started with, I feel like I still have a bit of cognitive dissonance with something else that's frequently brought up when the topic of dividends arises. I will often come across statements to the effect that the value of a stock is based largely upon expected future dividend payouts. There seems to be a bit of inconsistency here. Dividends don't provide anything more than what you had before the ex-div date, and yet expected future dividends play a big role in stock valuations? I know I'm missing something (and I would expect it to be something like, "future expected dividend payouts" stands for "if we think a company will become stable and profitable enough to pay consistent dividends in the future, that serves as a good reason to grant them this estimated current value"), but I was wondering if any of the brighter minds than mine here could offer their insight on this aspect of the dividend topic.
It depends on how investors value the future of a company's earnings and growth so the stock price is not directly related to the dividend except only for a brief time at the ex dividend date.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 3:05 am
by rossington
venkman wrote:
Mon Feb 10, 2020 11:39 pm
A company that consistently raised its dividend every year for the past 20 years might have outperformed the market over that time, But did it outperform because it raised its dividend and investors flocked to it; or did it outperform because it was just a really good company, and being able to raise the dividend was just a side effect of that superior performance?
Precisely, the answer is BOTH.... but the latter is more likely the norm.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 3:28 am
by rossington
mayhapbh wrote:
Mon Feb 10, 2020 11:37 pm
justsomeguy2018 wrote:
Mon Feb 10, 2020 9:48 pm
I feel like I have seen it said on here that dividends/ETF capital gains distros "aren't a free lunch" because they just lower the NAV.

I kind of follow, but I guess at the same time I don't follow.

If I own a high yield fund paying 5% vs a fund paying 0%, how am I not making money? If that is the case what is the point of receiving dividends at all?
Imagine a company worth $100, which has issued 10 shares (each worth $10).

You own 1 share of that company ($10), or 10% of the company as a whole.

The company increases in value and is now worth $200. Your 10% stake is now worth $20.

The company decides to declare a dividend. It will pay $1/share for each of its $10 shares outstanding; $10 total.

Where does the dividend come from? Well, it comes from the $200 company. And if you’re worth $200, and then give away $10, you’re now worth $190, all else equal.

So, what do you have now? You own 10% of a company worth $190 ($19), plus the dividend ($1). The same $20 you had before the dividend ($200 * 10%). Except now you may owe taxes, too.
Yes you may owe taxes but:
This example while plausible in it's own black and white context does not reflect the impact of the psychology of daily market stock price determination.
The stock price reduction at ex dividend date is nothing more than temporary as a result of the dividend. Beyond that then other market factors are determining it's price.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 6:50 am
by dewey
[/quote]

Imagine a company worth $100, which has issued 10 shares (each worth $10).

You own 1 share of that company ($10), or 10% of the company as a whole.

The company increases in value and is now worth $200. Your 10% stake is now worth $20.

The company decides to declare a dividend. It will pay $1/share for each of its $10 shares outstanding; $10 total.

Where does the dividend come from? Well, it comes from the $200 company. And if you’re worth $200, and then give away $10, you’re now worth $190, all else equal.

So, what do you have now? You own 10% of a company worth $190 ($19), plus the dividend ($1). The same $20 you had before the dividend ($200 * 10%). Except now you may owe taxes, too.
[/quote]

**This is the best explanation I’ve seen on dividends. Very simple illustration and easy to grasp. Thank you.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 8:53 am
by boomer_techie
rchmx1 wrote:
Mon Feb 10, 2020 11:27 pm
Dividends don't provide anything more than what you had before the ex-div date, and yet expected future dividends play a big role in stock valuations?
In between the ex-div dates, the company (hopefully) accumulated some profit. Thus, by the time the next ex-div date rolls around, the company's value has gone up.

If a company doesn't pay a dividend, instead just banking it, the stock price "should" increase to reflect the increased reserves. However, if a company accumulates too much cash, a corporate raider may swoop in and do a leveraged buyout of the company using it's own cash.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 9:06 am
by dbr
justsomeguy2018 wrote:
Mon Feb 10, 2020 9:48 pm
I feel like I have seen it said on here that dividends/ETF capital gains distros "aren't a free lunch" because they just lower the NAV.

I kind of follow, but I guess at the same time I don't follow.

If I own a high yield fund paying 5% vs a fund paying 0%, how am I not making money? If that is the case what is the point of receiving dividends at all?
Your first sentence is wrong but your title question is right and your third sentence is confused.

Dividends are not a free lunch because sorting stocks on dividend rates does not sort stocks for higher return. And if it did those stocks would also be more risky. In the past Swedroe among others have argued that dividend paying might be a partial proxy for value factor loading. That is distinct from growth stocks that pay less in dividends.

The title question is right. Dividends certainly are real money. Stocks are not money, but when you withdraw from a stock portfolio you do get real money out. The question is what happens to the portfolio then. What happens is that the portfolio grows by return less withdrawals and if you cash the dividends you rob from the return and the portfolio doesn't grow as much. You can produce the same result by selling some shares.

As to the third statement, to the extent a dividend of 5% means return of 5% you are gaining value in your investment. Of course, you haven't made any money until you sell the investment and own money instead of stocks, which are not money. If you cash the dividend instead of reinvesting it you have liquidated part of your position and will have money in pocket but less growth in investment.

For the investor per se there is no point to receiving dividends. In the larger financial picture, however, if there were never dividends investors would be concerned that companies were not giving back a share of the earnings to owners of the stock and would eventually be concerned that those companies were not really viable. But this part of the discussion is complicated and you can read plenty of that discussion in other threads or even in books and articles.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 9:09 am
by dknightd
"Explain to me why dividends aren't real money"

I cannot do that. They are real money. Perhaps you could consider them a "different" kind of money. The IRS does. There are pros and cons. It is still money :)

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 9:14 am
by alex_686
boomer_techie wrote:
Tue Feb 11, 2020 8:53 am
If a company doesn't pay a dividend, instead just banking it, the stock price "should" increase to reflect the increased reserves. However, if a company accumulates too much cash, a corporate raider may swoop in and do a leveraged buyout of the company using it's own cash.
And this is bad because? You will still get the cash. Maybe by a large special dividend, maybe via cash in the cash merger, maybe with shares in the new company (which has competent management.)

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 9:20 am
by dbr
alex_686 wrote:
Tue Feb 11, 2020 9:14 am
boomer_techie wrote:
Tue Feb 11, 2020 8:53 am
If a company doesn't pay a dividend, instead just banking it, the stock price "should" increase to reflect the increased reserves. However, if a company accumulates too much cash, a corporate raider may swoop in and do a leveraged buyout of the company using it's own cash.
And this is bad because? You will still get the cash. Maybe by a large special dividend, maybe via cash in the cash merger, maybe with shares in the new company (which has competent management.)
The biggest overnight profit I ever made on a stock was when a holding I had went private. In other words a group of inside investors wanted to trade me a lot of money for some shares. Of course that also forced me to take an involuntary capital gain, but money is money. It sure made the dividend they had been paying look shabby.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 9:28 am
by Wanderingwheelz
Finridge wrote:
Mon Feb 10, 2020 11:26 pm
Dividends are real money.

In non-tax advantaged accounts, they are also a good way to rebalance without selling shares and realizing capital gains. Instead of having the dividends reinvested into the mutual fund they originate from, invest them in the mutual funds you need to rebalance into.
I’ve thought about doing that on several occasions but figured it would just be one more thing that would make it harder for my wife to manage things in my absence since quarterly dividend cash sitting idle is a drag- especially in the settlement fund. I told her to just rebalance annually w/in the IRAs. Not sure she understood what that means... but.. I did tell her. I even wrote it down.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 9:29 am
by Jack FFR1846
In a tax advantaged account with dividends re-invested, it doesn't matter. A dividend and non-dividend paying company equal in every other way will have the same result for you.

In a taxable account, dividends are paid and YOU then pay taxes. You have no choice. Every time a dividend is paid, even if you re-invest it, you pay tax. In a non-dividend paying stock, you pay nothing until you sell. If you're trying to hold to some limit to avoid going over a cliff, it's a lot harder with dividend payments whose value you don't know until the company...or fund announces what it is. If there's a good quarter and it pushes you over a cliff.....too bad.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 9:46 am
by rkhusky
The advantage of a dividend is that it is in your bank account and not the company's bank account. If it is in the company's bank account, then there is a chance that you will never get it.

Getting dividends is good if you can be more productive with the money than the company will be. Dividends are bad if the company can be more productive with the money than you will be. In addition, you may have to overcome the tax drag of receiving dividends in a taxable account.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 10:32 am
by bertilak
rchmx1 wrote:
Mon Feb 10, 2020 11:27 pm
... the value of a stock is based largely upon expected future dividend payouts.
I think it is more accurate to say "based largely upon expected future earnings." Earnings may not always be paid out in dividends but they re still the important factor. Look at the early days of Microsoft. Look at the current days of Berkshire Hathaway.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 10:41 am
by watchnerd
JonnyB wrote:
Mon Feb 10, 2020 10:48 pm

It's a tax drag only if it is in a taxable account.
What a shocking surprise it would be if this wasn't true.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 12:05 pm
by Ramjet
Oops...

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 12:09 pm
by alex_686
Ramjet wrote:
Tue Feb 11, 2020 12:05 pm
I think the confusion comes when people mention that paid dividends reduce a stocks value

From Investopedia: "After the declaration of a stock dividend, the stock's price often increases. However, because a stock dividend increases the number of shares outstanding while the value of the company remains stable, it dilutes the book value per common share, and the stock price is reduced accordingly"
I think you are quoting from the “stock dividend” section, where a company issues new shares instead of paying cash. As such, not very applicable to this discussion of ordinary dividends.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 1:51 pm
by Ramjet
alex_686 wrote:
Tue Feb 11, 2020 12:09 pm
Ramjet wrote:
Tue Feb 11, 2020 12:05 pm
I think the confusion comes when people mention that paid dividends reduce a stocks value

From Investopedia: "After the declaration of a stock dividend, the stock's price often increases. However, because a stock dividend increases the number of shares outstanding while the value of the company remains stable, it dilutes the book value per common share, and the stock price is reduced accordingly"
I think you are quoting from the “stock dividend” section, where a company issues new shares instead of paying cash. As such, not very applicable to this discussion of ordinary dividends.
Will remove, thanks for catching error

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 2:07 pm
by deltaneutral83
justsomeguy2018 wrote:
Mon Feb 10, 2020 9:48 pm
If that is the case what is the point of receiving dividends at all?
You will find a lot of people who own a lot of Berkshire in their taxable accounts to have 100% control of taxable events as BRK doesn't issue dividends. A lot of people feel like the tax drag on say the S&P equates to something substantial like 30 bps annually (as mentioned several posts above mine). People who own Berkshire think it will do as well or better than its S&P peers and can eliminate the tax drag as well.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 2:49 pm
by GrowthSeeker
A dividend is real money moved from one pocket to another pocket along with a slight tax consequence.

Investors who place great importance on high, or consistent, or growing dividends as the basis for their stock-picking or fund-picking strategy might be about as likely to succeed as other beat-the-market strategies, i.e. maybe 50/50. I believe they are engaging in some form of fallacious thinking, most likely an underestimation of one or more biases in data selection.

Sometimes these "dividend investors" make a straw man argument by stating that those who disagree with them are claiming that "dividends are not real money". No one is making that claim.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 6:16 pm
by boomer_techie
alex_686 wrote:
Tue Feb 11, 2020 9:14 am
boomer_techie wrote:
Tue Feb 11, 2020 8:53 am
However, if a company accumulates too much cash, a corporate raider may swoop in and do a leveraged buyout of the company using it's own cash.
And this is bad because? You will still get the cash.
It is bad for current management - thus they don't want to accumulate massive cash reserves. It can also be bad for you when your "steady earner" is bought out from under you.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 7:11 pm
by Basis
whodidntante wrote:
Tue Feb 11, 2020 12:16 am
Dividends are like having the same threads over and over again. Nothing new is made; it's just pushing the same capital/knowledge around.
Dang this is smart. And funny.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 7:23 pm
by Phineas J. Whoopee
All money, in its medium of exchange sense, is real money. The NAV is real money too, in its unit of account sense.

For completeness, the third function of money is as a store of value. A fourth used to be cited, but now it's been subsumed into the others.

Not picking on OP: it seems to me as if a fair number of people, being mostly familiar with savings accounts, suppose stocks and their funds work the same way. That's an understandable error, but it is still an error. Interest on a savings account increases one's wealth. A dividend on a stock does not.

PJW

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 7:24 pm
by willthrill81
I smell troll.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 7:57 pm
by All Seasons
willthrill81 wrote:
Tue Feb 11, 2020 7:24 pm
I smell troll.
Ditto.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 8:02 pm
by cashmoney
aristotelian wrote:
Mon Feb 10, 2020 9:49 pm
They are real money, but so are capital gains. Both are part of total return. Capital gains are advantageous because you can choose when to realize them and pay tax, whereas you are forced to pay tax on dividends as they are paid.


IMO the fact that you don't have to choose or make a decision on when to take profits is what attracts many investors to dividends.I have to admit even though I know better i still get a little excited when my index funds pays its dividends .

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 8:04 pm
by Designairohio
I have around 8% of my portfolio in a REIT (Chimera Investment Corp, CIM) this company pays around a 10% dividend and the price stays pretty steady. It drops on exdividend day then normally recovers within 3 to4 weeks.

They way I see it I’m making 10% and acquiring more shares through reinvestment. Is this a poor investment?
Would I be better off in VTSAX Getting A 2% and the growth of the NAV?
All of my CIM is in tax advantaged accounts.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 8:34 pm
by nisiprius
VEIPX, the Vanguard Equity-Income fund, is a fund in a category that used to be better known: a stock fund that's intended to provide dividend income. It's actively managed but I'm going to use it because it goes back to 1988, much farther back than VHDYX. If we compare VEIPX (blue) to the Vanguard 500 Index Fund (orange), we see that in terms of total return, how much money each fund made one way or the other, they were a close match most of the time. The dividend fund didn't participate as heavily in the big bull market of the late 1990s; you could say, it didn't get caught up as much in the bubble; whether that's a good thing or a bad thing depends on your point of view. But, overall, about the same.

People like to put microscopes on small differences, and it's common to claim that selecting stocks with high dividends means selecting management that cares about shareholder value or whatever... just as some people claim that stocks with high loadings on the value factor are better, or whatever. But, overall, about the same.

If dividends were a free lunch, extra money on top of the same capital appreciation, then their accumulation and reinvestment would loft the blue curve farther and farther above the orange curve. That didn't happen. Every year, both funds made about the same amount of money, except for the late nineties, when the S&P 500 fund made more for a while and then gave it all back.

Source

Image

If, however, instead of showing total return, we set the chart to show price only, we see a huge difference. In terms of price per share, the S&P 500 fund (orange) grew far, far more than the dividend-oriented fund (green).

Image

So is the S&P 500 fund (orange line) hugely better? Of course not. Was the dividend fund (green line) hugely better? No. Both funds made and in most years they made just about the same amount of money, they just made it in different ways. The dividend fund investors received much more money in dividends. And the S&P 500 fund paid out much less in dividends, but almost exactly made up for it in capital appreciation.

Another way to say it is that the S&P 500 companies kept most of their earnings inside their stock shares, using it to invest in themselves and grow the company. The stocks in the dividend fund didn't keep as much of their earnings, but handed it out to shareholders instead.

Re: Explain to me why dividends aren't real money

Posted: Tue Feb 11, 2020 8:38 pm
by abuss368
justsomeguy2018 wrote:
Mon Feb 10, 2020 9:48 pm
I feel like I have seen it said on here that dividends/ETF capital gains distros "aren't a free lunch" because they just lower the NAV.

I kind of follow, but I guess at the same time I don't follow.

If I own a high yield fund paying 5% vs a fund paying 0%, how am I not making money? If that is the case what is the point of receiving dividends at all?
Dividends are cash paid to the shareholder from the retained earning of a company. Many investors who are int he accumulated stage will have dividends automatically invested. Retirees may have the dividends automatically deposited to a bank account to use to meet living expenses.

Re: Explain to me why dividends aren't real money

Posted: Wed Feb 12, 2020 12:46 am
by watchnerd
All Seasons wrote:
Tue Feb 11, 2020 7:57 pm
willthrill81 wrote:
Tue Feb 11, 2020 7:24 pm
I smell troll.
Ditto.
Lots of Boglehead thread titles these days are very click-bait sounding