Investing

Why Dividend Investing is not a great idea

  • Last Updated:
  • Sep 24th, 2020 5:53 pm
Deal Addict
Dec 4, 2011
1305 posts
670 upvotes
Montreal
There is not one size fits all investment strategy but for people that like to buy and hold as well as receive income, dividend investing can work out very well. The NA.TO stock I bought 20 years ago is now yielding 20% (rough estimate) on the money I invested in it (I saw someone else post this on Twitter). Not like the FAANGS (which I also own some of) growth but satisfying nevertheless
Deal Addict
Dec 3, 2014
2019 posts
1273 upvotes
Ontario
Interesting topic. I have many years left in the workforce and don’t need additional income now. In spite of that I do own some dividend paying stocks, as well as others that do not.

One item that has not been specifically mentioned, although alluded to by a few is diversification. A growth strategy may be “best” for one’s situation, but growth stocks are also the most volatile and prone to overvaluation. By purchasing a mixture of dividend and growth stocks (or just an index), one can benefit from the diversification of holding both.
Newbie
Jul 22, 2018
76 posts
48 upvotes
2009M5 wrote: Not every company would benefit from re-investing their dividends.
Usually the industries that pay dividends are at their peak, they're not growth stocks, so investing in R&D/product development for the sake of it seems dumb.
If a project was on the table that was profitable, there is no questions they'd fund it, if it wasn't profitable - why fund it? Might as well pay a dividend.
All companies have projects that will turn profitable some have longer timetable than others. usually the shorter ones get more priority.

The dividends are just to attract dumb investors.

Giving money to a company and them giving it back to you sounds so stupid to me. Some companies make way more money and dont know what to do with it ala apple. rather they just buy back their own stock in that case.
Newbie
Jul 22, 2018
76 posts
48 upvotes
rodbarc wrote: How is a dividend an additional risk? It’s cash, capital that can be reinvested on the same company, or another company, or spent, while keeping the same engine that produces such cash flow.

Lots of companies in March that reinvested their cash back, but did that help investors if they need income? How does that help the investor to average down with such opportunities? Or in 2016, 2011 or 2008? Dividends can be reinvested back, for a higher yield, which in turn produces further cash, which can be compounded further or spent. How is that extra risk?

Specially for new investors, it’s a lot easier to endure market gyrations because dividends continue to come despite price volatility. Dividends are paid on the number of shares you own and not affected by the price volatility of those shares. Therefore, even in a bear market when prices are dropping, your dividend income can still be rising. Which becomes an edge, since this is capital that can be reinvested on companies that got cheaper for reasons unrelated to the business itself. Unlike a company that doesn’t pay dividend, where you can’t add to those opportunities, unless you provide additional funding. How are dividends a flawed strategy in this setup?



Rod
Do you think its a good idea for companies to pay dividends, when they go through financial hardships such as the times you posted? Not as an investor sense but what is best for the company sense.
Deal Addict
Sep 20, 2014
1308 posts
452 upvotes
Toronto, ON, CA
BardoonD52881 wrote: All companies have projects that will turn profitable some have longer timetable than others. usually the shorter ones get more priority.

The dividends are just to attract dumb investors.

Giving money to a company and them giving it back to you sounds so stupid to me. Some companies make way more money and dont know what to do with it ala apple. rather they just buy back their own stock in that case.
Some people need income and prefer not to sell shares to generate income eg retirees.
If you’re a retiree with $1M in dividend yielders (that aren’t yield traps) - what would you recommend to cover expenses?
Selling stocks and paying cap gains and commissions or?
Deal Fanatic
User avatar
Dec 14, 2010
6123 posts
7029 upvotes
BardoonD52881 wrote: Do you think its a good idea for companies to pay dividends, when they go through financial hardships such as the times you posted? Not as an investor sense but what is best for the company sense.
That’s up to management to decide. I trust management when I decide to partner with these business, they know their business better than I, so I will let them make the best decision for the business and shareholders.

A company that has reliable and growing cash flows can afford to pay and increase dividends, because dividends come from cash, not earnings.

No business is capable of generating perfect long-term operating results. Inevitably, there will be a bad year, a bad quarter, or even a few bad years or bad quarters. However, a weak quarter or year does not necessarily imply that a sound business model is no longer valid. Businesses are competitive, economies are cyclical, and good managements respond and adapt.


Rod
Build a comprehensive portfolio based on Investing and Trading strategies. Check out these threads and join the discussion:

Investing strategy based on dividend growth

Trading strategy based on Graham principles.
Deal Fanatic
User avatar
Dec 14, 2010
6123 posts
7029 upvotes
BardoonD52881 wrote: All companies have projects that will turn profitable some have longer timetable than others. usually the shorter ones get more priority.

The dividends are just to attract dumb investors.

Giving money to a company and them giving it back to you sounds so stupid to me. Some companies make way more money and dont know what to do with it ala apple. rather they just buy back their own stock in that case.
Total return = capital appreciation + dividends. Dividends is a form of rewarding shareholders on profit operating results of the business that they invested on.

When a business is rapidly expanding, all cash flow is reinvested back into the business. That’s why most of Growth companies don’t pay dividends. However, once the company reaches a maturity level and can’t grow at the same pace, shareholders are better off having a portion of that cash in form of dividends instead of not being put to use by the business. Share buy back is not always advisable, since no business is interested in buying back their shares when it’s overvalued. So it makes sense to reward shareholders with dividends.

Apple and Microsoft didn’t pay dividends when they were growing at a fast pace and were smaller. They started paying later. They didn’t start to pay to attract dumb investors. They started to pay to put better use of their cash aligned to shareholder’s interest.

Dividends is not your money back. That’s Return of Capital. Dividends are from cash flow based on the operating performance of the business. That’s why quality business have a history of growing dividends, as their cash flow grows too. With dividends, I can count on a growing income without worrying if the market will crash before I reach financial independence or retirement, because the goal of most dividend investors is to never sell their shares (which is the engine that generates that income). Dividend compounding allows one to reach the desired level of income with a smaller portfolio, compared to a strategy that would require to sell shares to meet income.

As mentioned many times, a strategy is not better than another. They are different, both valid, for different purposes. Not every stock is the same. A stock like KO won’t outperform the market, and that’s by design. I bought them for their reliable cash flows into my portfolio, cash flows that have a very respectable cost of living increase. I'm assuming their high quality rating and business model will allow them to continue paying that dividend, without ever reducing it during my lifetime (8.5% CAGR in the last 20 years, 58 consecutive annual increases and counting). KO don’t offer dividends for dumb investors. They offer a percentage of their cash flow growth as cash to their shareholders, which they can decide to reinvest back if shares are fairly valued, or invest somewhere else, or spend it. What’s not to like with this setup?

If I want capital appreciation above the market, I buy growth stocks, not KO. Different companies, for different investing goals. That’s the beauty of the supermarket of stocks known as the stock market.


Rod
Build a comprehensive portfolio based on Investing and Trading strategies. Check out these threads and join the discussion:

Investing strategy based on dividend growth

Trading strategy based on Graham principles.
Deal Expert
User avatar
Feb 8, 2014
17327 posts
6188 upvotes
Germack wrote: This is for investments in a non-registered account. If the investments are in a TFSA or RRSP both investors will end up with 670K.
So the lesson here is invest in the TFSA and reinvest the dividends inside the TFSA as well as top it up each year.
In fact in Rand McNally they wear hats on their feet and hamburders eat people
Deal Guru
Jan 27, 2006
14784 posts
7720 upvotes
Vancouver, BC
BardoonD52881 wrote: Do you think its a good idea for companies to pay dividends, when they go through financial hardships such as the times you posted? Not as an investor sense but what is best for the company sense.
The same issue comes up with stock buybacks which have been used by a lot of non-dividend paying stocks as a way to 'return capital to shareholders'. In some cases, the buybacks have worked but in others, they have been a complete and utter failure as the stock price kept falling despite the billions spent on buybacks.
[OP]
Deal Addict
Nov 9, 2013
3939 posts
3625 upvotes
Edmonton, AB
BardoonD52881 wrote:
Giving money to a company and them giving it back to you sounds so stupid to me. Some companies make way more money and dont know what to do with it ala apple. rather they just buy back their own stock in that case.
I think to some degree we all buy appreciating assets so they give us money back (preferably more).

What if a company has a share price that frequently overvalued? For every $1 spent on buybacks, they will destroy a % of that capital, depending on how overvalued the share price is. With dividends that doesn't happen.

Also, isn't a buyback just another form of a company returning capital to it's shareholders, like a dividend? The only difference is instead of that cash being deposited into your brokerage account you see the buyback reflected in the share price.
Keep calm and go long
Deal Addict
Jul 8, 2013
1468 posts
1681 upvotes
Red Deer, AB
So far, not one person has mentioned that dividend investing requires great amount of effort and research. No one here has mentioned the time commitment required to maintain a large portfolio.

No one has mentioned that it takes someone with considerable skill and knowledge to buy good-quality dividend stocks, unlike brain-dead index funds. Not everyone is as knowledgeable as @rodbarc nor has the time commitment.

No one has mentioned that if you're timing the market by constantly buying/selling (which is the vast majority of the people), neither dividend-investing nor index investing will work.
TFSA: XAW | RRSP: VEQT + VAB | Non-Reg: XIC

It's really that simple.
Sr. Member
User avatar
May 31, 2018
536 posts
1094 upvotes
Saskatchewan
TuxedoBlack wrote: So far, not one person has mentioned that dividend investing requires great amount of effort and research. No one here has mentioned the time commitment required to maintain a large portfolio.

No one has mentioned that it takes someone with considerable skill and knowledge to buy good-quality dividend stocks, unlike brain-dead index funds. Not everyone is as knowledgeable as @rodbarc nor has the time commitment.

No one has mentioned that if you're timing the market by constantly buying/selling (which is the vast majority of the people), neither dividend-investing nor index investing will work.
A combo of brain dead dividend index funds of CDZ, CYH, ZDY and ZDI will provide a nice monthly cash flow with about as close to zero effort as is possible. And even a goodly sized batch of decent individual dividend stocks (we currently have 30) doesn't take that much effort to find given the amount of info easily available on the internet, and once they're in the portfolio there's no real need to mess with them again as you harvest the dividends. I honestly can't think of an easier way to have a passive income stream than these set it and forget it portfolios.
Jr. Member
Dec 26, 2019
177 posts
106 upvotes
I essentially have two portfolios: growth (Can, US, international) and Canadian dividend growth. I’m still fairly young. When I retire, I plan to slowly harvest my growth portfolio and will never sell my dividend portfolio. Just live off of dividends.

Even at my age, the predictability of my dividend portfolio has helped me take more risks. For example, I used my HELOC to invest knowing that the dividends can pay off the interest due.

It really is a set-it and forget it portfolio for me. I’ll continue to pay interest on my HELOC with a part of the dividends and grow the portfolio with the rest. It takes me 2 minutes, once per month. I only hold Canadian companies that are very unlikely to cut dividends.
Member
User avatar
Oct 12, 2009
426 posts
137 upvotes
There have been some guys on here making huge dividend gains a month for many years. There was a thread on it recently.

People say its boring, slow or you need a lot of capital up front, but overtime you will reap the rewards.

My brother in law gets a tidy 2.5k a month dividend and he invested 16-17 years ago by using 2 DRIPS without any annual top up.

I can make more in a day by day trading, than i do in six months with my dividend play, but as long as the established companies don't cut their divvy, long term I will reap the rewards. I always think of it as some sort of compound interest
2010 Contest Wins: 0
Deal Addict
User avatar
Aug 4, 2014
2755 posts
2447 upvotes
Toronto, ON
TuxedoBlack wrote: So far, not one person has mentioned that dividend investing requires great amount of effort and research. No one here has mentioned the time commitment required to maintain a large portfolio.

No one has mentioned that it takes someone with considerable skill and knowledge to buy good-quality dividend stocks, unlike brain-dead index funds. Not everyone is as knowledgeable as @rodbarc nor has the time commitment.
If you google around, you’ll find that most “regular folk” seem to buy “couple banks, couple pipelines, couple telcos, couple utilities, maybe a railroad and a grocery chain” and call it a day :) And “safe utilities” are popular as GIC replacements recommendation (with no regard to diversification, investor’s knowledge or stock valuation):
A safe investment, please

Q - I had a $30,000 GIC mature in my TFSA account, for which I earned a princely $666 in interest! I looked at putting the money into another GIC, but the return would be even less. I don't need the money for at least 10 years.

Can you suggest somewhere safe to put it in the meantime? Most of my investments are in mutual funds and stocks, so I’d like to have a little cushion in something that won’t lose money. Thank you for your time. - Susan D.


A – An investment that won’t lose money over 10 years? If you take inflation risk into account, even GICs and high-interest savings accounts could lose purchasing power over that time. A 10-year Government of Canada bond is only yielding about 0.5 per cent, so you probably don’t want to go that route either.

With a 10-year time horizon, I suggest you consider taking on a small amount of risk with your money. If you don’t own them already, some good utility stocks or a fund that invests in them would be worth considering. These would include companies like Fortis Inc. (FTS-T), Canadian Utilities Ltd. (CU-T) and Emera Inc. (EMA-T). Because most of their income is regulated, the downside risk is minimal, and the dividends appear to be secure. - G.P.
Gordon Pape’s mailbag: Seeking ‘safe’ options

Top