Investing

Why Dividend Investing is not a great idea

  • Last Updated:
  • Sep 24th, 2020 5:53 pm
Deal Fanatic
User avatar
Dec 14, 2010
6081 posts
6956 upvotes
CheapScotch wrote: - Dividends are not salary. A salary is compensation for your labour, and for the most part it is stable and reliable. Dividends are one form of compensation for your capital, but you need to step back and look at the bigger picture - the capital itself. As a shareholder, the compensation for your capital, in the form of dividends and capitals gains is not reliable because business is inherently risky. There are ways to mitigate that risk which you and I are both well aware of, but nobody should ever think of the returns on their investments in the same way they thing about their salary. And, again, you can't know what you future cash flow needs are (or the needs of your descendants). Someday, you or they will have to sell the stock.

Re: your example about CNR - you can cherry pick the past performance of a stock to provide evidence in support of pretty much any theory you have about investments.
Dividends are like a salary, a methafor to a dependable, reliable, predictable income that grows every year, despite of market conditions, because it’s on a portfolio, a collection of individual quality companies, which were acquired at fair valuation, following the same process as if you were to acquire the whole business. Like any investing book explains.

Dividends are my salary replacement, without me having to do labour. That’s exactly why dividends are a good idea for the investor that want to live from a perpetual growing income. Being in my 40s, I can achieve financial independence when dividends matches my current net salary. And that will last perpetually, as I will keep following the same principles.

So yeah, it’s like a salary, where you tag along good companies that gives you a raise about 7% every year. When we enter the financial independence or retirement phase of our lives, we can't go to the boss and ask for a raise because the cost of gas, electricity, or food has gone up. There's no more boss. The only boss left is us. As the new boss, it is incumbent upon us to come up with strategies to whip inflation, all by ourselves. Dividends more than provide for that.

Actually, they are way more reliable than salary on the job. Because if you don’t own your business, you are just a number. Look at how many people lost their jobs during the pandemic. But shareholders continued to be rewarded.

In the corporate world of public traded companies, shareholders come first, before staff and clients.

I don’t need to look at capital because that’s the engine to provide these dividends that I’ll live from. Short term capital fluctuations make no difference. But because these are high quality companies, acquired at fair valuation, capital will continue to increase. Dividend investing is not “yield at any cost”.

Dividends ARE reliable when the business continues to present quality metrics and continues to be well managed. They are not random numbers. They do not depend on the year’s performance for their payouts.

Remember Canadian banks in 2008? They all lost Billions. None reduced dividends. That’s the power of reliability.

CNR is not cherry picked. Take any of the 65 companies with a dividend aristocratic status and see how that applies consistently, from a dividend increase perspective. Or any of the 240 companies as a dividend contender status, and see how that applies consistently from a dividend payment perspective, regarding reliability.

A diversified portfolio, made of quality companies, acquired at a fair valuation to maximize margin of safety will always provide superior returns, be it dividend focused or growth focused. Despite if business risks. We are talking here portfolio, overall income reliability. Like I said earlier, some companies I have cut dividends. Some will be sold because they no longer meet my goals. Yet, my portfolio continues to grow, as well as my dividend income.


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
Nov 24, 2013
6142 posts
2897 upvotes
Kingston, ON
Germack wrote: Here is one more graph based on your scenario above:

Investor A (Dividend investor): 100k of investment; 5% dividend per year, dividend is re-invested every year for 40 years.
Investor B ("Capital gains" investor): 100k of investments; 5% capital gain per year for 40 years.

Additional employment income assumed for both investors 50K or 100K

Investor A will end up after 40 years with $417K ($100K income) or 582K (50K income). Investor B will end up with 670K (50K+100K income).

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.
This post was way back on page 2 but I didn’t see it ever get challenged. You’re showing portfolio balance after 40 years... great. What happens when you go to liquidate?

DRIPping increases your ACB of your investment each time. For those DRIP scenarios, you’d hypothetically sell and walk away with $0 of CGT. For the unrealized capital gain scenario, you have a $670k after 39 years, $704k after 40, investment with a $100k ACB. To liquidate, you’d owe CGT on a $570k capital gain. $285k taxable at a 50% inclusion rate. You can spread that out over a couple years but it’s not a clean-cut advantage. Many income situations would favour the DRIP stock over the CG stock in what you’ve calculated.
Deal Addict
User avatar
May 11, 2014
4020 posts
4262 upvotes
Iqaluit, NU
Mike15 wrote: This post was way back on page 2 but I didn’t see it ever get challenged. You’re showing portfolio balance after 40 years... great. What happens when you go to liquidate?

DRIPping increases your ACB of your investment each time. For those DRIP scenarios, you’d hypothetically sell and walk away with $0 of CGT. For the unrealized capital gain scenario, you have a $670k after 39 years, $704k after 40, investment with a $100k ACB. To liquidate, you’d owe CGT on a $570k capital gain. $285k taxable at a 50% inclusion rate. You can spread that out over a couple years but it’s not a clean-cut advantage. Many income situations would favour the DRIP stock over the CG stock in what you’ve calculated.
This is true. One could argue they will liquidate over time and calculate it this way, but for estate purpose, this is a larger potential problem since we never really know our demise.

And while those scenarios on paper are great on paper for calculation and demonstration, rarely is it put to practice. If said potential investor couldn't work as long or wanted small amounts of cash, depending on the amount and situation, investor A could be in an advantageous position to rely on the dividend cash flow for costs. Investor B may be forced to take a loss on sale, sell position accumulated and incur fees etc.
Support your local Credit Union!

Sask Pension Plan Upto $6300/yr in Credit Card spending on RRSP contributions
http://forums.redflagdeals.com/sask-pen ... ns-2167222
Deal Addict
User avatar
May 11, 2014
4020 posts
4262 upvotes
Iqaluit, NU
xgbsSS wrote: This is true. One could argue they will liquidate over time and calculate it this way, but for estate purpose, this is a larger potential problem since we never really know our demise.

And while those scenarios on paper are great on paper for calculation and demonstration, rarely is it put to practice. If said potential investor couldn't work as long or wanted small amounts of cash, depending on the amount and situation, investor A could be in an advantageous position to rely on the dividend cash flow for costs. Investor B may be forced to take a loss on sale, sell position accumulated and incur fees etc.
Actually,one of my greatest fears for new investors is the situation @Mike15 highlights in his post. Many new DIY investors do not realize the tax implications that could occur when accumulating assets in non-registered when they get on the bandwagon of investing. In fact the same can be argued for RRSPs. Anecdotally, I had to stop a nurse from repaying her mortgage by cashing out her pension. I told her to use her unused RRSP room and place the mortgage amount in an HISA as a way to know she has the ability to pay the mortgage, but not worth paying +50% taxes in one go to save on less than 3% interest on her mortgage.
Another started accumulating a large amount of assets and maximizing both TFSA and RRSP and planned to do the same in non-registered accounts. While in general, that is fine (saving/investing is generally a beneficial thing), but many people do not understand or realize tax implications which is also important.
Support your local Credit Union!

Sask Pension Plan Upto $6300/yr in Credit Card spending on RRSP contributions
http://forums.redflagdeals.com/sask-pen ... ns-2167222
Deal Fanatic
Feb 4, 2015
5944 posts
2436 upvotes
Canada, Eh!!
Feel I'm missing out on this fun * [note this is from fool.com 2019].
[/list]

York Water: 203 years.
Stanley Black & Decker: 142 years.
ExxonMobil: 137 years.
Eli Lilly: 134 years.
Consolidated Edison: 134 years.
UGI Corp.: 134 years.
Johnson Controls: 132 years.


Queue the "there are not real companies" or something similar.

Dividend paying companies not ideal for everyone so do need to assess your requirements. If need the regular divy income then have plenty to choose from [telecoms, banks, oil, utilities and heck one of my favourite AVGO... growth tech in 5G that pays good dividend]. If not need divy income then plenty of high growth companies.

V and MA might be good examples of quasi tech companies with low yield but growing at good pace. So not going to provide decent divy income until later but enjoy the growth in mean time.

Every investor different so perhaps should say "Why not investing not great idea".
Last edited by MrDisco on Aug 22nd, 2020 1:43 pm, edited 1 time in total.
Reason: unnecessary
.......
July 13, 2017 to October 25, 2018: BOC raised rates 5 times and MCAP raised its prime rate next day each time.

2020: BOC dropped rates 3 times and MCAP waited and waited to drop its prime rate to include all 3 drops.
Deal Addict
Oct 1, 2006
2109 posts
1723 upvotes
Montreal
Mike15 wrote: This post was way back on page 2 but I didn’t see it ever get challenged. You’re showing portfolio balance after 40 years... great. What happens when you go to liquidate?

DRIPping increases your ACB of your investment each time. For those DRIP scenarios, you’d hypothetically sell and walk away with $0 of CGT. For the unrealized capital gain scenario, you have a $670k after 39 years, $704k after 40, investment with a $100k ACB. To liquidate, you’d owe CGT on a $570k capital gain. $285k taxable at a 50% inclusion rate. You can spread that out over a couple years but it’s not a clean-cut advantage. Many income situations would favour the DRIP stock over the CG stock in what you’ve calculated.
Interesting post and you have a very good point. After taxes the difference between Investor A and B will definitely be smaller.

Worst case scenario: Investor B will liquidate his portfolio after 40 years of savings all at once. He would incur a tax bill of $115k (Ontario, 65 years of age, no other income). This will leave him with 555K after tax vs. $417k or $582k for the dividend investor. This is still significant better than what the high earning dividend investor will have after taxes (+138K).

In the case he will spread out his capital gains over multiple years, which most people will do, his tax bill will be significantly reduced.

"Best case" scenario: Investor B realizes only $40k of capital gains per year. He will end up paying $0 in tax for his total 570K of capital gains. (Ontario, 65 years of age, no other income).

The vast majority of real life income situations would favor CG over DRIP.
Deal Addict
Jul 23, 2007
4140 posts
2218 upvotes
My wife and I haven't even crossed into the OAS clawback zone, let alone $100,000 plus yearly income each, so paying taxes on dividends isn't a concern. Yet even with that we can still afford to contribute to the max. for our TFSA's annually and still have dividend income left over to add to a few of our individual Canadian dividend growth equities in the non-registered. For us, it's always been about enjoying life while at the same time living within our means.
Deal Fanatic
Nov 24, 2013
6142 posts
2897 upvotes
Kingston, ON
Germack wrote: Interesting post and you have a very good point. After taxes the difference between Investor A and B will definitely be smaller.

Worst case scenario: Investor B will liquidate his portfolio after 40 years of savings all at once. He would incur a tax bill of $115k (Ontario, 65 years of age, no other income). This will leave him with 555K after tax vs. $417k or $582k for the dividend investor. This is still significant better than what the high earning dividend investor will have after taxes (+138K).

In the case he will spread out his capital gains over multiple years, which most people will do, his tax bill will be significantly reduced.

"Best case" scenario: Investor B realizes only $40k of capital gains per year. He will end up paying $0 in tax for his total 570K of capital gains. (Ontario, 65 years of age, no other income).

The vast majority of real life income situations would favor CG over DRIP.
That “best case” is blatantly unachievable. It would take nearly 15 years to realize $40K of those capital gains per year at $0 tax. You mention 65, ON to get the age amount tax credits in order to be able to earn ~$20K a year tax free, but then you’d have to be deferring CPP and OAS for 15 years? That’d be penny-wise, pound-foolish.

I think it’s quantifiably false that “ The vast majority of real life income situations would favor CG over DRIP“ when the vast majority of real life people don’t make $100K individual income. I know that’s required entry for RFD PF, but it’s a minority slice of Canadians. Your $417K DRIP scenario based on $100K income only hits that point because of the tax bracket jump at $97K, when eligible dividend income taxation hits 25%. Here’s the figures at just slightly lower taxable income levels (that more Canadians fall into):
$90K - $507K ($100,000 * (1+5%*0.85)^39)
$85K - $567K ($100,000 * (1+5%*0.91)^39)
$80K - $568K ($100,000 * (1+5%*0.9108)^39)
$75K - $581K ($100,000 * (1+5%*0.92345)^39)
$48,535-73,783 - $595K ($100,000 * 1+5%*0.9361)^39)

I’m inferring you’re looking at taxation on eligible dividends in ON as that’s the only situation that gives the $417K-$582K gulf you presented, and only then once taxable income (before the dividend) crosses $97K. At far more common income levels slightly less than that (especially if you’re reducing your taxable income via RRSP or RPP contributions) the tax on the annual dividends doesn’t eat into your DRIP balance nearly as much.
Jr. Member
User avatar
Sep 5, 2018
117 posts
154 upvotes
Global dividend plunge to be worst since financial crisis

“ Global dividend payments plunged $108 billion to $382 billion in the second quarter of the year, fund manager Janus Henderson has calculated, equating to a 22% year-on-year drop which will be the worst since at least 2009.

All regions saw lower payouts except North America, where Canadian payments proved to be resilient. Worldwide, 27% of firms cut their dividends, while worst affected Europe saw more than half do so and two thirds of those cancel them outright."

So far...
Deal Guru
Jan 27, 2006
14547 posts
7444 upvotes
Vancouver, BC
pistilogo wrote: Global dividend plunge to be worst since financial crisis

“ Global dividend payments plunged $108 billion to $382 billion in the second quarter of the year, fund manager Janus Henderson has calculated, equating to a 22% year-on-year drop which will be the worst since at least 2009.

All regions saw lower payouts except North America, where Canadian payments proved to be resilient. Worldwide, 27% of firms cut their dividends, while worst affected Europe saw more than half do so and two thirds of those cancel them outright."

So far...
Yep and if you are invested in certain sectors, you are also down 20+% stock price-wise. The key to any financial plan is to have some sort of flexibility in terms of cash flow especially if you depend on the income from the market regardless if it's from capital gains or dividends. A good way to get that flexibility is to have some excess cash around where you can draw down when the market gets ugly and fill back up when the market returns.
Deal Addict
Oct 1, 2006
2109 posts
1723 upvotes
Montreal
Mike15 wrote: That “best case” is blatantly unachievable. It would take nearly 15 years to realize $40K of those capital gains per year at $0 tax. You mention 65, ON to get the age amount tax credits in order to be able to earn ~$20K a year tax free, but then you’d have to be deferring CPP and OAS for 15 years? That’d be penny-wise, pound-foolish.

I think it’s quantifiably false that “ The vast majority of real life income situations would favor CG over DRIP“ when the vast majority of real life people don’t make $100K individual income. I know that’s required entry for RFD PF, but it’s a minority slice of Canadians. Your $417K DRIP scenario based on $100K income only hits that point because of the tax bracket jump at $97K, when eligible dividend income taxation hits 25%. Here’s the figures at just slightly lower taxable income levels (that more Canadians fall into):
$90K - $507K ($100,000 * (1+5%*0.85)^39)
$85K - $567K ($100,000 * (1+5%*0.91)^39)
$80K - $568K ($100,000 * (1+5%*0.9108)^39)
$75K - $581K ($100,000 * (1+5%*0.92345)^39)
$48,535-73,783 - $595K ($100,000 * 1+5%*0.9361)^39)

I’m inferring you’re looking at taxation on eligible dividends in ON as that’s the only situation that gives the $417K-$582K gulf you presented, and only then once taxable income (before the dividend) crosses $97K. At far more common income levels slightly less than that (especially if you’re reducing your taxable income via RRSP or RPP contributions) the tax on the annual dividends doesn’t eat into your DRIP balance nearly as much.
Even with max CPP/OAS the CG investor would have a higher investment gain after tax then a dividend investor with only $48k of income .

Besides, I do not know many people who make 48K a year and are able to max their TFSA/RRSP and also have significant investments in a taxable account. Investor with significant investments in a taxable account normally have a very high income.

I guess we just have to agree to disagree.
Deal Addict
Jul 23, 2007
4140 posts
2218 upvotes
My wife and I feel lucky in that our taxable all Canadian dividend portfolio is now not that far off the value of our registered accounts combined. Once we start the RRIF withdrawals that will all change. When I finally left the work force for good, there was no TFSA at that time. Too little too late, but we both contribute to the TFSA anyhow. When I did retire, I thought if things get really desperate financially I might be able to get a minimum wage job somewhere, but as it turns out that wasn't necessary. No silver spoon here. I'm happy to pay my taxes due because when I look at the state of most of the rest of the world I'm thankful to wake up every morning and realize I live in Canada.

As far as dividend growth investing itself it appears to me that Canada has done remarkably well since the end of WWII in 1945 and doubly so since the start of the world financial crisis in 2008. Canada got off very lightly compared to the U.S., Britain/continental Europe financial sector. Long may it last.
Deal Fanatic
User avatar
Jun 19, 2009
5963 posts
1785 upvotes
Scarborough
I love all the discussion about theoretical scenarios and income brackets, I will have to go back and read through the thread and think from a holistic point of view. Having said that, one thing that I wasn't sure if it was mentioned yet, but dividends can act as a strong psychological safeguard against market gyrations and black swan events.

The examples cited are good in a vacuum, but as we all know, life throws curveballs at us all the time. Having dividend paying stocks can allow one to have more peace of mind/stability when looking at their investment portfolio as they are usually reliable, cash generating companies. Sure it can be argued that capital gains can theoretically come out with a higher after tax income, but using dividends as a reason to keep one invested during a market downturn is an easier sell, and much more practical in the psyche of the "average" investor. Just my two cents
Member
User avatar
Jul 24, 2014
285 posts
100 upvotes
Toronto, ON
SkimGuy wrote: Having dividend paying stocks can allow one to have more peace of mind/stability when looking at their investment portfolio as they are usually reliable, cash generating companies. Sure it can be argued that capital gains can theoretically come out with a higher after tax income, but using dividends as a reason to keep one invested during a market downturn is an easier sell, and much more practical in the psyche of the "average" investor. Just my two cents
Exactly, DGI is more psychological than financial, it sure works great for people believe in it ....and happen to be "successful" in a very limited degree or down the path for too long (and thinking it's fantastic)
Index Fund vs Individual Stock..."tigerdemi is a great man" tigerdemi said to himself in his dream.
Sr. Member
Sep 2, 2009
996 posts
705 upvotes
Ottawa
tigerdemi wrote: Exactly, DGI is more psychological than financial, it sure works great for people believe in it ....and happen to be "successful" in a very limited degree or down the path for too long (and thinking it's fantastic)
Has it not been shown that psychological issues/concerns are among the main reasons people fall behind financially/as investors? (buy high, sell low) If DGI solves that issue for many... then it has added value there. Few people can manage purely cold and calculated decisions for extended periods of time.

Top