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Dividends?

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Brian Earl Spilner
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8:07a, 12/23/24
AG
I notice that some folks go out of their way to look for stocks with dividends, or dividend ETFs.

What's the reasoning behind this? I feel like maybe people think dividends are "free money", or extra returns on top of your gains, when in reality it's just a forced taxable event every year, giving you less control over your taxes each year.

Or maybe it's a psychological thing because your shares increase when you reinvest? Even though it makes zero difference on your overall profit.

I'm very curious why people put any focus on dividends at all.
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tlh3842
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In reply to Brian Earl Spilner • 8:13a, 12/23/24
AG
I think people see a stock that goes up X% over a certain time period with a dividend is more profit than a stock going up the same X% over that same time period without a dividend
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Mustang1
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8:16a, 12/23/24
AG
I've read people do this as another form of income stream. Or some even use as only income. Ex: 80k in div inc/yr is enough to cover your annual expenses.
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Brian Earl Spilner
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In reply to Mustang1 • 8:18a, 12/23/24
AG
That's the part that I don't get. You could sell shares at any time and do the exact same thing.

Thing is, dividends will not allow you to avoid taxes on years you don't want to sell any shares.

I guess some people just want the choice removed. Guess it's all a psychological thing to see that as "income" because they're not actively selling it themselves.
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RockOn
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In reply to Brian Earl Spilner • 8:32a, 12/23/24
Brian Earl Spilner said:
That's the part that I don't get. You could sell shares at any time and do the exact same thing.

Thing is, dividends will not allow you to avoid taxes on years you don't want to sell any shares.

I guess some people just want the choice removed. Guess it's all a psychological thing to see that as "income" because they're not actively selling it themselves.
You're correct, but you're not going to convince someone to see things differently around money.

Before the late 1990's, selling shares had transaction costs and we didn't know what were historical safe withdrawal rates of portfolios, therefore only spending the dividends was a convenient, low-cost way of safely living off the portfolio.

Of course things are different today, but it's just one example among many where humans stick with what worked in their formative years despite becoming outdated.
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a07nathanb
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8:43a, 12/23/24
AG
I think it's mainly psychological

There are still lots of olds that pay transaction costs

Never underestimate the mental aspect though. My grandma inherited a bunch of Exxon when her dad died in the 70s. It's her only exposure to the stock market. Through the years she's needed money for various things and I've suggested selling a few shares. That's the craziest thing she's ever heard. She plans to pass them down just like they were passed down to her
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Troglodyte
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8:48a, 12/23/24
AG
Wrong or right, I tend to look at dividend stocks when I'm looking for more stability. If I think PEs are getting too high, I will look at dividend stocks. I think dividend stocks tend to be less volatile.
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El Chupacabra
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In reply to Brian Earl Spilner • 8:53a, 12/23/24
Brian Earl Spilner said:
That's the part that I don't get. You could sell shares at any time and do the exact same thing.

Thing is, dividends will not allow you to avoid taxes on years you don't want to sell any shares.

I guess some people just want the choice removed. Guess it's all a psychological thing to see that as "income" because they're not actively selling it themselves.
What if when it is time to sell shares the stock is down 25%? Or market is in a sustained downturn?

It's a tricky balance, I'm of the mindset of 'get both'...and the ratio of both probably should change depending on your stage of life.
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gigemhilo
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9:05a, 12/23/24
AG
Dividends when you are otherwise low income can be a non-taxable event - depending on the amounts. Just food for thought.

Also, different strokes for different folks.
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I bleed maroon
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9:06a, 12/23/24
AG
Ahhh, I see you've been reading Warren Buffett's reasoning behind BRK paying no dividend.

Good topic. Historically, with capital gains tax being almost double the taxable dividend rate, it made a lot of sense to prioritize regular and extraordinary dividends, for companies and investors. High trading commissions and transaction costs (as noted earlier) were also a consideration. Now that these have equalized, for the most part, the "loss of timing control" for taxes you mention is an argument against a regular dividend stream. Buffett's argument is that companies should either buy back their own stock or pay an extraordinary dividend if they can't find a more optimal use for "excess capital" within their own company.

From a company perspective, it makes sense to pay a dividend, if you're in a stable, high free cash flow type industry. The conceptual thesis is to return capital to shareholders if you can't reinvest it above your risk-adjusted return hurdle rate on capital investments within the company. For industries like utilities, materials, energy, heavy industry and communications infrastructure, for example, it is a wise use of shareholder capital to return it to owners vs. reinvest at substandard rates in less attractive projects. This is why XOM, T, FCX, SO, and others payout a decent steady dividend. It's a prudent use of shareholder capital.

The other area is the heavily cyclical companies, like shippers, pipeline companies, and others. They pay out a lot of dividends when times are good, and reduce the payout rate when in a down cycle. This makes a lot of sense to me, too, as the alternative is to borrow money in bad times to maintain the dividend (or keep the growing cash hoard in cash or low-yielding instruments in good times).

Short story - dividends shouldn't be viewed as universally positive or negative, but situationally, can make a lot of sense for both companies and investors (especially those needing a steady income stream).
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Brian Earl Spilner
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In reply to El Chupacabra • 9:38a, 12/23/24
AG
El Chupacabra said:
Brian Earl Spilner said:
That's the part that I don't get. You could sell shares at any time and do the exact same thing.

Thing is, dividends will not allow you to avoid taxes on years you don't want to sell any shares.

I guess some people just want the choice removed. Guess it's all a psychological thing to see that as "income" because they're not actively selling it themselves.
What if when it is time to sell shares the stock is down 25%? Or market is in a sustained downturn?

It's a tricky balance, I'm of the mindset of 'get both'...and the ratio of both probably should change depending on your stage of life.


It being a down year will make zero difference whether you receive a dividend or sell the same amount of shares.
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Brian Earl Spilner
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In reply to gigemhilo • 9:41a, 12/23/24
AG
gigemhilo said:
Dividends when you are otherwise low income can be a non-taxable event - depending on the amounts. Just food for thought.

Also, different strokes for different folks.


Sure, but the same is true of any capital gain.

Qualified dividends and long-term cap gains are taxed at identical rates.

And, avoiding those tax hits until you're in a possibly lower tax bracket makes capital gains more tax efficient.
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Brian Earl Spilner
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In reply to I bleed maroon • 9:49a, 12/23/24
AG
My argument isn't that dividends shouldn't exist, and I understand why companies pay them.

My point is that they shouldn't make any difference when trying to pick a stock or ETF, and they provide no actual benefit in the end.

I think a lot of people go out of their way to look for a good dividend-focused ETF, when they rarely if ever provide better returns than your standard ETF like VOO or QQQ. (Most of which pay dividends anyway.)

Case in point: Yukon Cornelius in his dividend ETF thread. He didn't want to discuss it in that thread, so I started a thread to discuss it.
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techno-ag
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9:51a, 12/23/24
AG
You don't have to worry a whole lot about income tax rates if married until you start getting above $394,600/year. At that point the rate jumps from 24% to 32%.

Even then, with careful deductions you can keep yourself under that rate. Real estate rentals are the best for that IMO. Depreciation, insurance, maintenance and management fees are all deductible.

YMMV.
Trump will fix it.
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El Chupacabra
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In reply to Brian Earl Spilner • 9:52a, 12/23/24
Brian Earl Spilner said:
El Chupacabra said:
Brian Earl Spilner said:
That's the part that I don't get. You could sell shares at any time and do the exact same thing.

Thing is, dividends will not allow you to avoid taxes on years you don't want to sell any shares.

I guess some people just want the choice removed. Guess it's all a psychological thing to see that as "income" because they're not actively selling it themselves.
What if when it is time to sell shares the stock is down 25%? Or market is in a sustained downturn?

It's a tricky balance, I'm of the mindset of 'get both'...and the ratio of both probably should change depending on your stage of life.


It being a down year will make zero difference whether you receive a dividend or sell the same amount of shares.
If you need $5k/month...and your plan is to sell 50 shares of ABC stock a month (currently at $100), but ABC just had a rough quarter and took a 25% hit and isn't showing any signs of recovering, now you're selling more shares per month to get the same $5k or eating cat food. May or may not be a real example, and the hope would be that at some point you're selling 30 shares/month to achieve $5k.
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Brian Earl Spilner
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In reply to El Chupacabra • 9:58a, 12/23/24
AG
Ok, but what exactly do dividends do that solve this problem?

In your example, are you selling the equivalent of what the dividend would've been paying?

If so, nothing has changed. You get your dividend, the share price adjusts down, and your portfolio remains just as beaten down.
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LMCane
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In reply to Brian Earl Spilner • 10:31a, 12/23/24

some investors literally create dividend portfolios

where all their equities are based around the fact they create a monthly dividend stream and live off of that.

not for me.
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I bleed maroon
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In reply to Brian Earl Spilner • 10:51a, 12/23/24
AG
Brian Earl Spilner said:
My argument isn't that dividends shouldn't exist, and I understand why companies pay them.

My point is that they shouldn't make any difference when trying to pick a stock or ETF, and they provide no actual benefit in the end.

I think a lot of people go out of their way to look for a good dividend-focused ETF, when they rarely if ever provide better returns than your standard ETF like VOO or QQQ. (Most of which pay dividends anyway.)

Case in point: Yukon Cornelius in his dividend ETF thread. He didn't want to discuss it in that thread, so I started a thread to discuss it.
You're providing very good arguments overall, except for the highlighted portion above. You're discounting the standard deviation of returns, volatility, and quality of earnings concepts. So, your risk-adjusted returns could well be worse for the index or high-flyer stock alternatives. It's not just looking at the last few quarters and seeing who had the best gross returns. Look at most 12-month historical periods during 2022 (or the decade of 2000-2010) to view the fallacy of your statement and potential recency bias.

Overall, I generally agree with your premise, but there are shades of gray, here.
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El Chupacabra
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In reply to Brian Earl Spilner • 10:53a, 12/23/24
Brian Earl Spilner said:
Ok, but what exactly do dividends do that solve this problem?

In your example, are you selling the equivalent of what the dividend would've been paying?

If so, nothing has changed. You get your dividend, the share price adjusts down, and your portfolio remains just as beaten down.
There are a LOT of people out there that only care about the income stream. They see a stock/etf/reit that has paid a consistent dividend for XX years and are happy with that. If their account is worth 500k or 1.5M...they don't care...they don't want to look at it and manage it...they just want a reliable, steady income stream for their remaining time on earth and whatever is left over, that's for someone else to worry about.
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Brian Earl Spilner
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In reply to El Chupacabra • 11:16a, 12/23/24
AG
Yeah, I'll buy that. I guess for those cases it works.
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jamey
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1:03p, 12/23/24
AG
It's also similar to investing in value stocks. People rotate into that for stability and depending on bond yields
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redline248
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1:10p, 12/23/24
AG
As far as taxing goes on the dividend, that only matters if you take it out in cash, right? As long as you reinvest or leave it in the account it doesn't get taxed?
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techno-ag
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In reply to redline248 • 1:46p, 12/23/24
AG
redline248 said:
As far as taxing goes on the dividend, that only matters if you take it out in cash, right? As long as you reinvest or leave it in the account it doesn't get taxed?
You don't have to worry about it in a tax-free account like a Roth. Otherwise, render unto Caesar.

https://www.investopedia.com/investing/perks-of-dividend-reinvestment-plans/#:~:text=How%20Taxes%20Affect%20DRIP%20Investing,income%20and%20is%20therefore%20taxable.
Trump will fix it.
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Petrino1
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In reply to redline248 • 2:07p, 12/23/24
redline248 said:
As far as taxing goes on the dividend, that only matters if you take it out in cash, right? As long as you reinvest or leave it in the account it doesn't get taxed?
In a taxable brokerage account, you are taxed on the dividend whether you reinvest it or not.
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Azeew
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4:40p, 12/23/24
Ultimately, the decisioning behind companies paying dividends, or not, boils down to one point: does the company (management & Board) believe they can better serve shareholders by retaining/reinvesting in the company or by paying it out to shareholders.

Companies that don't pay dividends believe they can increase earnings AND per share earnings by retaining capital to support organic growth, by making acquisitions, and/or repurchasing its own stock. In the early years, companies like Apple (current dividend 0.39%) grow so fast that they retain earnings (ie don't pay dividends) to support their growth through R&D, facilities expansion, remain debt free, etc). Once growth moderates, they begin paying dividends because they don't need 100% of each year's earnings to support their growth rate.

Eventually growth companies like Apple become dividend companies like Coca~Cola (current dividend yield is 3.10%). They retain enough to keep debt low, to make acquisitions, and to buy back their own stock but they're not growing sufficiently fast through organic growth or acquisitions to retain 100% of their earnings.

At least this is what good management/Boards do. Too many managements want to grow for growth's sake and don't do what's best for shareholders. In these companies, growth means management gets paid more but shareholders don't.

When I buy stock I don't worry about no dividend, low dividend or big dividend. I only think about Total Return.
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Yukon Cornelius
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In reply to Brian Earl Spilner • 5:33p, 12/23/24
AG
Lots of reasons.

For me personally it's about not having to time markets to profit. If something goes up 10x and you have zero dividends and don't sell any you've gained exactly ZERO dollars. Technically speaking only things with dividends or payouts are investments. Every stock without dividend is technically speculation. So that plays to my consideration a lot. A balance approach is best.

I would highly encourage anyone and everyone to read "The intelligent investor".


In regards to taxes. It does play a role If it bumps your tax bracket up. But if it doesn't I think it's an error in being so afraid of taxes to the point of not investing.
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Yukon Cornelius
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In reply to Brian Earl Spilner • 5:35p, 12/23/24
AG
You have to consider selling to create income isn't income. It's just liquidating assets. Which to me accumulating assets is a priority. Not selling them. So if you want income dividend are preferable because you don't have to sell any of your acquisitions
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Yukon Cornelius
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5:38p, 12/23/24
AG
You would have nearly twice the value if you put in 10k in 1990 in dividend stocks vs the sp500.
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BenTheGoodAg
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In reply to Yukon Cornelius • 5:45p, 12/23/24
AG
Do you have a source for this?

Over half of the S&P 500 stocks have some dividends, often a mixed performance of growth and dividends. When people talk about the long term performance of the S&P 500, they're usually accounting for reinvesting the dividends as well as the growth.
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Yukon Cornelius
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In reply to BenTheGoodAg • 5:48p, 12/23/24
AG
Yes it's dividends reinvested and I can't share it. The specific chart I have Is proprietary information. I'm sure a google search will show similar.

https://fa.wellsfargoadvisors.com/david-brown/mediahandler/media/249087/dsipperformance.pdf


Here's a publicly available info sheet. There's a graph comparing wellsfargo disp bs sp500. In sure there's some variation between funds
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Aggie Dad 26
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In reply to Brian Earl Spilner • 6:15p, 12/23/24
Brian Earl Spilner said:
I notice that some folks go out of their way to look for stocks with dividends, or dividend ETFs.

What's the reasoning behind this? I feel like maybe people think dividends are "free money", or extra returns on top of your gains, when in reality it's just a forced taxable event every year, giving you less control over your taxes each year.

Or maybe it's a psychological thing because your shares increase when you reinvest? Even though it makes zero difference on your overall profit.

I'm very curious why people put any focus on dividends at all.


Im doing it to troll you top notch investor types
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Aggie Dad 26
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In reply to Brian Earl Spilner • 6:20p, 12/23/24
Brian Earl Spilner said:
My argument isn't that dividends shouldn't exist, and I understand why companies pay them.

My point is that they shouldn't make any difference when trying to pick a stock or ETF, and they provide no actual benefit in the end.

I think a lot of people go out of their way to look for a good dividend-focused ETF, when they rarely if ever provide better returns than your standard ETF like VOO or QQQ. (Most of which pay dividends anyway.)

Case in point: Yukon Cornelius in his dividend ETF thread. He didn't want to discuss it in that thread, so I started a thread to discuss it.


So, 2006ish trolling?

old school bas****
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Aggie Dad 26
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In reply to Yukon Cornelius • 6:31p, 12/23/24
Yukon Cornelius said:
Lots of reasons.

For me personally it's about not having to time markets to profit. If something goes up 10x and you have zero dividends and don't sell any you've gained exactly ZERO dollars. Technically speaking only things with dividends or payouts are investments. Every stock without dividend is technically speculation. So that plays to my consideration a lot. A balance approach is best.

I would highly encourage anyone and everyone to read "The intelligent investor".


In regards to taxes. It does play a role If it bumps your tax bracket up. But if it doesn't I think it's an error in being so afraid of taxes to the point of not investing.


Thank you for this
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Yukon Cornelius
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In reply to Aggie Dad 26 • 6:39p, 12/23/24
AG
In his defense I did ask him to start a new thread for this topic and not to derail mine. Of which I appreciate him doing so. Both good topics too
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Brian Earl Spilner
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In reply to Yukon Cornelius • 6:53p, 12/23/24
AG
Yukon Cornelius said:
You have to consider selling to create income isn't income. It's just liquidating assets. Which to me accumulating assets is a priority. Not selling them. So if you want income dividend are preferable because you don't have to sell any of your acquisitions


Dividends and capital gains are both income. And both taxable. So, no net benefit.

Reinvested dividends feel like "accumulating", because you see your shares go up, which I understand psychologically. But it's no different from your standard capital gains in the end.
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