Wednesday, April 22, 2015

Do Dividend Haters Exist?

I’ve encountered the phrase “dividend hater” a few times now, and it got me wondering whether dividend haters actually exist. I’d have to say I’ve never met any but, like beauty, it’s all in the eye of the beholder.

My investing philosophy is simple enough. I value each after-tax dollar equally, whether it comes from dividends, capital gains, or interest. I know a great many people who think the same way. To be a dividend hater, I’d say that an investor would have to value after-tax dividend dollars below dollars from other sources. I’ve never heard of people like this, but I suppose they might exist.

However, I have heard of several people who value after-tax dividend dollars more than after-tax dollars from capital gains or interest. Perhaps these people should be called capital gains haters or interest haters.

I encountered the phrase “dividend hater” most recently in some tortured logic saying that it is a myth that stock prices drop by the amount of a paid dividend. I won’t bother to explain the obvious fact that the value of a company drops after it pays a dividend other than to point to Investopedia’s clear explanation.

One amusing part of the attempt to dispel this “myth” about dividends lowering a company’s value is the following scenario: “A company earns $1/share and sells for $10/share. Now, if that company distributed a $10 special cash dividend, it will not trade at $0.”

Under what conditions would a company trade for only $10/share if it has $10/share in the bank and earns $1/share each year? If investors expect the $1/share earnings to continue, then the stock price would be much higher than $10.

I suppose that investors might believe that conditions will change and the company’s future profits will be zero. If the company also has nothing to sell in a breakup, then it would indeed sell for $0 after paying the $10/share dividend.

Another possibility is that the company did not have $10/share in cash and went into debt to pay the dividend. If we assume the company was valued properly at $10/share before the dividend, then the lender that provided the cash for the dividend was a fool who won’t get all of his money back and has essentially made a gift to shareholders. The amount of the gift would be whatever share price the company has after paying the dividend.

I’ve still yet to encounter a true dividend hater, but no doubt the label will continue to be used. I’m content to value all my after-tax return dollars equally.


  1. Hi Michael,

    Isn't this subject a bit like your post from January 8th? Anyone questioning the "dividend investing brand" continues to receive undeserved grief.

    In your link to the DGI post, I'm not sure if you noticed that words like "can","should", "chances are" get used. Particularly it seems to assume that if a dividend is not paid out, that money "could" be lost in several other ways as described in the post and not used efficiently to create further growth?
    An excerpt:

    "Sure the company can accumulate cash, but then chances are that management will find a way to waste that cash and diworisify."

    "Chances are"?

    If that was the case that company may not be an ideal investment regardless if it paid a divided or not. Whats to stop a company from doing any of the same things after paying the dividend?

    I like and own some dividend stocks. I also own some ETF.s that pay dividends. I also index. Funny, my index fund pays me a dividend once a year too. But I'm also not closed minded to new innovations like mathematics.

    Is there some way of simply proving this with math (rather than with passion) using two similar companies one paying a dividend and one not. Having 2 companies balance sheets side by side? I tried looking around the internet for something like that. I could not find anything.

    I did however find a post on Seeking Alpha from 2014 entitled "Why I Never Want Berkshire To Pay A Dividend", with a good explanation of why and almost 200 comments underneath it arguing about it.

    Also BRK.B is referenced in the DGI post. Also the author owns it. I assume because it includes dividend payers within it, although it does not pay one itself? No one is hating dividend investing, it's more the "we vs. them" attitude that is the problem. Again "could" it also be the theme of the website being threatened by alternative or disagreeing views that creates such passion?

    This is obviously a hotly contested issue and won't go away soon. Good post as usual.

    1. @Paul: It's sort of funny that I've been cast in the role of being against dividend investing. In fact, I think that well-diversified dividend investing has a lot to recommend it when compared to the typical expensive crappy mutual funds people own. Where I differ from some dividend cheerleaders is that I don't think dividends are magic. I worry about those who expect too much from their dividend stocks. I also worry about the many Canadians who own just a few dividend stocks -- like just a couple of banks and BCE -- and call themselves dividend investors.

    2. I believe many dividend-oriented investors (though not all) tend to re-invest their dividends - DRIPs are popular. So they are in fact giving the cash right back to the management of the company (after possibly paying taxes if it's in an unregistered account).

    3. @Richard: It's true that many dividend investors reinvest their dividends. But they are getting shares from other investors. So, the net effect for management is that dividends reduce the money available to reinvest in the business. This is a good thing if they can't reinvest profitably and a bad thing if they can reinvest profitably.

    4. I see Richard just posted on DGI's website. I'm interested to see the reply to that, since it is in fact just the opposite view to his opening paragraph.

    5. I think the author never refused the fact that ex-dividend dates is not real.

      I think he is talking about value, not price of a company. You might want to check his example with Heinz in 2013.

    6. @Anonymous: I read everything the author wrote carefully. What he wrote is at odds with just about everyone else.

    7. I would be curious to see you refute everything point by point, rather than say vague things. As a value investor, that post made sense to me. I see how it might not make sense for someone who invests in index funds however.

    8. @Anonymous: The Investopedia article does the refutation. Truth shouldn't be determined by how we invest.

    9. @Anonymous

      This short post on Rick Ferri's blog pretty well spells it out for you. Read it, click on the links.

    10. You obviously didn't understand the article. He never refutes the ex-dividend date. It is your biases that are making it hard for you to comprehend it.

      Paul, your article is not even relevant.

    11. @Anonymous: Sadly, I'm getting used to ad hominem arguments when I write about dividends. I understood the article quite well. It can be summarized as "dividends are magic."

    12. It's only not relevant to a an individual fixated only on dividend investing. If at the end of every year I make an 8% return from index or dividend investing - really who cares. The following year both investments will grow again and the process will repeat. There is no advantage. What are we arguing about here, the index includes all those dividends paid out by all the stocks inside the basket of securities anyway? This no-win discussion is giving me a headache.

      I don't want to manage 30 dividend stocks by myself every year. I have proved to myself already that you can't always consistently pick a winner. I also certainly don't want to pay someone else 1 or 2% to do it for me either to get to the same result as indexing would over the long term minus the fees. I might as well just get a good mutual fund then.

      I also have to question if individual security dividend investing is really the best for those that can only muster up a small amount of money every month to invest. Novice investors go to a drip club site or other dividend site and may get the wrong impression of returns from all the hype.

      If a 2008-2009 crash rolls around again and your dividend stocks crash 50 % and many of the dividends are cut (supposedly the main attraction) the same people will be running to the exits again and not buying more shares as they should. It's human nature.

      I think a lot of people have become pretty brave since we are on a 6 year run up since the crash. Picking just about anything has brought you a decent return. A lot of dividend investors were created by the crash and the artificially low rates we continue to see. I think when deposit rates get back to 3 or 4% this also could hurt dividend stocks as well. Many people there feeling forced look for some kind of better return by low rates, may opt back out of dividend stocks, and go back into GIC's or CD.s, to smooth out and avoid the volatility of stocks.

      Again i don't think that Div. vs. Index investing deserves this much passionate discussion. I drive a Nissan, I also drive a Chevy and a Motorbike. They all get me to the same destination albeit in slightly different ways.

    13. Michael,

      So you spent a whole article discussing “logical flaws” of my post, yet you only mention in passing the post from your friend Robb who advocates a 6% withdrawal rate?

      Any way you look at his article, he advocates for something that is dangerous. Me – I just like being silly.

      Now tell me that Dividend Haters do not exist.

    14. @DGI: I'm not sure what you want here. I've written at length about how I think the withdrawal rates advocated by many otherwise good advisors is too high. I'm much more concerned about getting solid information to my readers than making sure to write the same number of words every time I'm critical of another blogger.

  2. I will admit I value dividend above capital gains and interest. Why? as a retiree living off my portfolio the dividend income stream is an additional buffer for when stock markets correct. The dividend stream (Which could be rocked but would not disappear except in armageddon scenarios!) supplements the cash wedge. In a pure indexed portfolio, I would have less time (Or need a bigger cash wedge) before needing to sell equities (In a depressed market impacting my capital) to fund income. Long and short of it dividends are more consistent than capital gains.

  3. I'm certainly not a dividend hater but to your point, I do not understand why people get so bent out of shape - treating after-tax growth so differently. I mean if you can get your 3-5% real return from dividends or gains or interest, does it really matter? No is my answer. I just want the 3-5% real return :)

  4. It is interesting, this ongoing battle between DG investors and passive indexes. It wasn't that long ago that the only practical way to access the equity markets was to buy individual stocks and it felt better to get a dividend cheque in mail rather than not getting one. Then along came low cost passive indexing and the research to support it, but people don't like change and want to stick with the way they've always done it.

    This is an interesting article about dividends and behavioural issues.

  5. I hate foreign dividends, and I dislike domestic dividends. It's about taxes. Foreign dividends are taxed at the same rate as ordinary income. If you're in a high enough tax bracket, domestic dividends are taxed at a higher rate than capital gains. And there is the possibility of capital gains being deferred.

    If a company wants to distribute capital back to shareholders, I much prefer buybacks. That assumes the company doesn't tend to do that a market peaks, and not at market nadirs.

    I'm not the only dividend hater. Berkshire Hathaway has only issued a dividend once. IIRC, the decision for the sole dividend wasn't made with Warren Buffett's input, and he later disagreed with that decision.

    1. @Anonymous: By the definition I chose, this doesn't make you a dividend hater. If you're comparing after-tax dollars and find one approach that gives you more after-tax dollars than another approach, then your preference is for more dollars. But I understand the point you're making.

  6. And apparently everyone else is "close minded" except him. That has to be one of the most hypocritical comments I have ever read. Read the last comment replying to a poster named "Tristan" The last paragraph is classic...
    I believe you are accepting and open to all methods of investing but just prefer indexing as your personal choice. From what I read for DGI, it's dividend stocks or NOTHING! Really ? Who is the "close minded" one?