That interesting, because I don't understand the mindset of investors who are just trading stocks like baseball cards. They don't seem to care what the company actually produce, just that the numbers tell them that the stock can sell for a little more next year.
Divided makes a lot of sense, because it keeps yielding money, for the same initial investment. So it's just extra money, but it's money you can actually spend. Sure you pay taxes on the divided, but you still hold the stock and can sell that at a late time.
Honestly I feel that it problems are the companies that never pay divided. The investors then depend on buy-backs or trading to recover their investment. This has created investors that do not care about the companies they invest in. The companies can go broke tomorrow and that's fine, as long as they can sell their stocks before it happens.
This is because dividend stocks tend to appreciate less.
So taking $X in dividends every six months ends up being the same as selling $X of your portfolio every six months in the end.
Though, in a tax-free retirement account, it's moot.
Suppose you have ~5 million invested for retirement. The dividend you could get from this is ~100k-150k per year.
That is a very livable salary if you want to retire early (45? 50?) and focus on your family and hobbies.
Does this make sense yet? It's essentially a conservative way to lead your live if you are not necessarily married to your profession.
Exactly, you either supplement your income with it or retire early and replace your income with it.
There are whole generations of people doing this.
If you want dividends simply sell a portion of your holdings every quarter.
When one focuses solely on dividend yield and not total return, which includes capital appreciation, it's a sign they don't really what's going on.
Where do you think the dividends are coming from? Straight from the company's market cap.
By preferring companies that consistently pay high dividend yields you're selecting for larger and established companies that have no better way to reinvest the money.
This may result in a fine choice if you want income, but the important distinction is not because of their dividend yield... it's because of their positions as market leaders.
Thus you may do just as well by selecting those large market leaders that pay no dividends but are reinvesting heavily.
That's not how it works for a publicly traded company in a free market. Historically announcing a dividend has usually caused more people to be interested in buying, which increases your market cap correspondingly.
REITs and telcos are a much better choice for this investor class.
Before the 1920s stock bubble, buying stock in a company was buying a portion of the company's future free cash flow in return for investment. The value of a stock was fundamentally coupled to running a profitable business. The dividend was the point.
The 1920s saw a major shift of valuation philosophy to a speculative mode, focusing on the price of a stock. Now, occasional crazy things happen where the price of a stock can shift dramatically even without change in the dynamics of the underlying business. Prices should reflect future earnings... but they often don't. Portfolio construction and indexing are protections against this, but the underlying philosophy goes even further in treating stock prices as random walks with underlying market beta, not as real businesses. Indexing punts out of real valuation.
I won't defend "dividend investing" with weird dividend manipulation, but I really do like having an alternative valuation model: the value of an investment is not the result of an increase in price since my purchase of that asset, but instead my recurring cash flow yield from owning that asset. I certainly have money in index funds and speculative assets, but I get a lot from a yield based valuation philosophy instead of price based valuation:
- Prices are heavily manipulated and favor insiders and funds, not individual investors.
- It feels more connected with reality.
- The growth of passive investments probably poses systemic risks (Mike Green's talks and interviews are great) and I don't want to piss in the pool too much. Yield based valuation makes me more comfortable making active investments.
- Easier to value different asset classes against each other, for example buying a house to rent out vs stocks. The valuation is my dollar yield per time per dollar invested.
- Boomers retiring and pulling money out of the system plus decay of globalization will put heavy deflationary forces on markets in the coming years. I don't feel like a price based approach to valuation provides clear guidance on how to navigate investments other than "be smart". A yield based approach lets me walk away with a return even if stocks stay flat or go down.
Pretty much all of the above comes from the book Getting Back to Business by Daniel Peris. Bit dry and dense, but very thought provoking.