Dividend Growth Investing | Summary and Q&A

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January 19, 2019
by
Ben Felix
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Dividend Growth Investing

TL;DR

Dividends do not significantly impact returns as corporations can use capital for various purposes. Dividend-focused portfolios limit diversification and dividends are not a guaranteed source of income.

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Key Insights

  • 😒 Dividends do not significantly impact investment returns, as corporations have the flexibility to use capital for various purposes.
  • 🧑‍🏭 Dividend growers have historically performed well, but their success is not solely due to dividends, but rather factors such as being value stocks.
  • ℹī¸ Dividends are not a guaranteed source of income, as firms can eliminate or reduce dividends during economic downturns.
  • ⛔ Dividend-focused portfolios limit diversification by excluding stocks that do not pay dividends, potentially impacting portfolio performance.
  • 🖤 The price for potentially higher returns from dividend-paying stocks is a loss of diversification and a lack of consistency in factor exposure.
  • 💓 There is no meaningful evidence that dividends alone indicate strong future returns or that investors can consistently pick dividend-paying stocks to beat the market.
  • 😘 Investing in low-cost total market index funds is a better option for most investors to capture the long-term returns of the overall market.

Transcript

  • I think that one of the single biggest challenges for investors is understanding that dividends do not matter. Dividends do not matter. Corporations can use their capital to invest in future projects, fund the research and development or fund that mergers and acquisitions. If they do not do any of these things with their capital, which would happ... Read More

Questions & Answers

Q: Why do dividends not significantly impact returns?

Dividends do not matter to investment returns because corporations have the option to use capital for other purposes, such as investments or acquisitions. Dividends are just one way for companies to return capital to shareholders, alongside share buybacks.

Q: Are dividend growers a good investment?

Dividend growers, or companies with a long history of increasing dividends, have historically performed well. However, their performance is not solely due to their dividends but can be attributed to other factors such as being value stocks or having robust profitability.

Q: Do dividends provide a guaranteed source of income?

Dividends are not a guaranteed source of income. In 2009, many firms eliminated or reduced their dividends. The returns of dividend-paying stocks and non-payers have been similar, indicating that dividends do not play a significant role in explaining differences in returns.

Q: Can dividend-focused portfolios limit diversification?

Yes, dividend-focused portfolios can limit diversification as they exclude a significant portion of stocks that do not pay dividends. This decreases exposure to different sectors and companies, potentially affecting overall portfolio performance.

Summary & Key Takeaways

  • Dividends do not matter to investment returns, as corporations can choose to use capital for other purposes such as investments, research and development, or mergers and acquisitions.

  • Dividend growers, or companies with a long history of increasing dividends, have had strong historical performance.

  • Chasing dividends can lead to a less diversified portfolio and dividends are not a guaranteed source of income.

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