To buck the trend in most articles titled with a question I’ll actually answer it: no, a dollar of dividends is worth the same as a dollar of capital gains. However, that didn’t stop a commenter, Rob, on a Canadian Couch Potato post from arguing differently. Please note that the Canadian Couch Potato himself was on the correct side of the math on this question, although he had the good sense to spend less time arguing with Rob.
Rob’s argument ran as follows. If you had invested $100 in the UK stock market in 1945, it would have grown to $7401 by 2011 if you lived the good life and spent all the dividends. However, if you had reinvested the dividends, you would have $131,469 by now! The return in this case is 18 times higher than the returns due to capital gains alone. So, this must mean that the dividends must be worth 17 times more than the capital gains.
We could take this a step further and observe that the average compound return in the UK stock market due to capital gains and dividends are 6.7% and 4.5% per year, respectively. Amazingly, even though the return due to capital gains is higher, the dividend return is worth 17 times more. This makes a dollar of dividends worth about 25 times more than a dollar of capital gains!
Of course, all this is nonsense; a dollar is a dollar. There can be differences due to taxation, but if we stick to thinking about tax-advantaged accounts like RRSPs and TFSAs, all dollars of return are equal.
We could just as easily have imagined an investor who gave away enough shares to charity each year to eliminate his capital gains and then reinvested his dividends. In this case, the original $100 would have grown to only $1776. Now we can say that the dividends only produced a return of $1676, but the capital gains and dividends combined produced a return of $131,349. So, the capital gain returns are worth 77 times more than the dividends. On a per-dollar basis, capital gains are worth 52 times more than dividends.
Of course, this line of reasoning is nonsense as well.
At its core, we can simplify the mistake with this logic into the following little story. Justin starts with a 1-inch by 1-inch piece of pizza (one square inch). If he extends it to 20 inches long, then he adds 19 square inches. But if he then extends the width to 10 inches, he adds 180 more square inches. So he reasons that width is more important than length. His friend Jim extends the width first and length second and concludes that length is more important. But, both are mistaken because length and width are equally important in determining area.
The moral of this story: don’t let people with bad math confuse you about investing.