Friday, October 22, 2021

Short Takes: Dividend Nonsense, Lingering Beliefs, and more

Recently, I saw another example of magical beliefs about dividends.  Nick Maggiulli makes the claim that the bulk of investor returns over time come from reinvested dividends.  In one 40-year example, the total return is 791% without reinvested dividends and 2417% with reinvested dividends.  Unsaid is that if you withdrew all price gains periodically (and thereby failed to reinvest them), the total return from just dividends would be far less than 791%.  

This isn’t hard to understand when you look at the situation clearly.  Suppose that over several decades dividends are responsible for doubling your investments twice, and capital gains are responsible for doubling your investments three times.  So, dividends alone would have given a 300% return, and capital gains alone would have given a 700% return.  But through the magic of compounding, reinvesting all returns gives five investment doublings, or a 3100% return.  

Dividend lovers like to compare the 3100% to the 700% and declare that the bulk of long-term returns come from dividends.  This is nonsense.  It would also be nonsense to compare the 3100% to the 300% and declare that the bulk of long-term gains come from capital gains.  The relative value of these two types of return is best viewed by looking at the doublings.  In this example, dividends are responsible for 40% of returns and capital gains 60%.  Clearly, both matter.

Here are some short takes and some weekend reading:

Morgan Housel
makes a strong case that our beliefs about the world can linger on while reality changes.  His best example is the changing demographics in China.  They are feeling the effects of their former one-child policy.

Doug Hoyes explains how people seeking debt relief with consumer proposals get scammed if they go to the wrong organization.

Justin Bender explains in detail how to track the Adjusted Cost Base (ACB) of asset allocation ETFs held in non-registered (taxable) accounts.

Robb Engen reviews Fred Vettese’s new book The Rule of 30.  Robb persuaded me to add this book to my reading list.


  1. Further on dividends, if a company doesn't issue dividends and is able to reinvest excess capital at high rates (return on equity, return on invested capital), then the investor benefits further by not paying any taxes on dividends. Most companies paying dividends have trouble reinvesting above the cost of capital and the investor getting the dividends would be better off moving along to another company. Of course, if you're using dividends for actual income/consumption, take what you can get.

    1. Anonymous,

      You're right about the tax savings, but these things are understood by investment pros who are (usually) the ones who determine a stock's price.

  2. Making ridiculous claims about dividends of course is harmful, but if ones style leans towards living more off of dividends and distributions and not selling their shares, there are values in that. You can feel comfort in knowing that you can reach a certain amount of average cash flow every month to add to your other pension tools without ever having to sell any of your stocks.
    March 2020 was also a great test to see what companies or ETF's cut or discontinued their dividends, and how they reacted in a crash. In a long drawn out crash you potentially would have to sell "unit's" off at prices that could be 30 or 40% off its longer term path. You would have to sell off more units to receive the same amount of cash flow, then those units will then no longer be there to rebound over time. Or.. tighten your belt for possibly a long while (2008). Do people take this into account when they are constructing someone's portfolio?
    I think people focus too much on someone making/stating their long term unrealized returns of 8.5% vs. someone with another investing style that "on paper" makes a few points less, but it makes them feel more secure to invest regularly and stay invested and be much less reactive to volatility.

    1. Hi Paul,

      For some people, focusing on dividends has behavioural advantages, but this always seems to come with some amount of magical thinking about dividends. It can be hard to decide for a given person whether these things balance or tip one way or the other.

  3. I was surprised by that post from Nick as well, especially the part where he shares the dividend income received in his own retirement account over the years. He conveniently ignored his own contributions, so instead it looks like he's getting this magical dividend growth. Of course, there's no way his dividend yield doubled in a single year.

    I like your way of framing it as 40% from dividends and 60% from capital appreciation.

    Thanks for the mention, I think you'll like the book. Fred does a thorough job, as always.

    1. Hi Robb,

      I was surprised as well, because Nick's posts usually make more sense.

      I'm glad you liked my framing. I used to be well paid for explaining technology clearly to executives, so I've had practice.

  4. I once was told, and it seems to have held true, that humans have no innate ability to understand exponentials. Combined with our love of a nice payday, it's not surprising that people go ga-ga for dividends at the expense of capital gains and leave their brains at the door. Even though they generally pay less and are taxed more.

  5. Anonymous,

    I can confirm that many seemingly intelligent people I've met can't understand exponential processes. Even just big numbers confuse some people who lead successful lives.