There has been abundant discussion regarding the utility of dividends. Many investment models rely on factors or other strategies in their attempt to increase returns or reduce volatility. These approaches generally focus on total returns and brush dividends under the rug. Some go further and argue specifically against dividends – occasionally likening dividend advocates to sacred cow worshippers. The low dividend yields and strong capital appreciation we have observed in recent years has probably diminished the reputation of dividends as well. On balance, we find the art and science of dividends has largely been forsaken.
This is a pro-dividend article. While we acknowledge some issues with dividends (e.g., inefficiencies in how they return capital to shareholders), we find many investors and practitioners do not fully understand or appreciate some of the key attributes that can make dividends useful – especially in the context of retirement income.
This article discusses some pros and cons of dividends. We also weigh in on previously-discussed issues and share what we believe are some new perspectives. Some of claims we revisit/challenge are:
- Synthetic dividends are the same as real dividends
- Dividends are equivalent to buybacks when returning capital to shareholders
- Dividends comprise the bulk of total returns investors experience
As the title suggests, the primary goal of this article is to explain what makes dividends different. We believe it is important to acknowledge the intrinsic fundamental nature of dividends. In particular, this creates a unique value proposition in that dividends can provide investors with a growing stream of income that is largely independent of market volatility.
On balance, we believe dividends are a powerful financial planning tool many retirement models seem to neglect. Please stay tuned for our future article(s) were we will present a retirement income strategy that leverages some of the benefits discussed in this article.