The dividend approach to investing has its appeal. But awell-researched critique at the Independent Investor website challenges that view.
The first partis an overview. The second partis a critical review of the advantages and concludes: The arguments seem compelling, but on second look, lose some of their luster. The third parttakes a look at the disadvantages.
Some main points:
- According to theMiller and Modigliani thesis, dividends dont matter (retained earnings produce growth)
- John Bogle says studies finding better returns from dividend investingare examples of data-mining
- Some studies did not find dividend stocks provided superior returns
- If dividend stocks did offer superior returns, efficient markets would discount the opportunity until the abnormal returnswere eliminated
- Dividend-based investing runs up against the rock of Gibraltar of modern investing: diversification
- In practice this technique starts looking like old fashioned stock-picking
- An investment policy that focuses exclusively on receiving regular income is not necessarily a protection over the long term against losses of capital caused by the effect of inflation or by stock market corrections
- This reduced volatility is criticized by some, who note that even dividend-paying stocks were hit hard during the recent stock market correction
- It is typically more efficient tax wise to generate a cash flow from share dispositions rather than from receiving dividends
The website doesnt have a spot for accepting comments, but it sure would be interesting to hear what dividend investors think of the critique.