Episode 95: Dividends Are Worthless, But Perhaps, Still Worthwhile

Transcript

Hello & Welcome to the Balanced Wealth podcast. My name is Jarrett Topel.

Today, I want to talk a bit about dividends.  What they are, and more importantly, what they are not. With the main question being, do dividends really add financial value to your portfolio, or is it all just an illusion? And with that, let me get started on this Podcast, which I am titling, “Dividends Are Worthless, But Perhaps, Still Worthwhile”

Dividends are often seen as free money. A company pays out a portion of its profits to shareholders, the cash hits your account or gets reinvested, and everyone is happy. Who doesn’t love getting cash, right?

But here’s the catch—dividends don’t actually increase the value of your investment.

Let’s say a company is worth $100 per share, and it pays a $5 dividend. The stock price then drops to $95, because that cash has left the company’s balance sheet. You’re not actually making $5, you are simply shifting value from one pocket to another. Think about it this way: if you withdraw $100 from your bank account, your total balance doesn’t grow. It just moves from your bank account to your wallet. And, that’s exactly what happens with dividends. The stock price adjusts, and the total value of your investment remains the same. So, whether you take dividends as cash, or reinvest them, your overall return is driven by the company’s growth, not by the dividends themselves.

This is why some of the world’s most successful investors, like Warren Buffett, prefer companies that reinvest their earnings rather than paying out dividends. Now, some investors love dividends because they provide predictable cash flow.

And that’s totally understandable. Receiving regular income can be reassuring, especially for retirees or those who prefer not to sell shares to fund their expenses. But here’s the thing—if you need income, you can create your own dividend by selling shares any time you want. This is called the “homemade dividend” approach, and in reality, it’s basically no different from receiving a company-issued dividend. The only real difference is that company-issued dividends often come with worse tax implications.

In many cases, dividends are taxed immediately at ordinary income tax rates, while capital gains, from selling shares, can be deferred, and then, when they are actually realized, they are often taxed at lower capital gains tax rates.

Additionally, dividends can be inflexible. When a company pays a dividend, you have no control over the timing or amount. If you were selling shares instead, to create your own income stream, you can choose when and how much to sell, optimizing for tax efficiency and cash flow needs.

Despite all this, dividends remain incredibly popular. Why? Psychology. Getting a cash payout feels like a tangible reward—proof that your investment is “working.” This behavioral aspect of dividends provides peace of mind, helping some investors stay disciplined and invested through market volatility.

There’s also a perception that dividend-paying companies are more stable or reliable. And, while this isn’t always true, companies that consistently pay and grow their dividends over time, often have strong fundamentals and a history of profitability. That can be comforting, even if it doesn’t fundamentally change the math of your investment’s value.

And there’s another psychological factor at play here, which is, loss aversion. Many investors hesitate to sell shares because selling feels like giving up ownership. Dividends, on the other hand, provide cash flow without requiring a sale. This can make dividends seem like a safer, more reliable option, even if their financial impact is neutral.

So, does this all mean dividends are bad? Not necessarily. If you prefer the convenience of automatic cash flow, and don’t mind the tax implications, dividends can be a useful tool. They can help investors stay the course during market downturns, knowing that they’re receiving income regardless of short-term fluctuations.

For younger, or more aggressive investors, in the accumulation phase, dividend-focused investing may not be the most efficient strategy. However, for retirees. or more conservative income-focused investors, dividends can provide stability, predictability and peace-of-mind.

So, what’s the takeaway? Dividends don’t magically increase your wealth—but they can provide stability and a sense of security. If that peace of mind helps you stay invested and stick to your strategy, then maybe there’s value in dividends after all, just not in the way many people think.

Disclosure

The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. This program should not be construed as Financial, Legal or Estate Planning advice. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. always please remember, investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.