Is Dividend Investing the Magic Pill

Is Dividend Investing the Magic Pill?

Recently I have seen multiple people putting out youtube videos touting how they became millionaires using dividend investing. How you can retire rich if only you invest in high dividend paying stocks and retire to a beach in the bahamas..

Particularly in Canada, there is a big wave of folks prescribing and following dividend investing.

There is atleast one fundamental problem with that prescription.

Firstly, after a major bull move (more than 10 years now and counting), its very easy to look back at any long strategy, including dividend investing and showcase how well it would have worked. By random chance even, a bunch of folk can easily get lucky and accumulate from before or immediately after the last down move and sure.. over the years have enjoyed both the dividends as well as capital gains. That does not mean that it is safe to blindly invest in stocks paying dividends nor does it prove that dividend investing beats other forms of investing (say indexing or value investing).

At a high level, dividend paying companies are basically large stable companies that think they are better off paying a part of their earnings back to the shareholders than to re-invest or grow the business. If not for that, they would be better off growing with the extra funds and adding to the shareholder value by increasing the value of the underlying business via growth. Let’s ignore the fact that once they start a dividend stream they get boxed into having to keep it stable or grow to avoid wall-street wrath. With that as a backdrop, you have to ask, is dividend investing really safe when you might be missing out on the possibly explosive growth that growth stocks offer? Does it really beat other forms of investing?

Here are a few links and articles worth reading..:
https://www.forbes.com/sites/jimdahle/2018/11/11/five-reasons-to-avoid-focusing-on-dividend-stocks/
https://www.fool.com/investing/2017/03/22/the-ironic-truth-about-dividend-stocks.aspx
https://www.dividend.com/dividend-education/5-common-misconceptions-about-dividend-investing/
https://seekingalpha.com/article/3997749-dividend-stocks-outperform

Overall, though it is not quite black and white (like most other things in life), my take is that due to the fact that the businesses offering dividends are established companies, the volatility of returns might be lower than the market in general but at various times they might significantly underperform growth stocks. That's the plus and the minus of it.

A bigger risk i see is that folk looking for that extra yield in the form of dividend get sucked-in into selecting individual tickers. In general, a roughly 3-4% dividend on average for me is not compensation enough to take on the additional unsystematic risk or even worse pick a bunch of correlated tickers adding on additional systematic risk. If anything, buy a dividend paying ETF like SDY in US, or XEI or VDY in Canada and call it a day.

Next time we will look at other monkeys touting covered calls as the magic pill that beats dividend investing and see what the real scoop there is..