What’s the problem with dividends?

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MapleSyrup
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What’s the problem with dividends?

Post by MapleSyrup »

Why do so many folks on here find dividend income undesirable if one needs income? Qualified dividends have the same tax rate as long term capital gains, so what difference does it make whether the income comes from selling appreciated assets or from dividends?
000
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Re: What’s the problem with dividends?

Post by 000 »

There's nothing wrong with dividends. But there might be something wrong with buying a lot of stocks that pay high dividends to the exclusion of other stocks (likely leading to being concentrated in decaying industries).
hi_there
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Re: What’s the problem with dividends?

Post by hi_there »

Dividends force you to realize those gains based on their schedule. So, if everything else is equivalent, as you mentioned, selling stock is better than dividends. There is a reason to prefer capital gains and no reason to prefer dividends.
Last edited by hi_there on Wed Apr 14, 2021 10:13 pm, edited 1 time in total.
Triple digit golfer
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Re: What’s the problem with dividends?

Post by Triple digit golfer »

Who finds it undesirable?

I think seeking out dividend paying stocks and expecting higher returns or thinking the source of the returns is superior is where you'll get pushback.
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MapleSyrup
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Re: What’s the problem with dividends?

Post by MapleSyrup »

hi_there wrote: Wed Apr 14, 2021 10:13 pm Dividends force you to realize those gains based on their schedule. So, if everything else is equivalent, as you mentioned, selling stock is better than dividends. There is a reason to prefer capital gains and no reason to prefer dividends.
OK, this makes sense.
Thanks!
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watchnerd
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Re: What’s the problem with dividends?

Post by watchnerd »

The biggest problem with dividends is when I forget to turn off dividend reinvestment and own-goal myself into a wash sale.
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JoMoney
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Re: What’s the problem with dividends?

Post by JoMoney »

You get to too choose when you realize the income from capital gains, and if you're in an accumulation phase in a taxable account then it makes a difference in taxes that might otherwise be deferred.
Also, this being a board focused on the advice of John Bogle, we primarily focus on broad market index funds over trying to pick individual styles of investing.
Some people like "value" or "growth" or "trend following" or "socially responsible" or "ESG" investing... those styles are also 'undesirable' to some. It doesn't mean you can't invest that way, but it's good to keep your costs low while still being well diversified, and it's hard to beat a broad market fund for being both diversified and low cost.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Pepper11
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Re: What’s the problem with dividends?

Post by Pepper11 »

MapleSyrup wrote: Wed Apr 14, 2021 10:11 pm Why do so many folks on here find dividend income undesirable if one needs income? Qualified dividends have the same tax rate as long term capital gains, so what difference does it make whether the income comes from selling appreciated assets or from dividends?
The problem is I want my income later, not now. If you are in the accumulation phase, you shouldn't be selling. Thus income from dividends, and the tax that comes with it, is undesirable. Why would I want a forced sale?
syphon101
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Re: What’s the problem with dividends?

Post by syphon101 »

I would like some clarification on how dividends are equivalent to selling shares. When you receive a dividend, the number of shares you hold remains the same. If you sell, then you're decreasing your number of shares. If you continue selling, eventually your shares will be depleted. On the other hand, if your dividend payments are enough to cover living expenses, then theoretically you'd never have to sell. That seems like a good deal to me. What am I missing? I realize the value of the shares decreases relative to the dividend payout. Do these values not typically rebound after a dividend payout?
hi_there
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Re: What’s the problem with dividends?

Post by hi_there »

syphon101 wrote: Wed Apr 14, 2021 10:33 pm I would like some clarification on how dividends are equivalent to selling shares. When you receive a dividend, the number of shares you hold remains the same. If you sell, then you're decreasing your number of shares. If you continue selling, eventually your shares will be depleted. On the other hand, if your dividend payments are enough to cover living expenses, then theoretically you'd never have to sell. That seems like a good deal to me. What am I missing? I realize the value of the shares decreases relative to the dividend payout. Do these values not typically rebound after a dividend payout?
If you sell say 2% of your stock dollar value every year, but the stock market goes up 10% every year, you will never deplete your shares. Assuming the stocks don't split, yes, you will own fewer shares, but does it matter if you have 10,000 shares worth $1 each or 5000 shares worth $2 each?
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Schlabba
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Re: What’s the problem with dividends?

Post by Schlabba »

syphon101 wrote: Wed Apr 14, 2021 10:33 pm I would like some clarification on how dividends are equivalent to selling shares. When you receive a dividend, the number of shares you hold remains the same. If you sell, then you're decreasing your number of shares. If you continue selling, eventually your shares will be depleted. On the other hand, if your dividend payments are enough to cover living expenses, then theoretically you'd never have to sell. That seems like a good deal to me. What am I missing? I realize the value of the shares decreases relative to the dividend payout. Do these values not typically rebound after a dividend payout?
With a growing share price you would sell less and less shares a year.

In the end what makes dividends and selling shares equal is that both dividends and share price depend on profit. If the companies are doing well you can access that value though both means.
Short term there might be a difference but in the end it is all about earnings.
khunron
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Re: What’s the problem with dividends?

Post by khunron »

IF you need another income stream they are fine. Some people don't.
JustinR
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Re: What’s the problem with dividends?

Post by JustinR »

MapleSyrup wrote: Wed Apr 14, 2021 10:11 pm Why do so many folks on here find dividend income undesirable if one needs income? Qualified dividends have the same tax rate as long term capital gains, so what difference does it make whether the income comes from selling appreciated assets or from dividends?
Dividends are WORSE than selling the stock yourself in several ways:
  • You can't control when
  • You can't control how much
  • Dividends are taxed more. When you receive a dividend, the entire amount is taxed. When you sell stock, only the gain is taxed.

Example: You receive a $500 dividend. All $500 is taxed ($75 at 15% tax). Instead, if you sold it yourself and $100 of it was gains, you'd only pay $15 in tax. That's a $60 difference for just $500.


So imagine an annoying guy named Ralph randomly selling your investments throughout the year, for random amounts, and you're taxed more than you if you sold it yourself.

That's dividends.
Last edited by JustinR on Thu Apr 15, 2021 4:54 am, edited 4 times in total.
GoldenFinch
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Re: What’s the problem with dividends?

Post by GoldenFinch »

^^Great synopsis and example JustinR.
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Re: What’s the problem with dividends?

Post by Dude2 »

The fundamentals have been addressed above. You can also add that nobody said all dividends would be qualified, that's an assumption. If not qualified, the dividend is interest paid at your income tax rate.

One of the reasons for posters being anti-dividend is simply to counter the pro-dividend lobby. Essentially we are probably neutral on dividends, but, because there are always going to be snake oil salesmen who want to present a dividend strategy to people and only present things in one positive fashion, we have to take a defensive posture. The neutrality is because, as you can clearly see with mutual funds every time they pay out their dividends, the stock price (NAV) is reduced. You don't get something for nothing. Sure, you have the same amount of stocks, but they are worth less. Surprisingly, they are worth less in the exact proportion to the dividends they paid out to shareholders. Shocking.

The other side of the coin is a risk story. Some of these funds that take the 80 highest paying dividend stocks and place them at equal weights, well, I ask you, is that the same risk profile as a total market index fund with 7000 stocks in it (across all sizes, sectors, weighted by market cap)? Sometimes higher risk equals higher reward. That's great, but investors need to understand the potential down side as well.
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dboeger1
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Re: What’s the problem with dividends?

Post by dboeger1 »

JustinR wrote: Thu Apr 15, 2021 3:12 am When you receive a dividend, the entire amount is taxed.
That's an interesting point I've never heard before, but I feel like it's also a bit misleading. Shouldn't the dividend theoretically be offset by an equally negative change in share price? The price is the market's estimate of discounted future earnings. Dividends consume some of those earnings. Presumably, the company's share price would be worth more (and thus taxed more upon sale) if it chose not to pay those dividends. Said another way, a company with a positive share price issuing its last dividend upon liquidation of all of its assets would subsequently be worth 0, and so the dividend amount would be offset by an opposite loss in share price, and there would more or less be no tax obligation.
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Re: What’s the problem with dividends?

Post by Chip »

dboeger1 wrote: Thu Apr 15, 2021 4:03 am That's an interesting point I've never heard before, but I feel like it's also a bit misleading. Shouldn't the dividend theoretically be offset by an equally negative change in share price?
Sure, but you don't get the full amount of that tax "benefit" until you sell the entire position.
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Re: What’s the problem with dividends?

Post by Jack FFR1846 »

Say you're getting an ACA subsidy, but are right at the cliff. You get an extra generous dividend because the market did well. Now you have no more subsidy in addition to having to pay tax on that dividend you didn't want in your taxable account.

Let's now do a comparison for basis. BRK/b pays no dividend, so if you bought shares 10 years ago, your basis is 10 years ago. VTI pays dividends, so if you re-invest dividends, first, you pay taxes in your taxable account at every dividend distribution. Your share price drops at every dividend distribution. Your re-investment now has a brand new basis, so if you were to sell shares including these, your tax on those new, re-investment shares is ordinary income instead of LTCG.

For those taking income, and relying on dividends, it's a forced income payment. Say you need $50k a year but your dividends pay $100k a year. You're paying taxes on that $100k and sitting on cash. Sure, you can re-invest it if you want. But if you were taking income by selling shares of non-dividend paying stock, you'd only take out the $50k you need, only pay LTCG on the gains of that $50k and not have extra money that you have to decide what to do with it. Plus with non-dividend paying stock, you can sell and take the proceeds as income in any amount and at the time you want it. Want it every week? No problem. Want it once a year, on January 2nd? No problem. You can't do that with dividends. Your desire to hold off in December so it doesn't add to your taxes....too bad, you're getting it.
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Mr.BB
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Re: What’s the problem with dividends?

Post by Mr.BB »

JustinR wrote: Thu Apr 15, 2021 3:12 am
MapleSyrup wrote: Wed Apr 14, 2021 10:11 pm Why do so many folks on here find dividend income undesirable if one needs income? Qualified dividends have the same tax rate as long term capital gains, so what difference does it make whether the income comes from selling appreciated assets or from dividends?
Dividends are WORSE than selling the stock yourself in several ways:
  • You can't control when
  • You can't control how much
  • Dividends are taxed more. When you receive a dividend, the entire amount is taxed. When you sell stock, only the gain is taxed.

Example: You receive a $500 dividend. All $500 is taxed ($75 at 15% tax). Instead, if you sold it yourself and $100 of it was gains, you'd only pay $15 in tax. That's a $60 difference for just $500.


So imagine an annoying guy named Ralph randomly selling your investments throughout the year, for random amounts, and you're taxed more than you if you sold it yourself.

That's dividends.
I hold a couple of dividend funds in my Roth account. When I want to start having the dividends sent to me directly after I retire, there is no tax on those dividends.
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dkturner
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Re: What’s the problem with dividends?

Post by dkturner »

Kenneth French has studied the dividend phenomenon and has documented that, historically, dividend paying stocks have provided higher total returns, with lower standard deviation of those returns, compared to non-dividend paying stocks. This may be a case of investors being willing to pay a higher price for dividend paying stocks because they are perceived as being more valuable than non-dividend paying stocks.
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firebirdparts
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Re: What’s the problem with dividends?

Post by firebirdparts »

dkturner wrote: Thu Apr 15, 2021 6:16 am Kenneth French has studied the dividend phenomenon and has documented that, historically, dividend paying stocks have provided higher total returns, with lower standard deviation of those returns, compared to non-dividend paying stocks. This may be a case of investors being willing to pay a higher price for dividend paying stocks because they are perceived as being more valuable than non-dividend paying stocks.
you may have mangled a word in there. It seems self-contradictory, unless you meant that investors paid more at the end of the study but not at the beginning of the study. I don't care enough to look. Normally of course it's after, you know, which by that I mean is neither the beginning nor the end.

Anyway, dividends are fundamental, and I'm a natural fundamentalist, so I don't argue about them. They are what they are. One thing I think might be important to point out, or non-obvious, is that companies don't control their stock price, so they don't control the yield. They just control the dividend amount. A company with a 7% dividend is perceived by investors to be shrinking (for example). People like us set the stock price. If you invest in it, by golly you better perceive along with the rest of the crowd.
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CyclingDuo
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Re: What’s the problem with dividends?

Post by CyclingDuo »

MapleSyrup wrote: Wed Apr 14, 2021 10:11 pmWhy do so many folks on here find dividend income undesirable if one needs income? Qualified dividends have the same tax rate as long term capital gains, so what difference does it make whether the income comes from selling appreciated assets or from dividends?
We all get to deal with dividends whether we want to or not. :beer

Location of the asset, type of asset, and knowing the tax code is key to mitigating one's taxes. Income from other sources is also different between investors. A household with salaries that bring in $250K+ per year, compared to a household that brings in $125K per year will both have a different response to your question of What's the problem with dividends?

Each household may also have different work related investment plans available to utilize for pre-tax deductions to lower the household's annual taxable income when it comes to figuring out the tax bill on dividends while still working. We are over age 50 and have a 401k, a 403b, a 457b and a mandatory pension which gives us about $84K available (using age 50+ catch up contributions) to trim off the taxable income for dividend and long term capital gain purposes when doing our taxes before we even get to the standard deduction.

Here's a nice tidy go-to regarding the types of assets that produce income and where they are best located in your portfolio:

https://www.simplysafedividends.com/int ... -dividends

Understanding that type of go-to guide is key to placement of a dividend income producing asset so you know if it should be in your taxable account, Roth IRA, or tax deferred retirement accounts.

Depending on one's taxable household income, there are many who pay $0 on qualified dividends. The 0% tax bracket income limit for dividends in 2020 for MFJ was $80,000 and rises to $80,800 in 2021. Standard deduction in 2020 for MFJ was $24,800 and rises to $25,100 in 2021.

That gives you these parameters to work within after adjustments to income (401k/pension/etc...)...

2020

$24,800 + $80,000 = $104,800

2021

$25,100 + $80,800 = $105,900

Depending on where one lives (cost of living) and their annual household expenses as well as household salary (or other income sources), the debate is open as to whether or not $104.8K in 2020 was enough to live on, or if $105.9K will be enough in 2021. If it is enough, then the strategy to pay $0 on qualified dividends or long term capital gains is available as part of the amount within those parameters.

Although not updated to 2020/21 tax brackets, this blog post does a nice job of showing one How to Pay No Tax on Your Dividend Income. Again, one's household income, adjustments to income (401k/403b/457b/pension), standard deduction, and taxable account can all be in alignment to pay $0 on qualified dividends and $0 on long term capital gains which means whether you take income from a dividend, or sell shares of an asset to produce your own DIY dividend for income - there is a path available.

https://retireby40.org/pay-no-tax-dividend-income/

We are still working, but are in the decade and a half transition range from age 55 to 70 which is the time gap that includes moving to retirement, and will include drawing income from sources before Social Security at age 70 and the RMD's at age 72. We see no problem dealing with dividends or long term capital gains within the tax code and using strategies to mitigate our taxes while we fund our expenses. I'm agnostic to both, but also understand the taxation or lack of taxation on both based on our individual household situation. Many are quick to have blanket negative opinions on long term capital gains and qualified dividends, but under the hood - those blanket statements may or may not apply to your own household.

Who Benefits From The Zero Percent Tax Bracket For Capital Gains And Dividends?
https://www.taxpolicycenter.org/taxvox/ ... -dividends

The lion’s share of the aggregate benefits from the zero percent bracket goes to filers between $50,000 and $200,000 in Adjusted Gross Income...

We are in in that group of filers, so we benefit.

Today's dividends for April 15th will be $789 from various assets in our accounts. They will get redeployed.

CyclingDuo
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UpperNwGuy
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Re: What’s the problem with dividends?

Post by UpperNwGuy »

For me, the problem with dividends can be summarized in one word: taxes.
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arcticpineapplecorp.
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Re: What’s the problem with dividends?

Post by arcticpineapplecorp. »

JustinR wrote: Thu Apr 15, 2021 3:12 am
MapleSyrup wrote: Wed Apr 14, 2021 10:11 pm Why do so many folks on here find dividend income undesirable if one needs income? Qualified dividends have the same tax rate as long term capital gains, so what difference does it make whether the income comes from selling appreciated assets or from dividends?
Dividends are WORSE than selling the stock yourself in several ways:
  • You can't control when
  • You can't control how much
  • Dividends are taxed more. When you receive a dividend, the entire amount is taxed. When you sell stock, only the gain is taxed.

Example: You receive a $500 dividend. All $500 is taxed ($75 at 15% tax). Instead, if you sold it yourself and $100 of it was gains, you'd only pay $15 in tax. That's a $60 difference for just $500.


So imagine an annoying guy named Ralph randomly selling your investments throughout the year, for random amounts, and you're taxed more than you if you sold it yourself.

That's dividends.
excellent explanation JustinR.
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arcticpineapplecorp.
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Re: What’s the problem with dividends?

Post by arcticpineapplecorp. »

dkturner wrote: Thu Apr 15, 2021 6:16 am Kenneth French has studied the dividend phenomenon and has documented that, historically, dividend paying stocks have provided higher total returns, with lower standard deviation of those returns, compared to non-dividend paying stocks. This may be a case of investors being willing to pay a higher price for dividend paying stocks because they are perceived as being more valuable than non-dividend paying stocks.
yeah, this doesn't make sense. can you show us the paper you're referring to?

paying a higher price doesn't generaly lead to higher returns. buying shares at lower prices lead to higher returns. something's not adding up here.

remember another thing--there are two choices when it comes to a company:
you can keep the money the company earns with the company (reinvest)
or
ask them to pay out to you (dividend)

why would you prefer one over another?

main reason is: who can earn you more on that money?

the company or you?

If the company can use that money to earn more than you can, you're happy to reinvest.

If you don't trust the company to use the money wisely (they have a history of making bad acquisitions/squandering cash, have no new ideas for product development, etc) investors demand that cash be paid out so they invest it themselves (to earn a better return/find another place to invest it).

ask yourself why you'd want to invest in a company that's paying a dividend if that's indicating they have no better use for that cash and/or can't earn more on that money than you can yourself somewhere else? Why do you want to invest in a company you don't trust how they use the profits?
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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Re: What’s the problem with dividends?

Post by Johm221122 »

If your specifically looking for "dividend income" your purposely giving up diversification of other assets. Your making a bet that dividend stocks are better than a diversified portfolio and will have a better total return.

Dividends are fine but I'm looking at total return of my portfolio and I have no idea if a portfolio of dividend income stocks will outperform a more diversified portfolio and it's many different asset classes.
dbr
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Re: What’s the problem with dividends?

Post by dbr »

The problem when people object to dividend schemes is not usually that there is anything wrong with dividends as to suggest that there is nothing especially helpful either. Sometimes someone goes so far as to think dividends are free money on top of ordinarily expected returns, and that is just wrong. Other times people have the mistaken idea that withdrawals from a portfolio can only be arranged by cashing dividend checks, and that is just not true and unhelpful as well. Pointing these things out is not being against dividends but is rather trying to offer thinking more in line with facts.

There might be a case for risk and return arguments. I don't think there is a case for dividend funds being of higher return than the total market except perhaps as a proxy for a Fama-French value tilt. It isn't impressive that such funds are less risky either, but if someone finds data they feel is a large enough effect and reliable enough to justify an investment selection, then by all means have at.

If a person finds taking dividend payments is a convenient way to withdraw money from a portfolio that is fine too. Almost anyone with taxable accounts holding stocks paying dividends and wanting to make withdrawals would take the dividends when they are paid but that would not have to lead to selecting a concentration in dividend stocks to try to match up the dividend payments to the withdrawals wanted. Doing that is more likely to be awkward and not helpful rather than the other way around, but to each his own.

The issue of taxes has been addressed.

The main thing is to disabuse investors of an idea that investing in high dividend paying stocks is an especially clever or necessary thing to do in preference to other and possibly more obvious and practical ways to do things. It is not to suggest that dividend investors are necessarily doing something wrong or that people don't approve of.
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Re: What’s the problem with dividends?

Post by international001 »

JustinR wrote: Thu Apr 15, 2021 3:12 am
Example: You receive a $500 dividend. All $500 is taxed ($75 at 15% tax). Instead, if you sold it yourself and $100 of it was gains, you'd only pay $15 in tax. That's a $60 difference for just $500.
Measure apples to apples. Compare the net return after taxes wether the company increases 25% in value or decides to do a 25% dividend distribution.
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Re: What’s the problem with dividends?

Post by international001 »

dkturner wrote: Thu Apr 15, 2021 6:16 am Kenneth French has studied the dividend phenomenon and has documented that, historically, dividend paying stocks have provided higher total returns, with lower standard deviation of those returns, compared to non-dividend paying stocks. This may be a case of investors being willing to pay a higher price for dividend paying stocks because they are perceived as being more valuable than non-dividend paying stocks.
I don't think that's accurate. When doing factor analysis, what really mattered is the value factor (like P/B). It just happens that P/B is correlated to dividends.

Moral: don't look for dividends stocks on purpose, look for low P/B (if you still believe on value factor)
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Re: What’s the problem with dividends?

Post by dukeblue219 »

dkturner wrote: Thu Apr 15, 2021 6:16 am Kenneth French has studied the dividend phenomenon and has documented that, historically, dividend paying stocks have provided higher total returns, with lower standard deviation of those returns, compared to non-dividend paying stocks. This may be a case of investors being willing to pay a higher price for dividend paying stocks because they are perceived as being more valuable than non-dividend paying stocks.
How recently? Would seem that so much of the market gains since 1995 have been AMZN, TSLA, NFLX, MSFT, AAPL, GOOG, FB, etc. A couple of those pay token dividends but overall I'd be hard pressed to agree that investors pay a premium for dividend payers in 2021.
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Re: What’s the problem with dividends?

Post by JoeQ »

syphon101 wrote: Wed Apr 14, 2021 10:33 pm I would like some clarification on how dividends are equivalent to selling shares. When you receive a dividend, the number of shares you hold remains the same. If you sell, then you're decreasing your number of shares. If you continue selling, eventually your shares will be depleted. On the other hand, if your dividend payments are enough to cover living expenses, then theoretically you'd never have to sell. That seems like a good deal to me. What am I missing? I realize the value of the shares decreases relative to the dividend payout. Do these values not typically rebound after a dividend payout?
My answer will be overly simplistic, but I don't think the other posters have answered your question adequately.

You are correct in saying that a dividend distribution does not affect your portfolio value directly. However, all things being equal, a "value" (dividend-producing) stock will appreciate less than a "growth" stock. So in essence, you are trading future appreciation for current income (i.e. a "forced sale", as others have said), which adds unwanted tax costs to your portfolio.

Anyone may feel free to correct me.
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rustymutt
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Re: What’s the problem with dividends?

Post by rustymutt »

JustinR wrote: Thu Apr 15, 2021 3:12 am
MapleSyrup wrote: Wed Apr 14, 2021 10:11 pm Why do so many folks on here find dividend income undesirable if one needs income? Qualified dividends have the same tax rate as long term capital gains, so what difference does it make whether the income comes from selling appreciated assets or from dividends?
Dividends are WORSE than selling the stock yourself in several ways:
  • You can't control when
  • You can't control how much
  • Dividends are taxed more. When you receive a dividend, the entire amount is taxed. When you sell stock, only the gain is taxed.

Example: You receive a $500 dividend. All $500 is taxed ($75 at 15% tax). Instead, if you sold it yourself and $100 of it was gains, you'd only pay $15 in tax. That's a $60 difference for just $500.


So imagine an annoying guy named Ralph randomly selling your investments throughout the year, for random amounts, and you're taxed more than you if you sold it yourself.

That's dividends.

What about tax deferred account?
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Re: What’s the problem with dividends?

Post by tibbitts »

dukeblue219 wrote: Thu Apr 15, 2021 8:00 am
dkturner wrote: Thu Apr 15, 2021 6:16 am Kenneth French has studied the dividend phenomenon and has documented that, historically, dividend paying stocks have provided higher total returns, with lower standard deviation of those returns, compared to non-dividend paying stocks. This may be a case of investors being willing to pay a higher price for dividend paying stocks because they are perceived as being more valuable than non-dividend paying stocks.
How recently? Would seem that so much of the market gains since 1995 have been AMZN, TSLA, NFLX, MSFT, AAPL, GOOG, FB, etc. A couple of those pay token dividends but overall I'd be hard pressed to agree that investors pay a premium for dividend payers in 2021.
That's always the problem with any historical study: you don't now how much of history applies. If you used your 25-year standard at certain times you'll have to admit that you would have found confirmation for some pretty sub-optimal strategies going forward, though.
dbr
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Re: What’s the problem with dividends?

Post by dbr »

syphon101 wrote: Wed Apr 14, 2021 10:33 pm I would like some clarification on how dividends are equivalent to selling shares. When you receive a dividend, the number of shares you hold remains the same. If you sell, then you're decreasing your number of shares. If you continue selling, eventually your shares will be depleted. On the other hand, if your dividend payments are enough to cover living expenses, then theoretically you'd never have to sell. That seems like a good deal to me. What am I missing? I realize the value of the shares decreases relative to the dividend payout. Do these values not typically rebound after a dividend payout?
The math on that is that the growth of your portfolio in a year is the return less the withdrawals. Return is the sum of capital price gains and dividends. If you spend the dividend that is a withdrawal because otherwise you are giving yourself the dividend in the return and also spending it.

So the understanding of how portfolios grow over time includes the condition that dividends are reinvested. To take a withdrawal it is immaterial whether one spends rather than reinvests the dividend or alternatively that one sells shares for a withdrawal of the same size.

The only way selecting investments in dividend stocks rather than the total market would allow the portfolio to grow more and/or allow greater withdrawals would be that the return on dividend stocks be greater than the return on the total market. Data shows that the return is not greater, certainly not by the amount of the dividend. It has been mentioned that to the extent a selection of dividend paying stocks is also a tilt to value factor loading, then if the Fama-French model is predictive, then a dividend portfolio would have a higher return accordingly. There are more efficient anbd effective ways to get a value loading than to select on dividend paying.

Larry Swedroe wrote a whole series of blogs on this topic which one can research:

https://www.google.com/search?q=swedroe ... CAk&uact=5

https://www.etf.com/sections/index-inve ... emystified
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Riprap
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Re: What’s the problem with dividends?

Post by Riprap »

There are no problems with dividends. Dividends prevent CEOs from doing stupid things with YOUR money. I can't understand why Bogleheads cannot grasp this concept.

The law (Investment Act of 1940 I believe) requires that funds pay out dividends from the underlying corporations in their holdings. It's pretty easy to understand this. If a corproration pays a dividend, then your fund will pay a dividend. Simple concept, see?

Please don't equate stock buybacks with dividends. CEOs routinely pay TOO much for their own stock. This has been shown to be true over and over and over and over again.

There are no problems with dividends. Even our mentor Jack Bogle said this.
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Re: What’s the problem with dividends?

Post by nisiprius »

All other things being equal--which they are not--there is no financial difference between a company retaining earnings and reinvesting them itself to grow its business, versus paying you dividends, your reinvesting the dividends to buy more shares of the stock.

At some level--which I don't personally understand and so can't evaluate the assumptions behind--the Modigliani-Miller theoremsays that
in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed. Since the value of the firm depends neither on its dividend policy nor its decision to raise capital by issuing stock or selling debt, the Modigliani–Miller theorem is often called the capital structure irrelevance principle.
If it doesn't matter to the firm, it shouldn't matter to investors--again, under that set of assumptions.

So what are the issues with dividends?

a) There are, or have been, or may be expected to be, differences in the taxation of dividends and capital gains.

b) Dividends are "pay the IRS now," capital gains are "pay the IRS later." Even if by some metric the tax cost is the same, the effective cost to you may differ--depending on what other uses you might make with the money, and depending on what you predict for your tax situation now versus your tax situation later. It's usually assumed that it must be better to pay taxes later than sooner, but that of course is not necessarily true. Without running actual numbers, it's easy to exaggerate the benefits of not paying now, and half-forget the future costs of having to pay later. So even when it is better to defer taxes, the dollar value of the deferral may not be all that big.

A very wealthy investor with a complex tax situation might find that the benefit of some tax maneuver is more than enough dollars to pay an accounting firm to execute it. It might be aspirational for "mass affluent" investor to execute the same maneuver, i.e. they are practicing things that will matter someday when the are rich, but possibly not saving much on taxes right now.

c) Stock buybacks and dividends are two different ways in which a company can directly share earnings with investors rather than reinvesting them. Dividends share them with all shareholders, whether they want them or not. Buybacks share them with investors who choose to take the buyback offer. Since buybacks tend to boost the price of the stock, they indirectly other shareholders, too. Some feel that buybacks are more advantageous to them than dividends, so, to them, dividends are a problem.

d) The management choices of paying dividends, making buybacks, or doing neither, reflects something about the business situation and the management policies of a company. Therefore, collectively, companies that pay dividends on their stock probably are systematically different from those that don't. Oddly enough, there is a significant coterie of investors who feel that paying dividends--particularly consistent and growing dividends--selects a group of companies with superior management whose stock is going to outperform the market (despite the fact that everyone knows with stocks and companies these are).
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Re: What’s the problem with dividends?

Post by FoolMeOnce »

JustinR wrote: Thu Apr 15, 2021 3:12 am Dividends are WORSE than selling the stock yourself in several ways:
  • You can't control when
  • You can't control how much
  • Dividends are taxed more. When you receive a dividend, the entire amount is taxed. When you sell stock, only the gain is taxed.

Example: You receive a $500 dividend. All $500 is taxed ($75 at 15% tax). Instead, if you sold it yourself and $100 of it was gains, you'd only pay $15 in tax. That's a $60 difference for just $500.


So imagine an annoying guy named Ralph randomly selling your investments throughout the year, for random amounts, and you're taxed more than you if you sold it yourself.
Good points, but I think the part about being taxed more is only a near-term consideration. Overall, your after-tax value of your position is equal whether there is a dividend or not.

Let's say you have a stock worth $100, and your basis is $50. If it issues a $2 dividend and the price adjusts to $98, you have a basis of $50, a taxable gain of $48, and taxable cash of $2. Assuming 15% tax on LTCG and dividends, your post-tax value is $50 + 0.85*48 + 0.85*2, same as if there was no dividend the price remained at $100.

There are ways to permanently avoid the tax, making the no-dividend scenario better - step-up basis at death, charitable contributions, or, breaking the rules for the above hypo, falling into the 0% LTCG and QD bracket. But aside from that, the value is the same, it is just that you are paying the tax now instead of later. This gets back to your first two points - you lose control over this income and the tax timing, missing out on chances to "game" the tax system in various ways on the portion that gets converted to a dividend, like delaying the tax until after your working years when you may fit more into the 0% bracket, managing income for ACA or other tax benefits, etc.
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Re: What’s the problem with dividends?

Post by Big Dog »

dkturner wrote: Thu Apr 15, 2021 6:16 am Kenneth French has studied the dividend phenomenon and has documented that, historically, dividend paying stocks have provided higher total returns, with lower standard deviation of those returns, compared to non-dividend paying stocks. This may be a case of investors being willing to pay a higher price for dividend paying stocks because they are perceived as being more valuable than non-dividend paying stocks.
Nobelists, M&M postulated that only higher returns are what matters.

https://www.dividend.com/dividend-educa ... ce-theory/
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Re: What’s the problem with dividends?

Post by ipdiddly »

1. I love getting a pay raise every year. PG just increased my quarterly paycheck by 10%. When did you last receive a 10% pay raise while working?
2, Two of my best performing "growth" stocks pay dividends: AAPL and NEE (the latter being a utility).
3. Boring dividend stocks can outperform the market: viewtopic.php?f=10&t=335317
4. If you own dividend stocks, you may be less inclined to panic sell during a market downturn if you know that steady stream of dividend income will continue.
5. Just because a company does not pay a dividend does not mean that the company will spend its retained earnings wisely. CEO's sometimes spend your profits foolishly, such as paying all the executives outlandish bonuses, building fancy offices, buying other businesses that don't contribute to the bottom line and have to be unloaded at a loss years later. Thus, the notion that companies that retain earnings will outgrow dividend payers is not necessarily true. (See item 3 above.)
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Re: What’s the problem with dividends?

Post by Riprap »

ipdiddly wrote: Thu Apr 15, 2021 11:20 amJust because a company does not pay a dividend does not mean that the company will spend its retained earnings wisely.
I've found that most Bogleheads cannot grasp (or choose to ignore) this concept. They are blind to value vs price when the conversation inevitably turns to stock buybacks. It's as if they believe management always operates rationally and efficiently.

It's truly baffling to me, yet amusing at the same time. All the chest thumping why dividends don't matter.
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Re: What’s the problem with dividends?

Post by burritoLover »

Let's boil this down to the crux of the issue: yield-chasing dividend investors believe that a stock dividend payment works the same as a bond interest payment (it doesn't). You are net nothing from your stock dividend - it does not increase your wealth. Whether the stock or stock fund pays a 1%, 2%, 5%, or whatever dividend is irrelevant as far as your total net worth (other than a net loss in taxable).

If you believe that not to be true, then you can simply buy the stock or stock fund paying a dividend the day before the ex-div day and sell immediately the morning of the ex-div and pocket the FULL dividend. So, for holding the stock or stock fund for less than 4 trading days a year, you can collect the full dividend as if you owned that stock or stock fund all year long. So you could do this with a high dividend stock fund and get 4% for holding it for less than 4 trading days a year with very little risk. Or you could stagger this with a number of individual high dividend stocks with different ex-div dates and collect even more. If you don't believe that the aggregate of all your dividend paying stocks does not drop by the amount of the dividends, then this strategy should be golden for you.
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Re: What’s the problem with dividends?

Post by CuriousTacos »

FoolMeOnce wrote: Thu Apr 15, 2021 9:59 am Good points, but I think the part about being taxed more is only a near-term consideration. Overall, your after-tax value of your position is equal whether there is a dividend or not.
...
There are ways to permanently avoid the tax, making the no-dividend scenario better - step-up basis at death, charitable contributions, or, breaking the rules for the above hypo, falling into the 0% LTCG and QD bracket. But aside from that, the value is the same, it is just that you are paying the tax now instead of later.
If you sell the entire position after one year, then yes, the after-tax value of your position is equal. But if you continue to hold the position, the drag from paying more taxes on dividends each year will leave you with less after tax than the no-dividend scenario if the tax rate is the same.

I suppose there is a scenario where you need to sell the entire position all at once in the future, and those capital gains push you into a higher tax bracket, but in my opinion that's reaching pretty far to justify dividends. Plus, you have the choice to harvest extra gains periodically along the way if your situation makes this more likely.
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Re: What’s the problem with dividends?

Post by nisiprius »

Riprap wrote: Thu Apr 15, 2021 11:31 am
ipdiddly wrote: Thu Apr 15, 2021 11:20 amJust because a company does not pay a dividend does not mean that the company will spend its retained earnings wisely.
I've found that most Bogleheads cannot grasp (or choose to ignore) this concept. They are blind to value vs price when the conversation inevitably turns to stock buybacks. It's as if they believe management always operates rationally and efficiently.

It's truly baffling to me, yet amusing at the same time. All the chest thumping why dividends don't matter.
It's not just chest thumping. The Vanguard Equity-Income fund is an dividend-oriented fund whose entire purpose is stated in its name, and it's actually older than Total Stock so I'll compare it (VEIPX, blue) with 500 Index (VFINX, orange).

Source

Image

There's not a whole heck of a lot of difference there, and most of what there is isn't too favorable to Equity-Income. The best you can say for it is that it would have kept investors out of the late-1990s tech bubble, and might be keeping investors out of a bubble now.

Now, internally the funds themselves are wildly different, as you can by switching the chart to price per share. They made their money in very different ways, yet they made about the same amount of money.

Image

To state an obvious bit of math, although people are not always clear on it, suppose funds A and B have a similar growth chart. Then, since the growth chart assumes reinvestment of dividends, that means that investors who reinvest dividends will experience similar portfolio growth. What is not quite as clear is that if the investors do not reinvest dividends, but every month they redeem funds as necessary so that they are both taking the same number of dollars out of the funds, then they will be drawing the same income from the fund and will see the same amount of capital that is left in their portfolios.

That is, a VEIPX investor is no better off than a VFINX investor who draws the same amount by redeeming shares as needed.

This is a real-world example in which dividends did not matter much.
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Re: What’s the problem with dividends?

Post by sailaway »

nisiprius wrote: Thu Apr 15, 2021 12:31 pm

That is, a VEIPX investor is no better off than a VFINX investor who draws the same amount by redeeming shares as needed.
That is what seems to get consistently lost. It isn't exactly that there is a problem with dividends, but rather than there isn't any dividend magic. There just isn't anything particularly special about dividends from a financial standpoint, even if they do seem to have a strong psychological pull for some people. For others, it boils down to, "If dividends aren't special, why not retain a little more control over timing of income with an index that isn't focused on dividends?"
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Re: What’s the problem with dividends?

Post by anonsdca »

MapleSyrup wrote: Wed Apr 14, 2021 10:11 pm Why do so many folks on here find dividend income undesirable if one needs income? Qualified dividends have the same tax rate as long term capital gains, so what difference does it make whether the income comes from selling appreciated assets or from dividends?
The reason many here object is very simple. It is just a different strategy than total return and incorporates a risk element that is frightening for some folks here. That is it.

There is a lot of nonsense in this thread and a lot of truth, but the back and forth is just a disagreement in strategy really. There are many other investing strategies that get the same wrath as dividends so this is not exclusive to dividends.

I think there are two primary reasons why someone would follow a dividend strategy as opposed to a TR strategy.

1) You do not need a large balance to construct a dividend growth portfolio that can sustain you many years, indeed all years. Way more years than a TR withdrawn rate can. Some people start late, some people dont make a lot of money, some people live very frugally, some people want to live a nomadic or abroad lifestyle, some people can make $500K - to $1M work and the idea that you are not trimming your income tree is comforting to some people. Different folks for different strokes.

2) There is a real fear factor for those who might not have enough and need to start withdrawing. No one on this thread has mentioned it, but what if the market is down 5 years in a row? Then taking your withdrawal from a sub-million dollar portfolio must be the most frightening thought as can be. You could clearly see all the confused TR strategists when it came to COVID and even some of the more minor 20% dips we have had over the past few years. They want to sell and go to cash simply because they watch their balance and they suspect they won't have enough at the end of the day and they want to preserve what they have. Income investors dont focus on the account balance only a steady reliable increasing stream of income. Again it is just a different focus or strategy.
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Re: What’s the problem with dividends?

Post by ipdiddly »

burritoLover wrote: Thu Apr 15, 2021 11:40 am yield-chasing dividend investors believe that a stock dividend payment works the same as a bond interest payment (it doesn't).

If you believe that not to be true, you can simply buy the stock or stock fund paying a dividend the day before the ex-div day and sell immediately the morning of the ex-div and pocket the FULL dividend.
Not sure why you demonize dividend investors as "yield chasing." Perhaps the dividend investor simply wants to invest in a strong company that believes in sharing the profits with its owners. Owning a company that pays a 2-3% dividend is hardly "chasing" anything.

You are correct that a dividend payment is not the same as bond interest. Dividends are tax favored, while interest is ordinary income. Also, the best dividend stocks increase the dividend every year - i.e., you get a pay raise - while bond interest is fixed to maturity. There are many companies with long histories of increasing dividends, some for 50 years or more. Where is the list of bonds or CD's that increase the interest paid during the holding period?

The example of buying a stock on the day before ex-div then selling the next day is ridiculous. There is no overriding factor that dictates what a stock price will do from one day to the next. This is driven by market forces. Otherwise, why not just buy Google or Amazon today, then sell tomorrow for a profit? Since they haven't paid a dividend, they MUST go up! Just do that over and over and you get rich, right? (Btw, I accept that the stock price for a dividend payer will decline by the amount of the dividend in the instant after the dividend is paid. But after that instant price reduction, the price thereafter is driven by market forces. I've seen many dividend payers go up in price on the ex-dividend date. According to your logic, that's an impossibility.)
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Re: What’s the problem with dividends?

Post by CuriousTacos »

Riprap wrote: Thu Apr 15, 2021 11:31 am
ipdiddly wrote: Thu Apr 15, 2021 11:20 amJust because a company does not pay a dividend does not mean that the company will spend its retained earnings wisely.
I've found that most Bogleheads cannot grasp (or choose to ignore) this concept. They are blind to value vs price when the conversation inevitably turns to stock buybacks. It's as if they believe management always operates rationally and efficiently.

It's truly baffling to me, yet amusing at the same time. All the chest thumping why dividends don't matter.
I personally think the value factor is (still) valid, and I know that value companies typically pay higher dividends. However, factor researchers do not consider dividend yield to be a factor itself (and many don't even include it in their definitions of any of the factors), and my understanding is that they considered that. So my view is that the dividend yield of value companies is incidental; if value companies instead chose to distribute their earnings through buybacks, that wouldn't change their stock performance, but would improve my tax efficiency.

I'd be interested to see research that shows that dividend yield is a stronger predictor of returns than any of the other common factors. A quick google search even suggests the opposite.
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Re: What’s the problem with dividends?

Post by dkturner »

dukeblue219 wrote: Thu Apr 15, 2021 8:00 am
dkturner wrote: Thu Apr 15, 2021 6:16 am Kenneth French has studied the dividend phenomenon and has documented that, historically, dividend paying stocks have provided higher total returns, with lower standard deviation of those returns, compared to non-dividend paying stocks. This may be a case of investors being willing to pay a higher price for dividend paying stocks because they are perceived as being more valuable than non-dividend paying stocks.
How recently? Would seem that so much of the market gains since 1995 have been AMZN, TSLA, NFLX, MSFT, AAPL, GOOG, FB, etc. A couple of those pay token dividends but overall I'd be hard pressed to agree that investors pay a premium for dividend payers in 2021.
Dr. French’s data on dividends (you can download his spreadsheets on his Dartmouth College website) goes back to the 1920s.
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Re: What’s the problem with dividends?

Post by Astones »

dkturner wrote: Thu Apr 15, 2021 6:16 am Kenneth French has studied the dividend phenomenon and has documented that, historically, dividend paying stocks have provided higher total returns, with lower standard deviation of those returns, compared to non-dividend paying stocks. This may be a case of investors being willing to pay a higher price for dividend paying stocks because they are perceived as being more valuable than non-dividend paying stocks.
Correlation does not mean causation though.
Few people dispute that well established companies are more likely to give dividends. The backlash against dividends enthusiasts is more about considering dividends as something desirable by itself, everything else being equal.

In a thought experiment of two companies that are identical on everything except the dividend policy, I'd prefer the one that doesn't pay them.
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Re: What’s the problem with dividends?

Post by watchnerd »

Astones wrote: Thu Apr 15, 2021 1:20 pm
dkturner wrote: Thu Apr 15, 2021 6:16 am Kenneth French has studied the dividend phenomenon and has documented that, historically, dividend paying stocks have provided higher total returns, with lower standard deviation of those returns, compared to non-dividend paying stocks. This may be a case of investors being willing to pay a higher price for dividend paying stocks because they are perceived as being more valuable than non-dividend paying stocks.
Correlation does not mean causation though.
Few people dispute that well established companies are more likely to give dividends. The backlash against dividends enthusiasts is more about considering dividends as something desirable by itself, everything else being equal.

In a thought experiment of two companies that are identical on everything except the dividend policy, I'd prefer the one that doesn't pay them.
I thought French basically said that it was not the "dividend fairy" that lead to the results, but just that the companies tended to be better run / profitable / established.
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