Psychology of dividends

[Bird In Hand]

I assume that most investors know that dividends act something like the financial version of Newton's third law -- i.e., the share price decreases proportionally to the dividend amount.

Yet even knowing this, I'm often tickled when I'm reviewing dividends on my various investment accounts.  "Oh, my dividends last year added up to x% of my predicted annual spend...I could just about FIRE on that!"

Something about the dividend feels like "free money" in a way that appreciating share prices don't.  Maybe it's because it's a discrete event vs the continuous ebb and flow of the underlying share price; every quarter or 6mo or year, a big chunk of $$ appears as a line item that looks and feels more like a paycheck.  Or maybe it's partially because the dividends keep appearing even if the shares had a down year.

This "'free money" feeling happened to me last year when my VPMAX (Vanguard PRIMECAP Admiral) threw off a yearly dividend 50% higher (per share) than the previous two years, and 2-3 times higher than it has been in recent years before that.  In my case it was an amount that would cover roughly half our annual expected retirement income, and that really made me sit up and take notice.  Of course, I am aware that in leaner years the dividend can be much lower.  In some years (2001-2004, 2009) VPMAX had dividends as low as 25-60x smaller than last year's.

Mostly I just wanted to comment on this psychological aspect.  But I am curious: for those who are FIRE'd and choose to have dividends deposited into their checking accounts (instead of reinvesting) to fund their living expenses, how much work is involved in anticipating the upcoming dividends and adjusting course as a result?  Let's say you're trying to keep your income in a very tight range for ACA purposes.  If you have dividends coming in from enough different sources, I imagine it could be tricky to manage, especially if the expected dividends happen to exceed your targeted income in a particular year.

[bacchi]

Are you talking about dividends or the EOY distributions?

The EOY distributions are announced ahead of time and, in my case, Roth conversions can be adjusted based on those amounts.

[Bird In Hand]

*shrug* -- I'm honestly not sure how to distinguish between them.  When I'm looking at my accounts in Vanguard it just lists the transactions (including the end-of-year VPMAX distributions) as "Dividends on Equity Investments".

[2sk22]

Interesting topic - I too think of dividends as a small but pleasant windfall. As it happens, earlier today, I was adding up the dividends received this year in various accounts and its a fairly good amount, about $10000 (year to date).

[Bird In Hand]

Interesting topic - I too think of dividends as a small but pleasant windfall.

Even though we know it's a zero sum game, I guess it is sort of a windfall in the sense that reinvested dividends net you additional shares, which represent greater future potential for growth, and -- all else equal -- a greater dividend share next time around.

As it happens, earlier today, I was adding up the dividends received this year in various accounts and its a fairly good amount, about $10000 (year to date).

And that's only through two quarters...just wait 'til those end-of-year dividends roll around!  I don't know which funds you have, but several of my funds either only pay out at the end of the year (like VPMAX), or the largest distribution is in the 4th quarter.

[Metalcat]

A few years back, retiring on only dividends was all the rage.

I never really understood it, but that's okay, because people don't seem to talk about it as much anymore.

As far as I could ever tell, and I asked a lot, the popularity was exactly for this psychological type of reason. It feels secure and doesn't require the psychologically burden of selling stocks.

If dividends give you warm and fuzzies, that's fine, all feelings about money are just that, feelings.

Just try to account for them when making decisions. Don't inflate the importance of dividends just because they give you warm and fuzzies.

[secondcor521]

But I am curious: for those who are FIRE'd and choose to have dividends deposited into their checking accounts (instead of reinvesting) to fund their living expenses, how much work is involved in anticipating the upcoming dividends and adjusting course as a result?  Let's say you're trying to keep your income in a very tight range for ACA purposes.  If you have dividends coming in from enough different sources, I imagine it could be tricky to manage, especially if the expected dividends happen to exceed your targeted income in a particular year.

Not much.  My taxable account is relatively small and is invested in a mutual fund which has a low dividend yield, so my dividends only represent about 10% of my annual spending.  Other than accounting for them when calculating my Roth conversion in December, it's all automated.  The dividends from taxable are just deposited into my checking account quarterly.

There are people over on early-retirement.org who have either (a) actively-managed funds and/or (b) high yielding investments in their taxable accounts and these people sometimes gripe about the problem you imply with your last two sentences.  The problem they face sometimes is that they've held these investments for so long that the unrealized capital gains can be an impediment to shifting away from those investments into lower and/or more predictable yielding investments.  The general advice for this situation is to either gradually shift away from them, or, as one person did, rip off the bandaid and do the move all in one year.

Another area where controlling taxable income / AGI in ER is useful is for college financial aid, although I think I'm in the minority with that one, as most people don't retire before their kids are in college, and having kids in college can entice people to stay in their jobs a while longer to pay for it.

Finally, I'll just add that paying off a mortgage allows one to manage AGI more easily, because you don't have to generate cash flow to make the mortgage payments, and not generating cash flow means it is easier to not generate taxable income.

[boarder42]

There is a lot of psychology in money. And to most dividends feel good. Me on the other hand they make me sick bc I'm like well there is some tax I have to account for that lowers my trad to roth conversion amount. My spending plan the first 5 years is to spend margin against my taxable account, supplemented in later years with Roth contributions depending on market returns. It could double in 3 years and I can keep living on the margin money.  Dividend payouts as you say lower the share price and give me taxable cash today. I HATE them. Probably as much as you love them.

[markbike528CBX]

I’m FIREd, so I have dividends go to my checking account.

They reduce the amount of sales of stocks I have to do.
Most of the dividends are Qualified, so the taxes are low as our total income is low.

During accumulation dividends were a bit of a pain, as our income was high enough to have the dividends taxed.

That said, dividends are money in the pocket NOW, as opposed to a hope of future capital gains.

Edit to add, because I can’t resist, a birdinhand is worth two in the bush.

[Bird In Hand]

There is a lot of psychology in money. And to most dividends feel good. Me on the other hand they make me sick bc I'm like well there is some tax I have to account for that lowers my trad to roth conversion amount.
...
I HATE them. Probably as much as you love them.

Lol, but how do you really feel about them? :D

For the record, I don't LOVE dividends, I just noticed that they impart a different feeling than selling an equivalent chunk of shares.  Selling shares seems more like I'm losing something tangible (shares!) that I worked hard to acquire.  Whereas the decreased share price resulting from dividends feels like less of a loss since the market -- not me -- did the heavy lifting to achieve the share price, and since I "know" the share price will recover shortly.  But I fully acknowledge it's more perception than reality, and it really is a zero sum game (tax implications notwithstanding).

I think we're also talking about slightly different things.  My large dividends are distributed in my pre-tax accounts where any tax implications are irrelevant, but from what I've seen it's almost all qualified dividends anyway.

I do have a modest after-tax account in VTI, which is pretty tax-efficient.  I barely even notice it at tax time, though I suppose it would be more noticeable if I had a lot more in after-tax.  Especially if I were trying to optimize  Roth/ACA subsidies.

[boarder42]

I’m FIREd, so I have dividends go to my checking account.

They reduce the amount of sales of stocks I have to do.
Most of the dividends are Qualified, so the taxes are low as our total income is low.

During accumulation dividends were a bit of a pain, as our income was high enough to have the dividends taxed.

That said, dividends are money in the pocket NOW, as opposed to a hope of future capital gains.

Edit to add, because I can’t resist, a birdinhand is worth two in the bush.

You can just sell the same shares NOW more tax efficiently and unforced.

[seattlecyclone]

I'm not a big fan of dividends. I've moved past the psychological "free money" stage and realize that the dividends are just the companies I own deciding when I will book income from my investments instead of me making that choice myself. The quarterly dividends mean that every third month I need to do something different to meet my MAGI target for the month than I do in the other months, and that's a bit annoying.

[Bird In Hand]

The quarterly dividends mean that every third month I need to do something different to meet my MAGI target for the month than I do in the other months, and that's a bit annoying.

That's what I was getting at with my original question.  For someone already retired with sizeable after-tax accounts throwing off frequent and/or large dividends, it's just another variable to mess up your MAGI.

In pre-tax land I'm blissfully unaffected by any of this, and I'm sure my perspective will probably change in retirement.

[secondcor521]

I'm not a big fan of dividends. I've moved past the psychological "free money" stage and realize that the dividends are just the companies I own deciding when I will book income from my investments instead of me making that choice myself. The quarterly dividends mean that every third month I need to do something different to meet my MAGI target for the month than I do in the other months, and that's a bit annoying.

@seattlecyclone - why do you have a monthly MAGI target?

In my world, the only relevant MAGI is the annual one on my taxes, which I only minimally pay attention throughout the year and then do the actual tax planning once in December when I do my Roth conversions.  The only annoyance I have with that whole situation is that a Vanguard fund I own in taxable distributes its last quarterly late in December so I either have to guess or wait, and waiting until the last few days of the year is a bit nerve-wracking for me, someone who likes to leave plenty of margin.

[seattlecyclone]

@seattlecyclone - why do you have a monthly MAGI target?

Medicaid. If our MAGI increases by more than $150 from one month to the next and I expect that increased amount to continue through the next month as well, I'm supposed to notify the state and they'll take another look at our finances. I'd rather not mess with that.

[secondcor521]

@seattlecyclone - why do you have a monthly MAGI target?

Medicaid. If our MAGI increases by more than $150 from one month to the next and I expect that increased amount to continue through the next month as well, I'm supposed to notify the state and they'll take another look at our finances. I'd rather not mess with that.

Ah, OK, that makes sense, thanks.

[bacchi]

The only annoyance I have with that whole situation is that a Vanguard fund I own in taxable distributes its last quarterly late in December so I either have to guess or wait, and waiting until the last few days of the year is a bit nerve-wracking for me, someone who likes to leave plenty of margin.

Vanguard publishes a guesstimate in late November and then firms it up in mid-December. Or is this some dividend/dist that's not on the EOY table?

https://personal.vanguard.com/pdf/RTYEEST_122020.pdf

[secondcor521]

The only annoyance I have with that whole situation is that a Vanguard fund I own in taxable distributes its last quarterly late in December so I either have to guess or wait, and waiting until the last few days of the year is a bit nerve-wracking for me, someone who likes to leave plenty of margin.

Vanguard publishes a guesstimate in late November and then firms it up in mid-December. Or is this some dividend/dist that's not on the EOY table?

https://personal.vanguard.com/pdf/RTYEEST_122020.pdf

It was the 12/18/2020 (and similar distributions) from VFIAX.  Your document lists $1.33 per share, actual was $1.3862.

Overall that $0.0562 per share difference doesn't add up to much, and less neurotic people or people with more hobbies than me probably wouldn't worry about it or would just make allowances.

Instead I did my last Roth conversion on 12/21/2020 (because by then the distribution was known exactly).  Apparently VFIAX distribution dates are usually around that date, so I have a week or so to get it dialed in.

As for me dialing things in, I managed to get my AGI exactly where I wanted it to the dollar last year, so that's my December hobby I guess.

[boarder42]

The only annoyance I have with that whole situation is that a Vanguard fund I own in taxable distributes its last quarterly late in December so I either have to guess or wait, and waiting until the last few days of the year is a bit nerve-wracking for me, someone who likes to leave plenty of margin.

Vanguard publishes a guesstimate in late November and then firms it up in mid-December. Or is this some dividend/dist that's not on the EOY table?

https://personal.vanguard.com/pdf/RTYEEST_122020.pdf

It was the 12/18/2020 (and similar distributions) from VFIAX.  Your document lists $1.33 per share, actual was $1.3862.

Overall that $0.0562 per share difference doesn't add up to much, and less neurotic people or people with more hobbies than me probably wouldn't worry about it or would just make allowances.

Instead I did my last Roth conversion on 12/21/2020 (because by then the distribution was known exactly).  Apparently VFIAX distribution dates are usually around that date, so I have a week or so to get it dialed in.

As for me dialing things in, I managed to get my AGI exactly where I wanted it to the dollar last year, so that's my December hobby I guess.

Sounds like a fantastic hobby to me

[bmjohnson35]

I track our financials monthly.  The MAGI forecast worksheet from our financial spreadsheet indicates that dividends will contribute around 18% toward our annual AGI in 2021.  I find our dividend income relatively consistent.  Our reportable income is low enough that our dividend forecast wouldn't make a significant difference in the end-of-year results. 

We are roughly a year and a half into early retirement.  I worried a lot more the first year about MAGI.  I don't really find myself worrying about this type of detail anymore.  Working part-time or capital gains on investments sold make a bigger impact.

[Fishindude]

We are retired and have large holdings in one stock (a company I'm very familiar with) that spits out a real nice quarterly dividend.   A couple times the company has done special dividends that were 4-5X the traditional quarterly amount which was pretty nice.   The stock has also increased in value per share nicely.

We like it.  Great spending money and a reliable source of retirement income, as well as a good, safe, long term investment.
Our annual income exceeds the amount to get any kind of discount on ACA insurance coverage, so the more the merrier.

[MustacheAndaHalf]

Before retirement, reinvesting dividends means one less thing to worry about / deal with.  Instead of the money being idle, it goes back into the same fund automatically.

But after retirement, those investments have to start flowing in the other direction.  Dividends are a starting point for money that needs to be spent, so it makes more sense to stop reinvesting.

These days, the most I think about dividends is when I get a 1099-DIV.

[Loren Ver]

Been retired for a couple of years and using ACA so MAGI really matters to us.  Most of our money is in taxable accounts so having those accounts spit out money does have an effect on us.  We don't get a lot of dividends, usually a few hundred, but we do sometimes get that big chuck at the end of the year from one or two of the funds.  Usually it is nothing.  Sometimes, in a good year it will be a thousand or two and easy to plan around, even though they like to surprise pay it out the week before Christmas with no warning. 

Last year, it was insane.  We got multiple payouts during the year and a big one at the end.  We blew past our ACA and then past all possibilities of a subsidy.  So in that last week of the year, I decided to pull out the max I could to fill in the zero % capital gains tax bracket, might as well lock in those awesome gains!

Unlike many people on the forum, I like sell shares.  I've owned these puppies a LONG time, and they are ready for their next job.  And with those "cash" gains as a buffer, we are now flipped so we can wait to sell shares the last week of the year going forward, just in case we get another money glut in the future. 

Loren

[BuildingFrugalHabits]

Last year, it was insane.  We got multiple payouts during the year and a big one at the end.  We blew past our ACA and then past all possibilities of a subsidy. 
Loren

I've wondered about this scenario, with the ACA do you forecast your expected income for the year to qualify for the subsidy?  Then what happens if you are off by a little bit or a lot in your case?  Do you have to pay back a certain amount of the subsidy at the end of the year? 

[BuildingFrugalHabits]

But I am curious: for those who are FIRE'd and choose to have dividends deposited into their checking accounts (instead of reinvesting) to fund their living expenses, how much work is involved in anticipating the upcoming dividends and adjusting course as a result? 

Let's say you're trying to keep your income in a very tight range for ACA purposes.  If you have dividends coming in from enough different sources, I imagine it could be tricky to manage, especially if the expected dividends happen to exceed your targeted income in a particular year.

Two things here:
1. whether or not dividends are set to pay out or reinvest, I believe they still incur the same tax liability
2. Our dividends represent a small fraction of our income but capital gains are harder to predict because the cost basis is specific to the asset you are selling.  So if I know I need to generate 30k a year to live on from selling stocks, my taxable income from that is likely to fluctuate significantly depending on what gets sold that year.  I think that is more difficult to plan around vs dividend income.

[boarder42]

But I am curious: for those who are FIRE'd and choose to have dividends deposited into their checking accounts (instead of reinvesting) to fund their living expenses, how much work is involved in anticipating the upcoming dividends and adjusting course as a result? 

Let's say you're trying to keep your income in a very tight range for ACA purposes.  If you have dividends coming in from enough different sources, I imagine it could be tricky to manage, especially if the expected dividends happen to exceed your targeted income in a particular year.

Two things here:
1. whether or not dividends are set to pay out or reinvest, I believe they still incur the same tax liability
2. Our dividends represent a small fraction of our income but capital gains are harder to predict because the cost basis is specific to the asset you are selling.  So if I know I need to generate 30k a year to live on from selling stocks, my taxable income from that is likely to fluctuate significantly depending on what gets sold that year.  I think that is more difficult to plan around vs dividend income.

Capital gains are 100% predictable for the very reasons you stated they aren't. You know your cost basis and you can choose the lots of shares you sell.

[markbike528CBX]

Even if you are using average cost basis, you can predict the gains/ taxes.

[Bird In Hand]

But I am curious: for those who are FIRE'd and choose to have dividends deposited into their checking accounts (instead of reinvesting) to fund their living expenses, how much work is involved in anticipating the upcoming dividends and adjusting course as a result?

1. whether or not dividends are set to pay out or reinvest, I believe they still incur the same tax liability

Yeah, when I wrote that above I was stuck thinking in pre-tax mode -- where dividends have no tax implications.

I now see that when you're retired with a substantial taxable portfolio, dividends can make targeting a specific income level harder, DRIP or no DRIP.  Especially for things like ACA subsidies or converting Roth up to the top of the current bracket.

[Loren Ver]

Last year, it was insane.  We got multiple payouts during the year and a big one at the end.  We blew past our ACA and then past all possibilities of a subsidy. 
Loren

I've wondered about this scenario, with the ACA do you forecast your expected income for the year to qualify for the subsidy?  Then what happens if you are off by a little bit or a lot in your case?  Do you have to pay back a certain amount of the subsidy at the end of the year?

Fast answer: Yes.  Yes, its a sliding scale.

Long answer:
We forecast our ideal (keeping us out of medicare territory) and then have to settle up at tax time each year as we are always off.  I always aim a little high to make double sure we aren't low (sliding off the low end is a definite NO, because we don't want to get reclassified as medicare eligible).   It's a sliding scale, so you only pay back to the amount of subsidy you should have received.  You can also choose not to take the whole subsidy (or any), and get the money after filing your taxes.  We don't do that, we would rather pay the government back after borrowing the money from them :).

For 2020, we just had to pay back all the subsidies we received.  Not really an issue when the "problem"  is too much income.  I'll take crazy growth anytime :).  Then, for some strange reason, the administration decided that we shouldn't have to pay back the subsidy, so at some point we might get a check paying back they money we paid them back earlier this year.  *shrug* What ever works :).

Loren

[Paul der Krake]

I think it's whack that 1 million dollars of generic stock holding only yields about $13k of dividends today. When I started investing about 10 years ago the rule of thumb was around 2%, so 20k/year.

Yes, buybacks, tax efficiency, blah blah. I get it. Still whack.

[Missy B]

I'm Canadian, and it sounds like our tax situation is different.
If you have no other income source, you can earn 55K a year per person in eligible dividends completely tax-free. Some provinces are a bit more, I think mine is 57K.
If you are in a middle/lower tax bracket, these dividends actually reduce your federal tax, on earned income.

Having too much income might end your eligibility for certain social benefits or claw back your OAS some.

Pick a sturdy dividend payer, and you will get the same dividend through market dives, no fussing over whether or not you can take money out without breaking your plan. 

[seattlecyclone]

Pick a sturdy dividend payer...

Okay, which companies won't reduce their dividends in the next recession? I remember noticing during the 2008 financial crisis that several "dividend aristocrats" (companies that had increased their dividend every year for at least 25 years) left that list during that time. It's easy to keep paying dividends when business is good. Past performance is no indicator of future results when conditions change.

[boarder42]

Pick a sturdy dividend payer...

Okay, which companies won't reduce their dividends in the next recession? I remember noticing during the 2008 financial crisis that several "dividend aristocrats" (companies that had increased their dividend every year for at least 25 years) left that list during that time. It's easy to keep paying dividends when business is good. Past performance is no indicator of future results when conditions change.

Agreed even as recently as 2020 dividends were cut by companies.  Baffles me that people keep making this statement

[ender]

I think the main reason people like dividends is you can look at a statement and clearly see the increased amount at a discrete point in time.

Vs market gains, which are spread out and not actually "visible."

Personally, it is nice when you get say $6k worth of dividends in a year/quarter/whatever and can go "boom! just got an IRA contribution for free!"

It's just more tangibly noticeable and feels more permanent than say, if you have $600k and the market goes up 1%.

[Metalcat]

I think the main reason people like dividends is you can look at a statement and clearly see the increased amount at a discrete point in time.

Vs market gains, which are spread out and not actually "visible."

Personally, it is nice when you get say $6k worth of dividends in a year/quarter/whatever and can go "boom! just got an IRA contribution for free!"

It's just more tangibly noticeable and feels more permanent than say, if you have $600k and the market goes up 1%.

I don't know how many times I can say it, but humans are not rational creatures.

[MustacheAndaHalf]

I think ignorance helps dividends.  You have 500 shares, and on the next statement still have 500 shares... but also "free money"!  And it's not 100% wrong - they put capital to work, and have passive income without effort on their part.  There's probably evolutionary psychology about never passing up free food, and that same wiring likely applies to money now.

I think it's whack that 1 million dollars of generic stock holding only yields about $13k of dividends today.

And falling.  VTI paid 1.2% of it's share price as dividends over the past 12 months.  The SEC yield is 1.18%, which backs that up.

[Paul der Krake]

I think ignorance helps dividends.  You have 500 shares, and on the next statement still have 500 shares... but also "free money"!  And it's not 100% wrong - they put capital to work, and have passive income without effort on their part.  There's probably evolutionary psychology about never passing up free food, and that same wiring likely applies to money now.

I have a pet theory about free food.

I used to work for a large company filled with highly paid workers where the interns made 6 figures. Departments and teams were incessantly trying to get participants to beta test this or that product or initiative. There would be flyers in the common areas advertising them, emails would get sent. Please come to room 734 at noon, complete these simple tasks, get a reward, your feedback is important, blah blah blah.

Significantly more people would show up when the reward was some sort of catered food (retail value, maybe $8) than if you offered a $25 gift card.

Food hijacks your brain, yo.

[FIPurpose]

I think this actually has more to do with what stocks are trendy and which ones are undervalued. Like Malcat said early in the thread, dividend stocks were trendy about 5 years ago. I think that's because small chips were making bank and people were ignoring the boring blue chips that were paying out 3-5% in dividends while also increasing in value 5-8% each year.

However with Covid, small stocks faltered and the blue chips made more money than ever. Thus the price on high dividend stocks goes up and their dividend payments end up more in the 1-3% range instead. Not that that makes them a bad stock, it just dries up the interest in creating a retirement portfolio.

Dividend portfolios can also be extremely dangerous especially if people get greedy looking at the 8-12% dividend range. There are stocks that are falling knives where sometimes you win such as when Seagate bottomed out in 2016. But also most dividend sites I've seen suggest a large number of oil stocks like Exxon (6.5% div today) and OXY. If you pick your stocks in a way where you basically created a proxy commodities portfolio, you're going to have a stressful time.

Once small chip stocks take off again, the big dividend players will shrink back again.

[MoneyTree]

As someone who was exposed to the concept of FIRE through the lens of collecting dividends from stable, Dividend Aristocrat type companies, I was borderline obsessed with tracking and calculating dividend payouts, and using that as my measure of retirement income, rather than some safe withdrawal rate. I held around 50 individual dividend paying stocks and tracked each one. I get the appeal because I was bought into it, and would say that it actually helped to hold my interest in saving and investing early on. There was definitely something motivating about having a few thousand dollars to deploy, and finally being able to pull the trigger on an undervalued stock with a sustainable payout ratio that I had been eyeing for months. It was more exciting than dumping it into VTSAX, for sure, and kept me going in those early years.

Over the past few years, I have reversed course entirely and now I hate seeing the dividends hit my taxable accounts. It took some psychological re-programming to get to that point, but I've lost the patience to track all these different stocks, and when I sat down and looked at the cold hard numbers. I realized I would be significantly further ahead if I had just invested in a broad market index fund.

Not gonna lie, it was a gut punch. All that work to research and track stocks, yet I still underperformed AND had to deal with the tax drag of dividends hitting my taxable accounts? I've been slowly selling off my dividend stocks as I am able, but its taking some time to do so because of the tax implications of selling off appreciated assets.

[Hash Brown]

AND had to deal with the tax drag of dividends hitting my taxable accounts?

Warren Buffet doesn't pay a dividend to shareholders partly for this reason. 

[MoneyTree]

AND had to deal with the tax drag of dividends hitting my taxable accounts?

Warren Buffet doesn't pay a dividend to shareholders partly for this reason.

Yep, and I AM a shareholder of BRK-B for that reason ;-)

[jim555]

I only care about total return.

[mizzourah2006]

I think the one part that gets lost in the "total returns" discussion is the idea of ownership. It's largely conceptual given the # of outstanding shares as compared to the # of shares you own, but I think it's still worth mentioning.

Imagine you owned 50% of a grocery store chain and you wanted to generate cash flow from that ownership. You have two options. One (Option A) is taking cash off the balance sheet quarterly (a dividend), the second (Option B) is establishing a valuation of your 50% stake and slowly selling your stake to generate that cash flow while re-investing the cash to grow the chain. At some point in the far future you would own far less of your grocery store chain (even if it is worth the same) in option B. In Option A you will always maintain the same amount of ownership in the company.

Now I understand this is a conceptual argument because for most of us it doesn't matter, but I still think it needs to be mentioned because they are two very different behaviors. It even seems to matter less at an index/mutual fund level too.

[FIPurpose]

I think the one part that gets lost in the "total returns" discussion is the idea of ownership. It's largely conceptual given the # of outstanding shares as compared to the # of shares you own, but I think it's still worth mentioning.

Imagine you owned 50% of a grocery store chain and you wanted to generate cash flow from that ownership. You have two options. One (Option A) is taking cash off the balance sheet quarterly (a dividend), the second (Option B) is establishing a valuation of your 50% stake and slowly selling your stake to generate that cash flow while re-investing the cash to grow the chain. At some point in the far future you would own far less of your grocery store chain (even if it is worth the same) in option B. In Option A you will always maintain the same amount of ownership in the company.

Now I understand this is a conceptual argument because for most of us it doesn't matter, but I still think it needs to be mentioned because they are two very different behaviors. It even seems to matter less at an index/mutual fund level too.

Well in option B, you're shrinking your size of ownership. In option A, the company is shrinking the size of the business that you own. So no, Option A does not maintain the same amount of ownership. The company is deliberately reducing the assets of what is owned, so you own less than before the dividend.

A dividend is the company deciding to buy a smaller pie. Selling stocks is you deciding to own a smaller slice of that pie. The end result is the same: less pie.

[mizzourah2006]

I think the one part that gets lost in the "total returns" discussion is the idea of ownership. It's largely conceptual given the # of outstanding shares as compared to the # of shares you own, but I think it's still worth mentioning.

Imagine you owned 50% of a grocery store chain and you wanted to generate cash flow from that ownership. You have two options. One (Option A) is taking cash off the balance sheet quarterly (a dividend), the second (Option B) is establishing a valuation of your 50% stake and slowly selling your stake to generate that cash flow while re-investing the cash to grow the chain. At some point in the far future you would own far less of your grocery store chain (even if it is worth the same) in option B. In Option A you will always maintain the same amount of ownership in the company.

Now I understand this is a conceptual argument because for most of us it doesn't matter, but I still think it needs to be mentioned because they are two very different behaviors. It even seems to matter less at an index/mutual fund level too.

Well in option B, you're shrinking your size of ownership. In option A, the company is shrinking the size of the business that you own. So no, Option A does not maintain the same amount of ownership. The company is deliberately reducing the assets of what is owned, so you own less than before the dividend.

A dividend is the company deciding to buy a smaller pie. Selling stocks is you deciding to own a smaller slice of that pie. The end result is the same: less pie.

Agreed. Yes, you own the same amount of a smaller pie in Option A and in Option B you own a smaller amount of a larger pie.

I don't think it's the same. If it was the same why would so many people care about maintaining X% of ownership in their company? Tons of benefits come with being majority shareholder.

Like I said above this is irrelevant for almost all of us, but they are still two conceptually different ideas and I think that gets completely ignored. That's the only point I was making.

If you owned a small business would you reinvest the profits and sell part of your business to take on a partner and share decision making power?

AND had to deal with the tax drag of dividends hitting my taxable accounts?

Warren Buffet doesn't pay a dividend to shareholders partly for this reason.

Also wanted to edit to add the idea that Warren Buffett hates dividends is extremely overblown. If he hated dividends so much why would the majority of his holdings pay out rather large dividends? He loves the cashflow they produce. He even brags about it in his newsletters. The amount of equity returned by Coca-Cola and Apple and that they own more or the same amount in the company today compared to years ago because of holding and share buybacks.

 He's in a special position of owning a conglomerate where it's likely the case he can deploy the capital he does have to return alpha beyond what he thinks you could do with a dividend elsewhere. But he fully understands that certain companies can't always do that because of their business model. But that doesn't mean he doesn't want to own those companies.

[FIPurpose]

I think the one part that gets lost in the "total returns" discussion is the idea of ownership. It's largely conceptual given the # of outstanding shares as compared to the # of shares you own, but I think it's still worth mentioning.

Imagine you owned 50% of a grocery store chain and you wanted to generate cash flow from that ownership. You have two options. One (Option A) is taking cash off the balance sheet quarterly (a dividend), the second (Option B) is establishing a valuation of your 50% stake and slowly selling your stake to generate that cash flow while re-investing the cash to grow the chain. At some point in the far future you would own far less of your grocery store chain (even if it is worth the same) in option B. In Option A you will always maintain the same amount of ownership in the company.

Now I understand this is a conceptual argument because for most of us it doesn't matter, but I still think it needs to be mentioned because they are two very different behaviors. It even seems to matter less at an index/mutual fund level too.

Well in option B, you're shrinking your size of ownership. In option A, the company is shrinking the size of the business that you own. So no, Option A does not maintain the same amount of ownership. The company is deliberately reducing the assets of what is owned, so you own less than before the dividend.

A dividend is the company deciding to buy a smaller pie. Selling stocks is you deciding to own a smaller slice of that pie. The end result is the same: less pie.

Agreed. Yes, you own the same amount of a smaller pie in Option A and in Option B you own a smaller amount of a larger pie.

I don't think it's the same. If it was the same why would so many people care about maintaining X% of ownership in their company? Tons of benefits come with being majority shareholder.

Like I said above this is irrelevant for almost all of us, but they are still two conceptually different ideas and I think that gets completely ignored. That's the only point I was making.

If you owned a small business would you reinvest the profits and sell part of your business to take on a partner and share decision making power?

Ok I guess. But 51% ownership is the only number that matters, anything less and it's all just bean shuffling. For public companies, they are diluting / buying back their shares all the time. I remember tracking my percent ownership in some stocks for a while, every month, my percent ownership was changing quite drastically. Some companies were net reducing shares, others were regularly selling new shares. My guess is that most companies in the S&P 500 don't have a single majority owner.

Bezos only owns like 10% of Amazon (He did own almost 50% at one point, but the divorce cut him in half)
Elon only owns about 25% of Tesla

It's simply that companies that big cannot grow that big without getting major capital investment. If you want to be big, you can't do it while also hoarding 50% ownership.

[mizzourah2006]

I think the one part that gets lost in the "total returns" discussion is the idea of ownership. It's largely conceptual given the # of outstanding shares as compared to the # of shares you own, but I think it's still worth mentioning.

Imagine you owned 50% of a grocery store chain and you wanted to generate cash flow from that ownership. You have two options. One (Option A) is taking cash off the balance sheet quarterly (a dividend), the second (Option B) is establishing a valuation of your 50% stake and slowly selling your stake to generate that cash flow while re-investing the cash to grow the chain. At some point in the far future you would own far less of your grocery store chain (even if it is worth the same) in option B. In Option A you will always maintain the same amount of ownership in the company.

Now I understand this is a conceptual argument because for most of us it doesn't matter, but I still think it needs to be mentioned because they are two very different behaviors. It even seems to matter less at an index/mutual fund level too.

Well in option B, you're shrinking your size of ownership. In option A, the company is shrinking the size of the business that you own. So no, Option A does not maintain the same amount of ownership. The company is deliberately reducing the assets of what is owned, so you own less than before the dividend.

A dividend is the company deciding to buy a smaller pie. Selling stocks is you deciding to own a smaller slice of that pie. The end result is the same: less pie.

Agreed. Yes, you own the same amount of a smaller pie in Option A and in Option B you own a smaller amount of a larger pie.

I don't think it's the same. If it was the same why would so many people care about maintaining X% of ownership in their company? Tons of benefits come with being majority shareholder.

Like I said above this is irrelevant for almost all of us, but they are still two conceptually different ideas and I think that gets completely ignored. That's the only point I was making.

If you owned a small business would you reinvest the profits and sell part of your business to take on a partner and share decision making power?

Ok I guess. But 51% ownership is the only number that matters, anything less and it's all just bean shuffling. For public companies, they are diluting / buying back their shares all the time. I remember tracking my percent ownership in some stocks for a while, every month, my percent ownership was changing quite drastically. Some companies were net reducing shares, others were regularly selling new shares. My guess is that most companies in the S&P 500 don't have a single majority owner.

Bezos only owns like 10% of Amazon (He did own almost 50% at one point, but the divorce cut him in half)
Elon only owns about 25% of Tesla

It's simply that companies that big cannot grow that big without getting major capital investment. If you want to be big, you can't do it while also hoarding 50% ownership.

I'm agreeing that for us it doesn't really matter the point I am trying to make is that owning a bigger piece of a smaller pie or a smaller piece of a bigger pie aren't truly interchangeable. Certain ownership garners you board seats, hostile takeovers don't start with 51%. They start at far less. You better believe Berkshire has clout into what goes on at Coca-Cola if they significantly disagree.

You can say you'd rather not have dividends in a vacuum but businesses don't run in a vacuum. Would you rather cash cows like Coca-Cola, AT&T, Verizon, etc. not pay any dividend and force all of it back into the coffers to either keep on the balance sheet as cash or try to force organic growth? I can tell you right now that as an owner of these companies via VTI I'd rather have the dividend to buy more shares of VTI with.

It's definitely a tax drag and I'm not advocating for a dividend portfolio, but dividends do have a purpose. The only other option is share buybacks, but I have questions about how well they are typically deployed and in most cases executives have enormous amounts of RSUs. So any buyback helps all of those RSUs. A dividend gets them nothing. So, if I get a dividend I can decide whether or not it makes sense to buy more shares of that company at that price. Share buybacks are forced purchases of company stock and the executives typically aren't judicial about it because any retired shares makes their future RSUs more valuable.

[Paul der Krake]

Conceptually, on the margin, I think it's generally better to have fewer owners with larger stakes. Strong, opinionated actors is a feature of good governance. Sometimes they'll get it wrong, but it beats inaction and complacency.

[mizzourah2006]

I think Ben Graham does an excellent job of walking through the lifeline of a company and how capital reinvestment and dividends follow this lifeline in his book the Intelligent Investor. I'd highly recommend it (as does WB)

[FIPurpose]

I'm agreeing that for us it doesn't really matter the point I am trying to make is that owning a bigger piece of a smaller pie or a smaller piece of a bigger pie aren't truly interchangeable. Certain ownership garners you board seats, hostile takeovers don't start with 51%. They start at far less. You better believe Berkshire has clout into what goes on at Coca-Cola if they significantly disagree.

You can say you'd rather not have dividends in a vacuum but businesses don't run in a vacuum. Would you rather cash cows like Coca-Cola, AT&T, Verizon, etc. not pay any dividend and force all of it back into the coffers to either keep on the balance sheet as cash or try to force organic growth? I can tell you right now that as an owner of these companies via VTI I'd rather have the dividend to buy more shares of VTI with.

It's definitely a tax drag and I'm not advocating for a dividend portfolio, but dividends do have a purpose. The only other option is share buybacks, but I have questions about how well they are typically deployed and in most cases executives have enormous amounts of RSUs. So any buyback helps all of those RSUs. A dividend gets them nothing. So, if I get a dividend I can decide whether or not it makes sense to buy more shares of that company at that price. Share buybacks are forced purchases of company stock and the executives typically aren't judicial about it because any retired shares makes their future RSUs more valuable.

That I agree with. And I personally would be in favor of making buybacks illegal (maybe with a few exceptions). If the only difference is tax accounting, then route all profits through dividends and only long-term investors will earn the preferential tax bracket. Owners of capital are greatly under taxed, and putting all companies on the same level is terribly needed.