The Big Problem With Dividend Investing (For Passive Income)

It seems that everywhere you look, you're told you need to build a dividend investing portfolio.

Every YouTube video, blog and social media influencer is telling you how great dividend investing is and that you need a to start a dividend investing portfolio too.

The problem is that much of this advice comes from poorly informed sources and the explanations seem to lack an understanding of what dividends are or why they are paid.

And in this video I try to explain the other side of dividend investing that is not quite as rosy but is very important for people to hear.

Because the advice we all hear about dividend investing stemming from the 1950s or 1970s simply isn't relevant and the world of investing has fundamentally changed.

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[frhabib]

And they take tax off your dividends if you’re holding US stocks. Then you invest back 15% less compared to growth stocks.

[TheCompoundingInvestor]

A Dividend is money in the hand to do whatever you want with. It is de-risked as it is in your bank account and i find it extremely motivating. I can then choose where to put those dividends with new money going in as well. I've grown my dividend portfolio for 12 years and have generated good capital growth as well as a growing dividend stream. With investing you are in it for the long term and whatever motivates and inspires you is important if you are going to stick at it through the ups and downs. I am definitely doing what suits me and it is the best thing I have ever done.

[TomekSw]

My reason for dividend investment is psychological, that I'll never touch my shares and still have cash to live on.

[pran]

I used to say the same thing a few months but I see the point of dividend investing now.
The whole focus of dividend investing is a focus on regular passive cash flow rather than looking at notional profit which is entirely dependent on Day to day market sentiment.
As long as the market keeps going up everyone wants to be a growth investor in FANG stocks.
With dividends - If you enter a prolonged bear market or sideways market - you don't even care about the share price as you're getting your regular payout.
Both styles are solving different problems there is no conflict.
Personally I think one needs both a growth index fund and some dividend stocks in a portfolio.

[Harv]

Think your point about how yes you own stocks that pay a dividend, however you don’t own BECAUSE they pay a dividend is crucial and an excellent point. Great vid Sasha!

[lawrencesinderson]

Owning Dividend paying shares is the equivalent of every 3 months cashing in your investment, taking the small gains and then immediately using that money plus dividend and reinvesting that to buy more shares. Which is worse than just having the share price increase due to the business trading and doing well.

[zantggm]

Missing the point, dividends pay my rent (keeping my stocks with the potential of futuru gains) but with stocks i would have to sell every month, therefore loosing my investment.

[malcolmbirkett]

I buy a stock at a reasonable price and then I'm paid dividends while I wait. What's not to like.

[filippxx]

You missed one thing which is crucial in investing: risk! Returns themselves need to be correlated with risk, otherwise everybody would put their money on BTC and just wait 10 years to be rich.🤭 Everyone is a genius in a bull market, but it is not that simple when you are talking about your retirement fund and you are 60.

[rogergeyer]

It's just trade-offs. It's not magically all good or bad.

Dividend payers tend to be more stable. Companies can't pay dividends without having real cash flow over time.

On the down side, dividends produce taxable income, so they're the opposite of tax efficiency.

To me, a good stock portfolio will have both an income portion and a growth portion. How to allocate among that depends on things like risk tolerance. There is no automatic right or wrong answer.

[Andromedaxterr]

High dividend stocks can attract more investors which can help grow these companies however, these companies are paying out a large proportion of their income to its shareholders which can hinder future growth as well.

[nickfifield]

What does your portolfio allocation look like atm? how do you plan to structure your investment portfolio when approaching retirement? Still 100% growth, a mix of dividend and growth or something else?

[WalayatFamily]

You are WRONG! Reinvesting dividends is a akin to share buybacks i.e. you are using company cash (dividends) to BUY shares in the company.

[Petocati]

I agree with all the points you make in the video. But there is one important advantage of dividend stocks if the investor happens to be cash-constrained: you get some cash without having to sell any shares. This might not matter most of the time but it does matter sometimes. For example, energy stocks dived in 2020, but the biggest names like Exxon still paid dividends (by having to borrow). So as an investor you still got cash without having to liquidate shares at a rock-bottom price. In 2021, good times returned, cash flowed jumped up and a part of it is used to deleverage. So, effectively Exxon did the cash-flow smoothing for its investors, which the investors might not have beed able to do (or at least on the same terms as Exxon).

[runningman]

I started off as a dividend investor, worst thing I ever did. Missed quality time with shopify as was persuaded by so called sources on youtube that this was massively overvalued. Eventually learnt how to do my own DD and bought Tesla. It did OK :)

[TheRealArjun]

What a load of nonsense…

Standard clickbait Sasha, craps all over MO/Altria Group. Conveniently ignoring the fact that.. since 2000 Altria is a top 5 best returning stock of all time? It returned 9, 620% from 2000-2020.

Didnt mention that, AT&T returns since 1997 with dividends reinvested? No he just childishly ignores the 25 years of dividends in saying it’s gone nowhere

[jessesinclair]

Sacha, what you are saying makes sense. BUT, why if I compare two funds or ETF with Accumulating vs Distribution class they have the same return? For example if you compare the YTD return as of today of VUAG and VUSA, the return is the same (or slightly higher for the Distribution class). How is that possible? Does that mean that VUSA distributed dividends but still achieved the same share price as the accumulating one?

[investmentkage]

I'm currently at 435 dollars a year in dividends. I'm mostly invested in divided growth stocks which tend to have a low yield

[robb]

The one thing I can see easy from the chart showing dividend percentage is there seems to be a pattern of when higher overall returns the lower the dividend % and when markets are down the more the dividend makes up. They do seem to be a hedge in bad times. The 70’s would of brought you hardly any returns and in the 2000’s you would of lost money with dividends. I like having a few good dividend stocks for a market crash. They will go down less then growth stocks and you can either then sell off and but into the growth stocks that went down more but will come back higher….or you can use the dividend income to invest into beaten down growth stocks. I agree in general as I am very strongly weighted to growth stocks in my portfolio…but feel it’s good to have a little balance.

[rd]

What we have here is a failure to understand a LOT about Dividend investing. What he doesn't understand is that having the CASH IN HAND instead of letting management use it for whatever is the whole point of Dividend investing. He want's to point out that as a share owner...you own that portion of the companies "income" anyways. Theoretically that is true, in the real world it's far more complicated than that and if you think i am wrong to go any company and try to "collect" on any cash. It's not about reinvesting in the same company, it's about having the cash to choose what you do with the cash that most managements (through many studies) have proven over time will squander on adventurous things like useless mergers...think Intel with Mcafee or AT&T with Time Warner (both now being undone at an expensive loss to shareholders).

In addition, he fails to understand that all those "if's" he talks about are HUGE if's and once companies get past the growth phase they have free cashflow that is available to pay the Dividend in the first place. If a company does not pay a dividend...then the ONLY way to make money is to be both right on not only your entry point but also on your exit point because there is no way to get any cashflow. This guy has CLEARLY never looked at Dividend Aristocrats OR Dividend Kings or Dividend Zombies and i doubt he even knows what these things are. He purposely looks at bad or marginal examples and then extrapolates a negative outcome. He makes ludicrous statements like "i can get 9% return by putting my money is a total market ETF" as if somehow that is a guarantee because he only knows an up market. Follow this guy at your own risk, this is a perfect example of an unsophisticated investor with minimal knowledge of something shooting his own flawed opinion as fact out for everyone to hear. Yes you are completely wrong, unfortunately for you. Let's see him change his toon with a few years of flat to no gains in his "total market ETF" and then see what he thinks about getting paid in cash.