When Dividend Investing Isn’t Worth It

I recently made a YouTube video about when dividend investing isn’t worth it. Here I will be breaking down the main points discussed.

The question really isn’t “is dividend investing worth it”, rather the question is how does it compare to growth or broad market index investing.

Let’s get broad market index investing out of the way first. The embodiment of this strategy is an etf like VTI.

VTI is the vanguard total US stock market ETF which gives you a simple low cost exposure to the growth of the total US economy. Broad market ETF investing is the advice most people dispense and it is the single best reason why dividend investing isn’t worth it. Why buy just dividend stocks when you can own a little of everything?

Dividends vs Growth

The debate between a dividend or value approach vs a growth approach is a much more level comparison. Below is a chart of the returns of the S&P 500 by decade split between returns from price appreciation and dividends.

The first thing to note is the extreme variances observed. Decades such as the 2010s and 1990s were dominated by growth while periods such as the 2000s and 1970s were very flat leaving dividends to account for most of the gains realized.

This data is nicely complemented with the following chart showing returns and volatility by dividend policy.

The takeaway here is the greater consistency (lower volatility) of dividend paying stocks compared to growth stocks which contributed to great total returns throughout the decades.

Growth investing, when the timing is right, can still offer outstanding returns. Using the ARKK innovation ETFs as an example, in 2020 the fund experienced 152% growth. However the same fund YTD (November 2021) is down 16%. This high volatility does create trading opportunities for those with the ability to do so.

In comparison, SCHD is a top tier dividend ETF that returned a modest 15% in 2020 and YTD (November 2021) has returned an additional 24%.

My analysis of this data leads me to believe neither strategy has a definitive advantage. Growth stocks tend to have periods of explosive price movements followed by periods of underperformance. Dividend stocks tend to have lower volatility and lower but more consistent returns, ultimately leading to comparable total returns over long periods of time.

Current situation

This is a summary from a Morgan Stanley report titled, “Why Dividends Matter” by Christopher F. Poch.

This acknowledges a few facts in the economy currently, the first being historically high corporate earnings.

Second is the historically high price to earnings ratio, an indication of overall valuation.

Together it indicates we may be leaving a period of high growth such as the 1990s and moving into a period of sideways price movements such as in the 2000s.

If this is true, the data suggest the comparably consistent returns offered by quality dividend paying stocks might account for a meaningful portion of the total returns for the foreseeable future.

Closing thoughts

Humans are notoriously poor at predicting the future, this is why a broad market index approach is such a hard strategy to beat. I personally hedge my bets by having a mixture of growth stocks with high growth potential and dividend stocks with historically more consistent returns in my portfolio.