Comments by "JP 72" (@739jep) on "The Irrelevance of Dividends" video.

  1. This analogy doesn’t work, you’re not ‘killing the golden goose’ by selling shares. The ability of the company to generate profits isn’t impacted by how much of the company you own.
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  2. The problem with this comparison is that dividends are nothing like rental income … they only feel that way. This is a common behavioural error known as the free dividend fallacy. When your tenant pays you rent the value of your property doesn’t go down. It’s gone from your tenants account to yours. When a company pays you a dividend it goes from their account to yours , problem is you have a share in the assets held in that account. They’re basically paying you with your own money. Dividends and rental income are thus not equivalent. Dividends are a method of returning capital , not creating capital. A fairer comparison would be saying dividends are like the method of payment the tenant chooses to pay you with (cash , cheque or direct debit). ✌️
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  3. ‘Also half of S&P 500 returns are from dividends reinvested’ That’s just a recount of how capital was redistributed in the past , it says nothing about how the S&P 500 return would have looked had those dividends not been paid. It doesn’t add anything to the discussion of whether dividends are relevant or not. If the irrelevance of dividends holds then you could assume that the S&P total returns would have been roughly the same regardless of whether dividends were paid historically or not.
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  4. Where was he wrong though?
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  5.  @alankoslowski9473  I think there’s just some confusion or disagreement involving the semantics here. I don’t think he’s saying dividends themselves matter to the decision making of investors or that they should be favoured. I made that mistake as well reading the post originally. I believe his point is more a philosophical one - that is, businesses must have the potential to pay a dividend , otherwise the nature of a business would fundamentally change. I would say businesses wouldn’t even be business without this potential. I can’t think of many reasons why anyone would start a business if they couldn’t have the profits distributed to them. What is not being said is that investors should favour dividends or dividend paying companies are preferable - it’s just that if they weren’t allowed or even possible then the very nature of business would be fundamentally different - and that gives dividend some kind of pseudo / philosophical value at least. But it doesn’t make a dividend paying company better than a non dividend paying company. All companies have the potential to pay a dividend , its just that the decision of whether to pay one or not matters nought. But yes. I think we all agree here that dividend focussed investing is irrational and that’s what matters.
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  6. Before considering tax and transactions costs your net wealth would be the same. This is because the drop in share price is due to the business transferring capital to you. It’s not a discounted share price, it’s just what the company is worth considering they just lost a lot of cash on their balance sheet. After considering those things your wealth will likely be less, or at least .. if the company doesn’t pay dividends you can then decide yourself when to incur tax and transaction costs by selling shares.
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  7. For example?
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  8. Perhaps - but wouldn’t it make more sense to target those factors directly? After all companies that don’t pay a dividend could have good exposure to those factors , and some companies that don’t pay a dividend may have limited exposure to those factors. You also run into problems of diversification investing this way.
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  9.  @marthvader14 the cash on the companies balance sheet is finite too. As are its retained earnings.
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  10. Holy moly this is silly 😂
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  11.  @dakotadak100  it’s silly because ‘share price volatility being greater than dividend volatility’ isn’t evidence that dividends are relevant in the slightest. It’s basically the same argument (just a different metric) as saying ‘dividend stocks have historically returned more therefore dividends are relevant. ‘ Both these arguments confuse correlation with causation. What matters is if dividends themselves affect risk adjusted returns. There is no evidence that they do which supports the generally accepted theory. It’s even more silly if you use this kind of reasoning to justify picking individual dividend stocks , or even dividend funds because then you become under diversified and exposed to more unsystematic risk.
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  12. ‘Performance of dividend paying stocks out performs non dividend paying stocks’ This is true historically, but it’s not because of dividends. It’s due to dividend paying stocks as a group being more exposed to certain risk factors. The problem with focussing on dividends is that you will ignore non dividend paying stocks that are also exposed to these risk factors which in turn will make your returns less reliable as you will not be as diversified.
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  13. This doesn’t inform us that dividends are relevant. It informs us that investing is relevant.
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  14. It’s no different to saying , if a company keeps paying dividends - won’t they eventually run out of money?
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  15.  @dakotadak100  there’s a very large difference between saying: ‘volatility matters’ and ‘dividends are less volatile therefore they matter.’
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  16.  @dakotadak100  again you’re confusing correlation with causation. Just because dividend stocks generally have less volatility , does not mean that reduced volatility is caused by the dividend policy of the firm. If dividend paying firms generally have other characteristics that actually cause the reduced volatility that means that those characteristics are what matter - not dividends. If you mistakenly attribute the causal factor as being dividends , when it is another factor responsible for the reduced volatility , then you will mistakenly focus on dividend and ignore stocks that don’t pay a dividend BUT still have the characteristic responsible for the lower volatility. Correlation does not equal causation. That’s the mistake you’re making. The divided irrelevance theory deals with company value anyways. Talking about volatility is itself a red herring.
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  17. A stock gives you a share of a company. Therefore a stock has value because a company has value - so the important question is what gives a company value? It’s decision on how it should distribute capital comes after the capital has been created so it can’t be dividends that give a company its value. Maybe there is something to your ‘potential to pay dividends’ idea , but I’m not sure this means dividends matter. It’s a bit hypothetical. If businesses owners could never transfer wealth created by their business to themselves would they even start a business? In that way you’re right , dividends are an important mechanism for markets to even exist because if they wernt possible the market likely wouldnt exist - at least as it does now. That doesn’t mean they’re relevant to investors decision making however , which is what this video is about.
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  18.  @julianf9745  technically that is probably correct, although I’m not sure Pluto ever has value to begin with if nobody would pay for it. That is likely your point but it seems meaningless to me. It’s a little like saying a share being a part ownership of a company is the mechanism that makes the market work , if it wasn’t a part ownership it would have no value. Well yeh but so what right 🤷‍♂️? Regardless how is this relevant to the investor? How should it influence an investors decision making? What you’re describing is basically just the rules of the game and we must decide how to play the game only after we agree on the rules. What’s ultimately important is whether the dividend policy of companies Or groups of companies are at all relevant to the investor (not whether businesses have the potential I pay dividends, which all companies do) That’s what the video is addressing when it’s talking about the irrelevance of dividends - nobody has said dividends arnt an important component of total returns. It almost sounds like you’re equating ‘dividends are irrelevant’ with ‘dividends are bad/pointless’. Your Pluto analogy is almost the same thing as saying a share has value but once it’s sold to you you’re not allowed to sell it. If you were never allowed to sell a share nobody would pay a single dime for it either. It’s completely hypothetical, doesn’t reflect reality and does nothin to tell us what factors should influence an investors decision making.
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  19. Saint Nico you’re misrepresenting his position - he freely admits in both videos that dividend stocks have done really well. This doesn’t mean dividend irrelevance theory isn’t applicable to the real world. He is saying that they have done well due to their exposure to well known individual risk factor such as value and profitability. The problem is if you target stocks based on their dividend , then you will leave out stocks that are also exposed to the value and profitability factors but pay no dividends. This decreases your opportunity set of stocks to invest in.
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  20. No it doesn’t.
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  21. You can’t throw out the conclusions derived from the theory simply because the assumptions arnt true. You would have to ignore a lot of useful theories if that were the case. Dropping some of the assumptions means the theory has to be adjusted , not dropped, in this case the assumptions just help keep the theory clean and simple. Do you think the authors of these papers arnt aware that taxes exist? The theory helps provide an explanation as to what we see in the data. On the whole , when dividends are paid, the prices of stocks fall relative to the amount of the dividend. When factor regressions are run on dividends in relation to asset pricing we find there is no statistically relevant relationship between dividends and returns. The dividend irrelevance theory , while imperfect, is one of the best theories we have of explaining these empirical facts. It’s fine if you want to ignore the theory but that doesn’t change the data and the conclusions we draw from it.
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  22. The franking credit helps make dividends less tax inefficient than the otherwise would have been - but even with fully franked dividends it doesn’t make dividends themselves relevant to investors.
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  23. It’s not clickbait. It’s the name of a well known theory in finance - which was exactly what was discussed in the video. Dividends are included in the calculation of total return , but actually they are irrelevant to total returns as the theory states that should the dividend had not been paid , then that component of the total return would have simply shown up as capital gains. So dividends are indeed irrelevant to the total return.
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  24. Not true. If you really wanted to put on a tin foil hat , you could much more easily argue that those who want people to remain poor are the ones arguing that dividends are relevant. Receiving dividends is often a tax event , dividends that are reinvested increase brokerage revenue for brokers , people who receive dividends can spend the money etc etc
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  25. There’s nothing that forces this to be the case , but it’s demonstrable in the data that this is what occurs. The market just does a good job of pricing in that information.
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  26. And yet when we look at the data to find variables that explain stock returns, dividends are not found to be a factor.
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  27.  @SuperKiller232  he means low share price with respect to some fundamental indicator. For example price to book ratio. This is because value is a independent type of a priced risk. You can expect to earn a premium for it by being exposed to it - but of course it’s important you do so by by picking individual value stocks but by investing in a total market index fund AND holding another type of value fund so that assets with this type of characteristic are held in excess of their market weights within the context of your well diversified/low fee portfolio.
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