Debunking Dividend Fallacies

San Luis Obispo bike rider and friend.

While I considered placing a reference to this dividend article in the Forum, I thought it sufficiently interesting to write a short blog on the subject.  Dividends Do Not Make Up The Majority Of Long-Term Total Returns is an old Seeking Alpha article that debunks what many Dividend Growth Investors (DGI) advocate.  While the article will appeal mainly to math nerds, it is very understandable.  Take the time to study it and don’t rush through the arguments.

First, what is a DGI?  In general, these are investors who place the importance of dividends above capital gains.  The basic philosophy is to save and purchase shares in stocks that are classified as Dividend Aristocrats or Dividend Champions.  These are companies that have consistently raised their dividends for a minimum of 25 years.  These investors have clear goals and they are to buy and hang on to stocks that will eventually provide sufficient income for retirement.  I’ve looked over several portfolios constructed this way and the yield is normally in the 3.5% to 3.7% range – perhaps a little higher.  An ETF investor using the “Swensen Six” model comes close to this yield, but does so with much less risk due to the broader diversification.

One of the major drawbacks to DGI investing is that one needs to be a stock picker, although the dividend payout requirements does a lot of screening for followers of this model.  The DGI style of investing has a lot going for it and I am not one to dismiss this approach to portfolio management.

There is another misuse of information that frequently comes out of the dividend investing style and it is popularized by Lowell Miller in his book, The Single Best Investment: Creating Wealth With Dividend Growth.  One of Miller’s fundamental arguments is what I call a “feel good” calculation.  When any of us looks up a ticker on Yahoo! we see what the dividend is per share and the percentage yield.  Miller and his followers don’t use this figure, but instead calculate the yield based on the purchase price.  For someone who purchased Coca-Cola (KO) back in the 1950s, the yield is tremendous.  Calculating the yield of a security based on the purchase price bears little connection to the reality of what the real yield is and that is why I call it a “feel good” calculation.

Reactions to the Seeking Alpha article is welcome.  Enjoy reading and studying the included ideas.