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I’m loving the mailbag feature you started. Here’s my questions I’m hoping you can answer: Do you know anything about dividend investing or any resources to share on dividend investing? It seems like all personal finance bloggers are pushing index investing. I understand indexing and am following that strategy right now. The only “competing” or comparable strategy I see around is investing in stocks with strong dividends. I’m curious how this compares to indexing as an investment strategy, but don’t know where to start to get information on it.
I guess I’m wondering if it’s a “safe” long term strategy like index investing? It must require more time and research compared to just picking index funds. Like I said, I don’t really know much about it besides seeing it mentioned in some articles (and having a family who likes to only buy stocks that give dividends) so I was looking for an introduction.
I think I speak for all index investors when I say, “Hey, I got nothing against dividends, I love dividends!”
My index ETFs all have very nice little dividend perks (the cap-weighted average dividend of all the stocks included in the index). The thing is I don’t really care if a stock produces dividends or not as long as it is awesome. How do I know a stock or company is awesome you might ask? I know that it is awesome because it is my index – the 60 biggest companies in Canada, 4,000+ biggest companies in the USA, or 6,000+ biggest companies in the world (check out this article for more information the ETFs I’m referring to). By making a blanket statement like, “I only invest in companies that pay dividends” (Kevin O’Leary has made this attitude sort of famous) you are leaving some pretty massive winners off the table. Warren Buffett – who many consider the greatest investor of all time – doesn’t pay dividends out to holders of his company’s (Berkshire Hathaway) shares. Apple didn’t pay dividends during all of the years it saw explosive growth either.
Apple would have been a stock that growth investors loved. Growth investors tend to be on the opposite end of the spectrum from dividend investors. The idea is that if a company is paying a dividend, usually it is a fairly stable, mature company that has a proven record of profits. Growth investors would argue that the real money is in identifying stocks that are quickly growing and have competitive advantages. These types of companies are often small companies that are taking large risks and many pay only small dividends or none at all.
It all comes back to the fact that there are essentially two ways a stock can make you money. It can go up in value (whether through higher profits, stock buybacks, or anything else). This is called a capital gain. The other way is through dividends. Some people will argue for one form of making money over the other depending on tax situations and other various criteria, but since pretty much all of my investing will take place in registered accounts, I’m not too worried about it all. Ultimately, I find debating the whole growth vs dividend vs value investing models to be a lot of abstract razzle dazzle that usually just results in a typical “paralysis by analysis” situation. This is where the true value of index investing lies: in its simplicity! Continue Reading