The truth about dividend investing

Dividend investing gets a lot of attention.

And although I'd prefer to chalk it up as noise and distraction, I think it's important to address.

Why?

Because I get asked about dividend investing all the time:

"I just started investing should I look into companies that pay great dividends?"

"I'm interested in this company because they pay great dividends. What's your opinion?"

I will never give blanket advice.

But the truth is when you're just starting out or if you're still in your accumulation phase, you most likely do not need to be worrying about this stuff.

Because building wealth is about focusing on needle movers:

Increasing income.
Decreasing or maintaining expenses.
Investing the difference.

Dividends have their time and place in a portfolio, but the obsession with them is misplaced.

So why is my Twitter feed filled with accounts dedicated to dividend investing and tweets bragging about their monthly dividends?

Because many investors view dividends as free money.

And as a result, many of them are willing to pay a premium for this income.

To understand the truth, we need to define what a dividend is.

When a company is profitable, they have two options:

Keep the extra cash and reinvest back into the business.
Pay the extra cash to shareholders in the form of a dividend.

Which method is better?

The answer is it depends on the company.

Some companies are better off keeping the cash and reinvesting into the business.

Berkshire Hathaway (Buffett's company) does not pay a dividend.

Why?

In his words:

"We don’t pay dividends because we think we can churn every dollar we retain into more than a dollar of market value. The only reason for us to keep your money is if it becomes worth more by us keeping it than it would be worth if we gave it to you. If we can create more than a dollar of market value for every dollar we keep you’re better off.."

The long story short is that dividends do not contain additional information about expected returns.

And exclusively focusing on dividends may harm diversification because there is a huge portion of stocks that do not pay dividends.

Dividend paying companies tend to be large companies in specific industries.

Eliminating non dividend paying companies means you may be eliminating smaller companies and entire industries that are important for diversification.

I love methods and strategies that allow you to build wealth and get closer to financial freedom.

So for dividend-only investing?

Should not be a top concern while growing your wealth.