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Dividend Investing
We now interrupt your regularly scheduled innovation investing to bring you some "other thoughts" on other ways to think about investing.

Yesterday, someone asked in my general direction: "What dividend stocks do you recommend?"

And, well, I have thoughts.

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My personal take is that dividends are irrelevant. Thats a tad savage, but let me explain:

When I say that dividends are irrelevant, I don’t mean that they are not an important component of total returns. They are. What I mean is that dividends are not relevant in determining which stocks may have good future returns.

We have to talk about what dividends are to unpack that a little more:

A dividend of $1 is the same thing as $1 received by selling some shares of a company. This is because the distribution of a dividend results in a reduction in share value.

The important point is that a company’s value falls by the amount of the dividend when they pay it out. This is true whether the stock is up or down.

Dividends do not explain future returns, and limiting your opportunity-set to the companies that pay dividends arbitrarily cuts your investable universe in half because roughly half of global stocks do not pay dividends.

Also, you are in control of paying taxes on the gains. When you take a dividend, you have to pay taxes on it (if you don’t reinvest it). And if you always reinvest it… why do you care that there is a dividend in the first place?

Dividend growing companies do tend to be large cap value stocks with robust profitability that invest conservatively, so that can possibly be a reason for outperformance as a group if there is any… but its important to understand that the performance is coming from those factors and not the dividend itself.

There is no reason to believe that dividends, or the growth of dividends, is an indication of a good stock to own. If that is your strategy, its probably a better use of your time to look at other approaches to analyze good companies that will actually affect the stock performance.

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