The Ownership Dividend
Click here to buy the book.🚀 The Book in 3 Sentences
The Ownership Dividend by Daniel Peris predicts a coming paradigm shift in the U.S. stock market from an emphasis on share price appreciation to a return to a more cash-based system of returns where investors will prioritize dividends.
In the book, the author explores the historical importance of dividends for investors and argues for a shift back to prioritizing dividends over share price appreciation in the near future.
The Ownership Dividend is a must-read for all investors, especially those who follow a dividend investing strategy, as it provides crucial historical context on dividends and explains their philosophical significance in the context of business ownership within the public market.
🧠 Key Takeaways
Even though tax policy has influenced market behavior over time, that isn’t what has fundamentally changed the overarching relationship between companies and their shareholders. The desire for dividends has been impacted by a variety of other factors (such as the rise of share buybacks), and while tax implications are worth considering, they don’t (and shouldn’t) define the essence of why and how companies choose to create value for shareholders.
Back in the days before modern financial theories, the relationship between companies and their investors was built on a cash-based foundation, one that had been established over centuries, if not millennia, of business ownership. This relationship was especially important throughout most of history when investors had limited control and access to information.
Traditionally, investors valued companies that generated profits and rewarded shareholders with dividends, but recent decades have seen a shift towards more speculative strategies, with many investors now preferring share price appreciation over dividends. This shift was driven by several factors, including decades of declining interest rates, the increased availability of information, and the creation of democratized investing platforms that have helped open the market to a wider range of participants.
While dividends have historically been seen in a positive light, the concept of a "return" has evolved from a temporary liquidation payment to a more perpetual collection of ongoing profits, shaping how investors think about their returns and the form in which they come.
The sensible way to receive a share in a company's success is through cash distributions (dividends) from the company's profits, not by selling shares for potential capital gains (which may never come).
Unlike dividend-paying stocks, which provide a regular income stream without having to sell any shares, a non-dividend-paying stock offers no usable benefit to the investor unless it is sold.
Focusing on dividends means prioritizing companies with strong, sustainable operations that can consistently generate profits (and be held accountable to shareholders through the distribution of those profits). This approach can offer more stable and reliable returns compared to the often unpredictable movement of share prices, which are influenced by a plethora of other things separate from business fundamentals.
Investing for share price gains is a more speculative approach by nature. It’s more akin to gambling on the whims of the market (where anything is possible) rather than securing a steady, reliable source of income tied to the company’s operational performance.
While it's true that paying dividends reduces the capital available for reinvestment, this constraint forces management to be more selective and strategic in how they allocate the remaining funds. They can't afford to invest in low-return projects because they need to ensure the business continues generating enough cash to sustain the dividend payments. This creates a natural check on management, encouraging them to focus on more strategic uses of capital that contribute to the company's long-term growth.
With the rise of share buybacks, companies have started to influence their own share prices directly. Instead of just focusing on running the business—selling products or offering services—they’re now actively participating in the market alongside their shareholders.
A high-dividend payout serves as a "trump card" for shareholders by reducing the chances that management will act in ways that don’t align with shareholder interests. By regularly returning cash to shareholders, management is less likely to have excess funds available for investments that may not benefit the shareholders.
When you find yourself on the receiving end of a dividend cut, it’s best not to panic and immediately sell when one of your companies reduces its dividend. It might seem counterintuitive, but sometimes the best move is to add to your position in a company that's just reduced its dividend.
If the company didn’t pay a dividend and kept all its earnings, there would be pressure to find ways to use that money, as shareholders expect returns on their investment. This situation can push management to take action simply for the sake of doing something, even when there might not be a good opportunity for those funds. This pressure can lead to poor decisions, such as bad acquisitions or other ineffective uses of capital, ultimately resulting in subpar returns for shareholders.
✍️ Memorable Quotes
“So when not taxed at all —the first period— dividends defined the market. When highly taxed—the second period—they were still omnipresent until the world went topsy-turvy in the 1990s. And then when they were less taxed versus the prior decades—the third period—dividends retreated substantially. There will be additional discussion of taxation later. Suffice it here to note that while taxation may be an important factor in the investment equation for many market participants, it does not appear to have been—nor should it be—a structural one in regard to the relationship between owners of companies and the companies themselves.”
In the first period (1871-1954), when dividends were not taxed at all, they were the primary driver of the market. This suggests that investors placed heavy emphasis on dividends as a source of income, which speaks to their importance in the financial strategies of both companies and investors.
Moving into the second period (1954-2003), when taxation on dividends was heavy, you might expect that the desire for dividends would diminish due to the increased tax burden on investors. However, as the quote points out, dividends remained "omnipresent," which tells us that despite an unfavorable tax situation, dividends continued to be a desired source of returns for investors.
The third period (since 2003) marks a shift back toward lower taxation. Ironically, dividends have become less prevalent during this time, which suggests a more meaningful shift (not related to taxes) in how companies and investors approached creating value for shareholders.
In the end, even though tax policy has influenced market behavior over time, that isn’t what has fundamentally changed the overarching relationship between companies and their shareholders. The desire for dividends has been impacted by a variety of other factors (such as the rise of share buybacks), and while tax implications are worth considering, they don’t (and shouldn’t) define the essence of why and how companies choose to create value for shareholders.
“But the expected standard cash relationship between company and investor in the period before the academics explained it all was a natural manifestation of centuries, if not millennia, of business ownership, particularly when that ownership took the form of minority stakes in companies about which minimal other information was available. Investors did, do, and will continue to hope for great future outcomes for their riskier investments. But in the meantime, the cash dividend (or bond coupon) was real and tangible when little else about an investment was. Investors instinctively understood, as most successful businesspeople have from time immemorial, that the value of an asset—what you might pay for it—is based on what you could expect to derive from that asset as its owner.”
Back in the days before modern financial theories, the relationship between companies and their investors was built on a cash-based foundation, one that had been established over centuries, if not millennia, of business ownership. This relationship was especially important throughout most of history when investors had limited control and access to information.
Without the detailed insights we’re so lucky to have today, investors of the past needed to rely on something tangible to assess the value and performance of their investments, and that tangible element was often the dividend, or some different name for the same thing. The dividend payments provided a real, reliable, and measurable return during a time when little else about a company was known or could be verified.
This idea also touches on a deeper and practically timeless understanding that many successful business people have followed throughout history: the value of an asset is fundamentally tied to what it can produce for its owner.
This understanding goes beyond modern and complex financial models and taps into one of the most basic fundamentals of business. Whether investors are buying real estate, a private business, a farm, or some other asset, they often base their valuation on the potential cash flow that the asset can generate.
This is just as true today as it was in the past and, in my opinion, underscores the perpetual importance of dividends when investing in the stock market—which, let’s not forget, is a market for businesses.
“How did we get to the current state of affairs where investment in successful companies based on current and future distributable cashflows occupies just a tiny corner of the U.S. marketplace for stocks? That is from the investor’s perspective. From the corporate perspective, the questions are why major businesses with ample internal cashflows do not reward shareholders in cash and why they are not called out for it. It is a strange world indeed. The movement away from a cash-based ownership relationship occurred in parallel in the halls of academe and on the floor of the stock exchange.”
In today’s stock market, cash-based investing, once common and respected, has become a niche strategy that often looked down upon. To understand this change of heart, we must consider both investor and corporate perspectives, along with broader cultural and academic changes.
For investors, focusing on cash returns like dividends has become rare and somewhat frowned upon. Traditionally, investors valued companies that generated profits and rewarded shareholders with dividends, but recent decades have seen a shift towards more speculative strategies, with many investors now preferring share price appreciation over dividends.
This shift was driven by several factors, including decades of declining interest rates, the increased availability of information, and the creation of democratized investing platforms that have helped open the market to a wider range of participants.
On the corporate side, many major companies now retain more of their earnings instead of rewarding shareholders with greater dividends. The reason for this lies in the changing priorities of management, the changing capital requirements of many of today’s businesses, and the changing preferences of investors.
With so much emphasis on share price returns, companies feel pressured to reinvest more of their profits into growth initiatives like research and development, acquisitions, or share buybacks. These activities are considered more beneficial than paying out larger dividends because they have the potential to create greater share price returns.
As an example, share buybacks can boost earnings per share (EPS) and, in turn, share prices, which aligns with the incentives of management teams whose compensation may be tied to earnings growth or share price performance.
It’s also important to note that this move away from larger cash returns didn’t happen in a vacuum. A significant shift in academic thought and cultural attitudes toward investing played a big role as well.
In recent decades, academic theories have emphasized the importance of growth, innovation, and market efficiency. These ideas have influenced both individual and institutional investors, and have shaped how they approach their investments.
As an example, the efficient market hypothesis (EMH) suggests that all available information is already reflected in share prices, making it impossible to consistently outperform the market. In other words, the market is all-knowing all the time.
This theory has contributed to the rise of passive investing into things like index funds, mutual funds, and ETFs, which focus on broad market exposure over individual stock selection.
Along with this academic shift, there has also been a cultural change in how we view stocks—as vehicles for growth and speculation rather than consistent income. As interest rates have generally declined over the past few decades, the potential for capital appreciation has become more enticing than consistent cash flow from dividends.
The media and financial industry have amplified this shift with their glorifying of high-growth stories and long-shot bets (see the Wolf of Wall Street or The Big Short). This leaves many investors seeking the crazy returns they hear and read about, pushing cash-based investing further into the background.
Given all these factors, we dividend investors find ourselves in a market that, while still rewarding, can feel a bit strange, counterintuitive, and even judgmental to those of us who want to generate a growing cash return from our investments.
“It is all too common in finance and investing to assume that the “rules” are the rules, have always been that way, and will always be that way. Memorize the rules and make a lot of money. Well, it turns out that is not correct. Many of the so-called rules by which we invest (or live) have a specific context of creation that explains them. They were relevant in that context. They may or may not be relevant in a different context.”
We dividend investors tend to break away from the “rules” that have guided many investors over the last few decades. Our approach, which is currently out of favor and considered unconventional, doesn’t necessarily align with the current emphasis on share price appreciation or passive investing as the primary paths to wealth.
With that said, it’s important to keep in mind that these “rules” were developed within specific contexts and were relevant in those contexts. For example, the push for broad diversification—and the subsequent push to outsource your investment decisions through index funds, mutual funds, and ETFs—became popular as a way for the everyday investor to save time and reduce risk.
That’s not to say that any of those things are bad, by the way. The point is that just because these “rules” work for some people doesn't mean they are the only way to invest, or that they will always be the best approach in every market environment.
We dividend investors realize this, and by choosing an investing style that is currently out of favor (and has been for decades), we are going against the grain. We recognize that our approach doesn’t fit neatly into the mold of the status quo, and that there are other viable ways to build wealth—ways that may not follow the conventional rulebook.
Ultimately, it’s important to understand the context in which these financial “rules” were created, and it’s important to know that you don’t have to abide by them. While some investors may continue to, others, like us, can still find success by investing in a different way that better suits our goals and preferences.
“While the term dividend has rightly and accurately passed into general usage with a positive connotation—as in an activity that pays a dividend the term “return” has evolved over time. It started out signifying the physical return of cash at the end of an investment—the handing over of the initial investment amount, with some extra to represent the profit. That was the nature of the earliest joint-stock companies associated with specific ventures, such as bringing spices, silks, and other rarities by boat to Europe from Asia. It was a liquidating payment. Over time, it came to represent the cash payment of profits in cash from an ongoing enterprise. Or if from a private asset, the returns were the rents from real estate or the yields of the productive land. Yes, the price of an asset rose and fell every day on London’s Exchange Alley, New York’s Wall Street, and anywhere else investments were bought and sold, but non-speculative thinking about such investments, to the extent that there was such thinking, came from contemplating the income stream associated with the asset. To that point, the embryonic stage of what we now call shareholder activism or good governance was about getting more dividends for shareholders.”
In its earliest form, a "return" meant getting back your original investment, plus a bit of profit.
This was typical in the early days of joint-stock companies, which were set up temporarily for specific ventures like transporting exotic goods from Asia to Europe. Since these companies were not permanent, returns were essentially liquidating payments—the company would be dissolved once the venture was completed, and you would get your initial investment back along with any profits.
Over time, the meaning of "return" broadened. Instead of just referring to liquidating payments, it began to describe the profits distributed by ongoing businesses. In private investments, your returns often came as rent from real estate or yields from productive land.
When it came to stocks, despite daily fluctuations in value on exchanges like Wall Street or London’s Exchange Alley, investors of the time were less concerned with share price changes and which direction they’d go. Instead, they prioritized the steady income streams their investments generated.
This mindset laid the foundation for what we now call shareholder activism or good governance, which initially focused on ensuring shareholders received their fair share of dividends.
In short, while dividends have historically been seen in a positive light, the concept of a "return" has evolved from a temporary liquidation payment to a more perpetual collection of ongoing profits, shaping how investors think about their returns and the form in which they come.
“From a business ownership perspective, however, they are not the same. They are not even close. The logic of business ownership, particularly for minority shareholders of large publicly traded companies, makes a cash distribution from profits—not going into the marketplace to harvest potential capital gains—the natural mechanism for sharing in the success of an enterprise. It is a matter of philosophy, not mathematics. To suggest otherwise is to compare 2+2 with (18325)(2^2)/((SQRT (400)) *15)-(3^3) *2)-20 (in Excel format). Yes, both formulas equate to 4. But how you get to one is very different from how you get to the other. The former is a natural consequence of business ownership, of receiving a share of company profits after other investment needs of the business have been met. Your effort is more metaphorical than real: it involves being ready to receive “the check in the mail.” The latter is far more complicated. It involves having an unrealized capital gain at a certain time, determining that it is sufficient or necessary to meet your income needs, then going out into the marketplace, when it is open and when it is in a good mood, finding a buyer at your price (a limit order) or an acceptable price (a market order), having the trade settle without issue, and the funds making their way into your account. Instead of business ownership, it is the active diminution of your stake in the enterprise. Moreover, there are risks along the way at each step of that sequence. Individually, they may be quite small, but they are there.”
When it comes to business ownership, dividends and share price appreciation might seem like two sides of the same coin, but in reality, they’re worlds apart.
This is especially true for minority shareholders of large publicly traded companies. The sensible way to receive a share in a company's success is through cash distributions (dividends) from the company's profits, not by selling shares for potential capital gains (which may never come).
Sure, the math might sometimes look the same: whether you’re receiving a steady dividend or selling shares that have appreciated in value, the dollar amount could end up being similar. But this isn’t just about numbers; there’s a philosophical difference that matters.
Think of it like this: comparing dividends to capital gains is like comparing a simple equation (2+2) to a complex Excel formula ((18325)(2^2)/((SQRT(400))*15)-(3^3)*2)-20). Both might equal 4 in the end, but how you get there is entirely different.
Dividends are straightforward. As a shareholder, you receive a portion of the company’s profits after it has reinvested what it needs. You don’t have to do anything—just sit back and wait for the payment to hit your account.
This is the natural outcome of owning a business. If you were investing in a privately owned business, like a laundromat or a restaurant, you probably wouldn’t even consider it if you weren’t guaranteed to receive a percentage of the profits. Investing in publicly traded companies should be no different.
On the other hand, capital gains can be much more complex and much less reliable. To benefit from them, you need to decide when to sell your shares, hope the market is favorable, and sell at your desired price.
Each step involves some risk, and selling means that you have to reduce or completely eliminate your ownership in the company, which in my opinion, is the worst part. Why would you want to chip away at your collection of assets, especially after spending years, maybe even decades, building it up in the first place?
“In recent decades, market sentiment has become so detached from fundamentals that one can make or lose a great deal of money in the market’s playthings such as Peloton, Trupanion, etc. The enormous volatility of their share prices makes it impossible to count on any reliable, predictable harvesting of capital gains. And they also run the risk of extreme capital loss at the first sign of genuine risk on the horizon.”
It’s no stretch to say that the share price performance of many companies today is driven more by hype than by sound fundamentals, especially when dealing with short-term time frames. The Gamestop saga is a prime example of this—it wasn’t the first, and it certainly won’t be the last.
In some instances, a company’s fundamentals can be strong, like with Nvidia (NVDA), which can spark the initial rise in share price. But once investors catch on, they start piling in, which creates the vicious cycle.
The share price rises, fear of missing out (FOMO) sets in, more investors jump in, repeat.
This cycle continues, inflating the share price well beyond what the company’s fundamentals would logically support. Eventually, the bubble grows until it reaches a breaking point, and you never know when that’s going to come.
It hasn’t happened with NVDA yet, and it’s impossible to predict when the ride will end, but it always does, and often with great volatility. This unpredictability can make investing in these types of stocks feel more like gambling than actual investing.
What’s even more unfortunate is that many investors have no idea why they bought these stocks in the first place. The truth is that they just didn’t want to miss out on the party.
This is one of the many reasons I prefer investing in dividend stocks.
Companies that pay dividends are often more established and less susceptible to the extreme price swings (and hype) that accompany the hot stocks of the moment. This makes for a more enjoyable and less stressful investing experience, especially for those planning to invest over the long term.
“What a strange definition of success, where you have to part with an asset to realize its value, because it generates no return on its own? But that’s what a share price is; it’s just a number. You can’t pay for a meal with it; you can’t make a mortgage payment with it. It may make you feel good to see a higher number than yesterday, but that does not on its own allow you to increase consumption or spending. In that regard, share prices are like pieces of jewelry. They may look good on you and you may be happy about owning them, but that’s where their utility ends unless you are prepared to part with the asset.”
Unlike dividend-paying stocks, which provide a regular income stream without having to sell any shares, a non-dividend-paying stock offers no usable benefit to the investor unless it is sold.
Sure, it might be a nice ego boost to see the share price go up, but outside of that, the increase has no practical utility unless you start selling off parts of your investment (and why would you want to do that?).
It’s like jewelry in that regard. Much like a high share price return, jewelry can be visually appealing and may even give you a sense of accomplishment or self-worth.
But just as you can’t use a Patek Philippe to pay for groceries, a rising share price doesn’t actually improve your financial situation unless you cash it out. Its practical value remains untapped until you decide to part ways with it, which is not an issue with dividend-paying stocks that can deliver perpetual returns without needing to be sold.
This raises an important question: Can an investment truly be considered a success if you have to liquidate it to receive the benefit?
While the author would answer "no," I see it a bit differently.
Although I’m more partial to receiving dividends, a share price return is still a return. However, I personally prefer not to chip away at my assets to reap their benefits. This is one of the things I love about dividend investing—you get to enjoy the returns without having to dwindle down your portfolio.
Not everyone shares that same perspective though. There are plenty of investors out there who prioritize share price returns, and don’t have an issue with liquidating their portfolio to fund their lifestyle.
To them, a high share price return can feel like a marker of success, and it is, to an extent. But the downside is that the value can only be extracted when you part with the asset.
While share price appreciation is important and can signal a strong, growing business, consistent (and growing) dividend income that allows you to continue holding your investment is an equally respectable—and often underrated—measure of success that shouldn’t be overlooked or looked down upon.
“Having capital gains depends on market sentiment, on the views of people often far removed from the activities of a company. In contrast, dividends are a function of a company’s operations. A dollar may be fungible; how it is generated is not. Drawing this distinction—between a capital markets activity and a business outcome—may be the most important assertion in this book.”
Share price movements are largely influenced by market sentiment, especially in the short-term. On a day-to-day basis, it’s pretty much all emotion.
This sentiment reflects the collective mood of investors on any given day, which can be swayed by factors like economic news (interest rates), company-specific news (Starbucks gets a new CEO), or rumors and other things that may not accurately reflect the company's actual performance.
In contrast, dividends are directly tied to the company's operations. Unlike capital gains, dividends are a tangible result of a company's ability to generate profits and free cash flow.
The author argues that while money is fungible (meaning all dollars are the same), the way it is earned is not. A dollar gained through dividends, which comes from a company's successful business activities, is fundamentally different from a dollar gained through speculative capital gains.
The importance of this distinction lies in its implications for how you should approach your investments.
Focusing on dividends means prioritizing companies with strong, sustainable operations that can consistently generate profits (and be held accountable to shareholders through the distribution of those profits). This approach can offer more stable and reliable returns compared to the often unpredictable movement of share prices, which are influenced by a plethora of other things separate from business fundamentals.
The author emphasizes that understanding this distinction is the most important takeaway from the book, and if you remember just one thing, it should be this.
“Consistent with my maxim of business ownership being reflected in a tangible, cash relationship, I view these investments to be “speculations.” Without a distributable cash stream, the investor in a successful enterprise is entirely dependent on the ever-changing market price of the investment. That is the dictionary definition of a speculation.”
This quote highlights one of the key tenets of dividend investing: true, lasting investing is about maintaining a steady, growing, cash-based relationship with the businesses you own. Just as you’d expect regular cash flow from a private business like a restaurant or laundromat, the same principle should apply to publicly-traded companies.
When an investment doesn’t pay dividends, you’re left relying solely on share price movements for returns—a strategy that’s inherently risky and unpredictable. Share prices can fluctuate wildly from day to day, often driven by factors that have little to do with the company’s actual performance.
A recent example of this unpredictability was when Starbucks, a company that actually does pay a dividend, announced they’d be replacing their CEO. The stock jumped 24.5% from the news that day, but the underlying business remained the same, showing how market reactions can be disconnected from the company’s fundamental performance.
The moral of the story is that investing for share price gains is a more speculative approach by nature. It’s more akin to gambling on the whims of the market (where anything is possible) rather than securing a steady, reliable source of income tied to the company’s operational performance.
“The resulting atmosphere of speculation is not just in terms of the investor who is left only with share price returns. The cashless model also affects management. Low hurdle rates open the door to bad investment decisions by company leaders. While it can be hard to prove at a macro-market level that senior executives are using low cash expectations to overfund projects or make poor investments, it is simple to demonstrate at the behavioral finance level. Free money—nearly free to borrow debt, and similarly low-cost equity when no cash strings are attached leads exactly to the type of behavior you would expect. If managers actually worked for shareholders and were held accountable by the elected board of directors, this wastage might not be a problem. But in the age of the imperial CEO—and make no mistake, we are living in such an epoch—bad investment decisions are not the preserve of investors only. One form of managerial speculation is in their own shares, the much-vaunted share buybacks.”
Many investors, often those who criticize dividends, argue that paying dividends takes money out of the business and that this money would be better reinvested for growth. However, they overlook the crucial role dividends play in holding management accountable and maintaining discipline within the company.
While it's true that paying dividends reduces the capital available for reinvestment, this constraint forces management to be more selective and strategic in how they allocate the remaining funds. They can't afford to invest in low-return projects because they need to ensure the business continues generating enough cash to sustain the dividend payments.
This creates a natural check on management, encouraging them to focus on more strategic uses of capital that contribute to the company's long-term growth.
“Still, let’s consider the broader implications of buybacks from a business ownership perspective. They are part and parcel of the shift in definition of market success from distributions-based—the dividends paid—to a nearly exclusive focus on the share price. It also redefines a company’s relationship to the capital markets. Rather than having the capital markets reflect the value of the company—the collective wisdom of investors—share repurchase programs make companies into market participants, that is, above and beyond their supposed core competence of widget making. There may be nothing wrong with that, but investors should be aware of how the investment process—the supposed valuation mechanism of the stock market—has been altered in the process.”
Traditionally, a company’s success was measured by how much it returned to shareholders through dividends—the preferred way for investors to share in the company’s profits. However, in recent decades, the focus has shifted toward share prices, with less emphasis on the regular cash flow from dividends.
This shift has also changed how companies interact with the stock market. The market used to be a place where investors collectively determined a company’s value based on its performance.
But with the rise of share buybacks, companies have started to influence their own share prices directly. Instead of just focusing on running the business—selling products or offering services—they’re now actively participating in the market alongside their shareholders.
There’s nothing inherently wrong with this, but it’s crucial for investors to understand the implications. The traditional role of the stock market as a tool for valuing companies has evolved.
Now, companies can influence, and even manipulate, their share prices through buybacks. While this can benefit shareholders, it also means that a company’s share price can rise independently of its actual business performance.
“Investors with other preferences will look askance at high payout companies as handcuffing management. They are right. A high payout does limit management options. And from the perspective of this minority shareholder, that’s a very good thing. Company managers with no cash obligation to shareholders behave exactly as you would expect them. There is an agency cost to being a minority shareholder. A high-dividend payout is the shareholder’s trump card.”
As mentioned in a previous quote, some investors criticize high payout companies, believing that paying out large dividends restricts management's ability to reinvest in the business and pursue growth opportunities.
They see it as "handcuffing" management by limiting their options. However, this limitation can actually be a good thing, especially from the perspective of a minority shareholder.
A high-dividend payout serves as a "trump card" for shareholders by reducing the chances that management will act in ways that don’t align with shareholder interests. By regularly returning cash to shareholders, management is less likely to have excess funds available for investments that may not benefit the shareholders.
In other words, "handcuffing" management through high dividend payouts helps ensure that shareholder interests are protected and that the management stays focused on making disciplined, value-driven decisions.
When management has no obligation to return cash to shareholders—such as a commitment to paying dividends—they may prioritize their own interests, leading to decisions that don’t necessarily maximize shareholder value.
“But as a business owner operating through the stock market, my goal is to maximize the cashflows, not the narrative. So we accept dividend risk as part of the dividend investment framework. Indeed, the logic of maximizing portfolio income can mean adding to a position of a company that has just reduced its distribution. What’s done is done; it is a sunk cost. If the outlook for the company is improved as a result of the action, then adding to it might make sense. Seeing your holdings as businesses rather than just stocks is another way of putting the occasional dividend cut in context. Do you sell a rental property where the income stream from it has declined one year? Possibly, if you feel the rental stream will not recover. But if you see a better future after the rough patch, you might keep it, or even invest more in the property. Now the stock market usually makes a hash of share prices where companies are facing genuine dividend risk, both prior to and immediately after a cut. So the decision to exit, maintain, or increase a position is not an easy one. The important factor is taking a long-term view and considering the prospective or historical dividend cut within the context of the overall portfolio’s future income stream.”
As a dividend investor, your primary goal isn't to chase market trends. It’s about the steady income your investments generate, not just the day-to-day fluctuations in share prices.
With that said, dividend cuts are an inevitable part of the journey. They're not something anyone looks forward to, but they come with the territory, and you’ll experience at least one across your multi-decade investment journey.
When you find yourself on the receiving end of a dividend cut, it’s best not to panic and immediately sell when one of your companies reduces its dividend. It might seem counterintuitive, but sometimes the best move is to add to your position in a company that's just reduced its dividend.
The question you need to ask is whether the company’s outlook has improved because of the dividend cut. If the future looks brighter, then doubling down might actually make sense.
To put it another way, don’t just look at your stocks as mere ticker symbols on a screen. You need to always think of them as ownership stakes in living, breathing businesses.
Think about how you would approach a rental property. If your rental income went down one year, would you immediately sell the property?
Possibly, if you thought the situation wouldn’t improve. But if you believed the rough patch was temporary and things were likely to get better, you would probably hold onto the property.
The same thought process should be applied to stocks. The stock market, though, has a way of overreacting, especially when a company is at risk of cutting its dividend.
My guess is that this probably has a lot to do with the liquidity of stocks. It’s much easier to buy and sell them at will than to do the same with a rental property.
Still, it’s important to take a step back and consider the long-term impact on your overall portfolio. Will the dividend cut really harm your future income stream, or could it actually set the stage for better returns down the line?
At the end of the day, every investment is a piece of a larger puzzle, and sometimes, even after a dividend cut, that piece still fits perfectly into your overall strategy.
“For me to argue against this Truth—that is, focusing all your energy on maximizing risk-adjusted total return—could get me in trouble with the authorities, so I won’t say that. What I can and will say is that very few investors actually follow the official prescription, perhaps because it is not particularly good advice. It’s a one-size-fits-all handcuff, and it rarely, if ever, comports with what people actually want in life or from their investments. All the textbooks and all the training programs aim in this direction, and I’m not saying that it is not True—particularly in a classroom setting—but like many truths that people seek, it’s a complicated, often oversimplified quest.”
All you hear is that total return is all that matters. Whether it comes from dividends or share price appreciation, total return is treated as gospel, and any other approach is heresy.
However, as the author argues, this mindset is a one-size-fits-all approach that doesn't necessarily align with what many people, especially everyday investors, truly want from their investments.
The everyday investor isn't always focused on maximizing total returns. Often, they just want to retire comfortably and have their investments cover their bills—something that can be achieved without chasing the highest possible total return.
As Russ likes to say, there's more than one way to financial heaven. Yet, for some reason, many investors, particularly those online, tend to criticize others who have different investment goals and strategies.
This is why dividend investing often gets a bad rap. It's been out of favor for the last couple of decades, leading some to quickly dismiss those who prefer a cash-based relationship with the companies they invest in.
What's interesting is that many of the investors who discredit dividend investing are newer to the market. They've only experienced a period of significant share price growth.
It will be interesting to see if their perspective changes during a prolonged sideways market, or in the face of a major bear market or recession.
“Yes, we trust management; yes, they are very good at their jobs; but no, we do not give them a blank check all the time. The dividend forces them to have to make decisions even more rigorously than they might otherwise wish to. As a minority shareholder with no direct control over the operations of the company, this is what I want, even if it comes at a cost of some missed growth opportunities.”
In essence, dividends help keep a company’s management team accountable to shareholders by reducing the funds available for reinvestment. With fewer resources at their disposal, management must be more disciplined in how they allocate the company's retained earnings.
If the company didn’t pay a dividend and kept all its earnings, there would be pressure to find ways to use that money, as shareholders expect returns on their investment. This situation can push management to take action simply for the sake of doing something, even when there might not be a good opportunity for those funds.
This pressure can lead to poor decisions, such as bad acquisitions or other ineffective uses of capital, ultimately resulting in subpar returns for shareholders.