This came up in the M1 Finance Sub, but I will share here.
People who say that Dividends are just a forced sale are flat out wrong. They will point to the fact that the stock price often drops on the dividend ex-date, but ignore the fact that it almost never drops by the exact amount of the dividend, and sometimes even goes up. If it's a "forced sale" that shouldn't happen.
But they are stubborn and refuse to consider that. So here's some more obvious evidence.
Scenario 1:
- I borrow $5,000 from my M1 account at 2% interest, and I buy a stock that pays a 3%+ dividend over time.
- I use the dividend to pay off the loan.
- After some time, the loan is completely paid off, and I now own those shares free and clear. They paid for themselves.
In this way, Dividend stocks have a few similarities to real estate in that you can buy the asset with borrowed money, and use it to pay for itself.
If Dividends were just a "forced sale" then as I pay off the loan, the value of my portfolio should decline to zero. Because otherwise "its just inventing money out of nowhere."
"But, that's just market returns! I can do that with growth stocks that don't pay dividends, just by selling some!" No, you can't. At least, not always. Dividend stocks you can, growth stocks you can't.
Scenario 2:
- I borrow $5,000 from my M1 account at 2% interest. I buy growth stocks that don't pay a dividend.
- Market declines 10%
- I now have liabilities of $5,000 + interest, and assets worth $4,500.
- I can't even repay my loan by selling. Let alone make money. I have to pray the market turns around and my hot new tech stock works out and doesn't fall on its face.
Scenario 3:
- I borrow $5,000 from my M1 account at 2% interest. I buy dividend stocks that pay a 3%+ dividend
- Market declines 10%
- I use the dividend to pay off the loan
- I still have my portfolio of $4,500 worth of stock that I bought with somebody else's money.
I'm not saying growth stocks are bad. Growth stocks are good. I own a lot of them.
But the idea that "dividends are just a forced sale" is wrong.
When you buy a business, you are buying a value producing asset. Dividends are capitalizing on that value.
To return to the Real Estate comparison. Not exact, obviously, but illustrative to clarify
- Dividend stocks are rental properties (that you don't have to maintain). You buy the asset, and it produces income for you for as long as you own it. It will likely pay for itself over time.
- People who buy Growth stocks are "House flippers". They don't take any of the income the property could produce by renting it. Instead they fix it up, and hope to sell it to somebody at a higher price. If you pick the right house in the right neighborhood, this works if the market is going up. You can get burned if the market is going down.
Both are valid ways of making money. Both produce value.
But to say "Dividends are just a forced sale" indicates somebody who doesn't understand how dividends work.
Submitted October 28, 2021 at 11:27AM by TheDreadnought75 https://ift.tt/2XTev0y
