Summary
- In an article in the Globe & Mail, Benjamin Felix claimed focusing on dividend stocks would prevent from getting an optimal return and that index ETF investing is a lot better.
- Ben's says focusing on dividend investing leads to poor diversification. But I'm pretty convinced that among the thousand stocks paying dividends, you can build a solid portfolio covering different sectors.
- Dividend Growth investing is not perfect, it's not easy and it requires lots of commitment. But if one follows a solid investing process and pick dividend growers across various sectors, chances are he/she will outperform the market.
- This idea was discussed in more depth with members of my private investing community, Dividend Growth Rocks.
A few days ago, a reader asked me what I thought about dividend growth investing vs. ETF (index) investing. He referred to an article from the Globe & Mail written by Benjamin Felix. He claimed that dividend investing is nothing but a fairy tale. He described how focusing on dividend stocks would prevent from getting an optimal return and that index ETF investing is a lot better.
"In my opinion, investing for dividend income is one of the most romanticized ideas in personal finance." - Ben Felix
That's it! This guy is looking for a fight!
I'm sure he expected a response from dividend investors, and this is what I'll be providing today. But before I start debunking his arguments one by one, I'd like to mention that I have nothing against ETF or Index investing. In fact, I truly believe there are multiple ways for an individual investor to be successful on the market. Some do it with technical analysis, others with options. Dividend growth investing and index investing are just two more ways to make money. The problem I have with Ben's article is how he despises dividend investing with a questionable rationale.
He also published a video earlier this year on his YouTube channel restating pretty much what I found in the article:
"Dividends do not matter" -Ben's YouTube introduction
In his video, he asks investors to prove him wrong. I will use both the article and the YouTube video and answer his points one by one. I'm using Ben's article subtitles to answer them.
But first, I'm tired of people citing Buffett
Ben is no fool, he is a portfolio manager with PWL Capital in Ottawa. But I really wonder why he cites the greatest investor of all time, Warren Buffett, to prove his point. Besides looking cool, citing successful people doesn't mean much. As an example, Buffett explains why his company doesn't pay dividends (Berkshire Hathaway (BRK.A, BRK.B) 2012 letter to investors as cited by Ben). His rationale totally makes sense (he prefers to keep the money to find better alternatives like investing than giving money back to shareholders.) Now, let's look at Buffett's top holdings today:
(Source: GuruFocus)
15 of his top 20 holdings pay dividends. Interesting enough, in the same 2012 letter to investors, Buffett also mentions:
"We applaud their actions and hope they continue on their present paths. We like increased dividends, and we love repurchases at appropriate prices."
My point on Buffett? He's richer than all of us combined together. But that doesn't mean he is not human and does not make mistakes. Everything he says is not directly coming from God and should not necessarily followed to the point (after all, my returns would have been pretty bad if I had invested in Kraft Heinz (KHC) and IBM in the past few years!)
Dividend investing leads to poor diversification
Ben's first point is that focusing on dividend investing leads to poor diversification. He argues that 35-40% (video) of stocks don't pay dividends. By ignoring such large amount of stocks, your portfolio will suffer from poor diversification.
This sounds like a very poor argument. In fact, I'm pretty convinced that among the thousand stocks paying dividends, you can build a solid portfolio covering different sectors. Oh wait, let's take a look at my portfolio, shouldn't we?
... Read the full post on Seeking Alpha
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