It was nice to see a prominent dividend investor in Canada’s national newspaper ‘come clean’ about dividends. John Heinzl has a dividend portfolio that he tracks for readers of the Globe & Mail where I am a subscriber. I’ve dropped the truth about dividends (bombs for dividend devotees) in the investing comment sections a dozen times or so over the last few months. Maybe this was a response or recognition, don’t know. All said, glad to see John educate readers on the fact that ‘dividends, don’t actually create wealth. Rather, they simply transfer cash from a company’s balance sheet to the investor’s account.’ Dividends don’t create wealth, so there’s no dividend snowball. In fact, dividends are of no special use in retirement either – a fact that many will find counterintuitive.
I’ll offer the full quote from the Globe & Mail piece (sub required) …
The powerful benefit of dividends that no one talks about.
Dividend Confessions
Yes, an article that offers Confession about dividends and wealth creation starts with a benefit. This is still Canada after all 😉 Here’s the quote …
But some criticisms of dividends are also valid. For example, it’s true that dividends, per se, don’t actually create wealth. Rather, they simply transfer cash from a company’s balance sheet to the investor’s account. All else being equal, when a $1 dividend is paid, the stock price should fall by $1, so the investor is no further ahead. The drop in the stock price rarely matches the dividend exactly, because myriad other forces also affect stock prices.
So, if receiving a dividend doesn’t actually make you richer, what is the point? I would argue that a dividend makes you feel richer, which is what matters from a behavioural standpoint.
Well it’s not ‘per se’. There is no out. Dividends don’t contribute to wealth creation.
$50 – $1 = $49
In the above, the $1 represents the dividend, $49 is the new stock price on ex dividend day, before the ongoing pricing in the open market.
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A single dividend event can’t create wealth, so obviously multiple and ongoing dividends can’t create wealth. There is no ‘dividend snowball’ by way of dividend reinvestment. You’re using the dollar to buy stock at $49 – your new name on investment boards is ‘Even Stephen’.
You can’t handle the truth
I offered this comment on the Globe piece.
The first reply to my comment, and on the truth that Mr. Heinzl presented …
Nonsense
Diehard dividend investors still think that …
$50 – $1 = $50
In fact that is the prevailing opinion in the comment section. It’s a great article recognizing the power of dividends. The greater mathematical truth is ignored, or dismissed.
Doubling down on dividends
It’s too late of course, for most. Canadian Malcolm Gladwell, author of Outliers and a super-smart observer of human behaviour offers that …
When someone has a long-held and deeply held conviction, when presented with the simple truth, they don’t embrace the new reality – they double down on the falsehood.
Sorry, I had to paraphrase. That’s courtesy of Malcolm and The Bomber Mafia that I read recently.
Dividends are a divining rod
Dividends can be a divining rod that help you find certain kinds of companies. For starters they find profitability and at times (of high dividend) the big dividends can find value.
The Beat The TSX Portfolio is a good example of that.
But mostly the dividends will fish among a few sectors. Beat The TSX holds blue chip financials and utilities (including telco and pipelines). Those are sectors that have outperformed over the last 3 decades. Occasionally, an oil and gas stock or consumer stock will sneak in at a time when value is present.
Norm Rothery (also in the Globe) shows that the big dividend approach found the second best performing style over the last few decades, for Canadian stocks.
I’m a big fan of the low volatility approach. Greater returns, less risk? What’s not to like, especially for retirees. You can consider the BMO Low Volatility ETF – ZLB-T.
Or just buy enough of the individual stocks in the index / ETF. And ya, the high dividend stuff works too.
Dividend growth
The dividend growth divining rod can work as well. A meaningful dividend growth record (10 year, 15 years, 25 years for instance) can help find strong and durable business models – the Quality factor. The Dividend Aristocrats in Canada appear to have offered no benefit. The Dividend Aristocrats in the U.S. offered outperformance moving through the dot com crash, side-stepping the extrement over-valuation issue.
Divdend growth is best used with other factors, such as financial health screens or pure Quality screens.
Dividends and behaviour
I like the friendly hug and reminder offered from a dividend. They’re telling us that business is good and the company or companies in the ETF are ‘doing good’. They’re making money and throwing some your way. I like them, even though I know they are not contributing to wealth creation, or providing any benefit in retirement funding.
And on this blog I have certainly mentioned the emotional and behavioural benefit of dividends. Just add that to an awareness of how to maximize performance. Separate the emotion and the math. Quite simply, you can do a lot better in the accumulation stage and in retirement when you recognize what is a dividend.
Dividends in retirement
And keep in mind that there’s nothing special about a dividend in retirement. It doesn’t matter if you create a homemade dividend (share sale) or if the company removes the value for you by way of a dividend payment. I did a series on dividends for Seeking Alpha, here was a retirement example. I tested BlackRock (BLK) vs the S&P 500 (IVV) in a retirement funding scenario. BlackRock has a stellar dividend record. No cuts, and a wonderful dividend growth rate. The S&P 500 offered dividend cuts, and a much lower yield. The total returns were near identical. But IVV came out ahead on delivering income.
BlackRock had greater volatility and greater draw down. The stellar dividend record offered no support. Retirement portfolio success comes down to total return and risk level. Given that the dividends are ‘irrelevant’ you can move on to building the superior high quality portfolio, while ignoring the dividends.
Here’s another example I provided. High dividend VYM mixed with growth to deliver identical total returns vs low dividend VIG.
The retirment funding scenario …
At Retirement Club, we learn how to build a better portfolio and create a more optimal retirement cash flow plan, by way of retirement cash flow calculators. Self directed investors / retirees can make sure they’re doing it right. We ignore the dividends, some will consider any tax benefit for Canadian dividends (in modest fashion) when applicable.
But any tax benefit will not trump risk management and sensible asset allocation.
Reach out, if you’d like more info on Retirement Club for Canadians.
The Sunday Reads
At Dividend Hawk’s portfolio week in review, TD Bank reports …
The Toronto-Dominion Bank (TD) Reports Second Quarter 2025 Results; TD reported second-quarter non-GAAP EPS of C$1.97, down 3.4% year-over-year but exceeding analyst expectations by C$0.19. Revenue rose 9.6% to C$15.14 billion, surpassing estimates by C$1.69 billion. The bank’s Common Equity Tier 1 (CET1) capital ratio improved significantly, reaching 14.9% at the end of the quarter, up from 13.1% in the previous quarter. Provisions for credit losses (PCL) totaled C$1.34 billion, an increase of C$129 million from the prior quarter and C$270 million higher than the same period last year.
It was a solid report, and the stock was up 2.55% for the week. It will be interesting to watch the rest of the Canadian banks report this coming week.
As I offered last week – Canadian stocks moved to an all-time high and it was the financials doing the heavy lifting.
How to invest in the Canadian banks.
At Findependence Hub are Canadians hanging on to their Florida properties?
At Banker on Wheels, they feel it’s the end of bitcoin. That said Bitcoin recently moved to all-time highs. It appears to be acting like digital gold, responding to fears of fiscal issues with the rising U.S. debt and deficits. Of course, governments debts are out of control throughout the developed world. I think I’ll hold, and add 😉
I’m happy to be at a 3% weighting in my RRSP and a near 25% weighting in the TFSA.
Banker also steers us toward – You can’t put a price on mental freedom. For Nick at Dollars & Data, part of the freedom was a move away from individual stock selection. And you’ll find a video looking at the risks of an early retirement.
Here’s Part 3 of Bob at Tawcan’s trip to Taiwan.
This week, I applied to manage our CPP investments, wish me luck 😉
Isabelnet offers a very interesting chart on valuations for U.S. sectors …
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Dividends might not create wealth, but they may provide an effective decumulation strategy for retirees in that they take the “what to sell and when” decisions away. Perhaps not suitable for everyone, but it seems a reasonable option.
Hi Steve, it can ‘work’ but it won’t be optimal. It will fall down in many areas. You’re letting the dividends decide your spend rate and risk level if you’ve designed your portfolio with the dividend stream in mind.
You can’t use an optimal retirement cash flow plan (software). That would require various spend rates and spend rates that will evolve through the entire retirement stage. Meaning you’d be very inefficient ‘living off of the dividends’. Create less income with more taxation. Likely with greater risk.
Also your asset allocation and risk level would drift over time, decided by dividends. As an example a higher yield would see lesser price gains while providing more income. While a growthier stock such as Apple provide less income but would grow to a larger portion of your portfolio – the tree is not being trimmed.
It’s not a very strong idea to live off of the dividends.
You can do much, much better with a financial plan and using share sales in the mix with dividends and other income.
Feel free to reach out.
Well Dale, I have created wealth through dividends. We bought our 2 kids shares of TD years ago before the stock split. Both bought 100 shares at $25.67 each, for roughly $2,600. The shares were under a lot of pressure then. The 1st 5 years they received the dividend, (it started at $112 a quarter. This was to show them that they could get paid for investing in a company that pays dividends. Then we in rolled them into a Drip. Also the stock had a 2 for 1 split. Today they have 361 shares each. At today’s price $92.91, they are worth $33,540.51. And they are receiving $1,516.20 a year in dividends that are being reinvested. Compound interest is doing its magic. They can also draw the dividends if needed to pay expenses. I don’t think it matters if you reinvest or draw for income. It’s all money and money is a form of wealth.
Hi Pete, thanks for sharing. Investing with kids can be a wonderful learning experience, and dividends in the mix can help as well. It sends a good signal and they can watch the growth of the value and the dividends. That said to complete the education you can also show them what a dividend is. It’s a removal of value, there is no compounding or wealth creation. Remember with reinvestment they are buying shares at lower prices, they’re all square Young folks should be made aware of total return. Their goal should be to make the most money. While a nice lesson, the dividends will be irrelevant in that wealth building journey.
Dale, here’s another angle. Wealth creation depends on a number of other inputs, at times unknown regardless of good strategy. Your health, your frugality, unexpected expenses etc. Do you walk many kms a day (as I do) or will you buy a gym membership. Do you eat out often or do you enjoy your own cooking? Will you bother to check a food app daily ( I use Flashfood for Superstore) to get those discounted (by 50%) food items? A family can save hugely! Will you buy a new car or a used one in sound condition and low mileage? Are you in debt? What kind of credit card do you use? We’re presently in Budapest and using the Scotiabank Passport Visa Infinite Card which has zero foreign transaction fees, 6 free airport lounge visits a year and a 1-2% cashback. The card is free for us with my particular bank account. They gave us $300 in goodies when we got it. One could say in a cheeky way they’re paying us to use it – we pay off the balance every month. Ah yes those magic words “wealth creation”
To stir the pot a little more wealth creation also depends on timing. 2009 was fortuitous as I received a lump sum which I promptly pumped into the stock market right around the March lows. It wasn’t genius but I “prayed” with a stiff drink it would be a good idea to megabuy BMO when almost everyone and their granny were screaming “dividend cut coming!” … and it worked out well. Since then I’ve lived off tax efficient dividend growth for many many years and the overall income has tripled. John Heinzl’s “feel good” sentiment resonates well for me even if I missed Amazon.
In addition and as a matter of design we now own two dividend growth stocks in our TFSAs – Enbridge and BNS. There were others in the past, some good, some bad, some VERY bad but … somehow we’ve accumulated a combined $560,000 which according to a Rob Carrick article in the Globe on October 24th is better than 99.8% of Canadians. Thru all the ebbs and flows and if we need the tax free income it’s presently at $33,500. I’m a little astonished by the result but reinvesting those dividends really were the key to wealth creation.
Well that’s our story.
Hi Barry, thanks for your comment. We have a life plan section in our Retirement Club online community space. We certainly share on health and well-being and making sure you have a rich life plan filled with lots of friendship and purpose.
So nice to hear about your trip, and I’ll look into that card. I’ll likely add that to the travel section in Retirement Club – that space will be kicked off this week.
And glad you invested when you had the money, that’s what the studies say to do. We can’t market time.
Also glad you have the results you needed to reach your goal (by the sound of things). But again remember the reinvestment of dividends created no wealth. You were paid dividends, the share price dropped by equal, you bought shares at the lower prices. You’re all even.
Your portfolio wealth value is represented by the share price and number of shares.
Thanks again for sharing, Dale
Yes … I agree about the math.
I get the math calculation but when you sell your growth stock to get a homemade dividend you no longer have that stock. Once it’s sold it’s not going to deliver you anything in the future. I like that a dividend stock will pay out an amount each year and because I didn’t sell it then it will repeat again every year that I hold it. There will be an income stream that I wouldn’t get the benefit of if I sold it off, which I think is a major benefit in retirement.
Hi Jim, the dividend provides absolutely no additional protection from sequence risk. I provided a couple of chart examples in the post. You can run comparisons forever and you’ll come to the same truth/conclusion.
A dividend removes value from the company or holding. It does not matter if the company (managmement) removes the value (dividend) or you remove the value by way of a homemade dividend. A $1 billion company removes $50 milllion. It doesn’t matter if they do it, or you.
Usually, we will be collecting dividends and harvesting shares. That is the optimal arrangement – all within a greater financial plan.
Feel free to reach out again.
Dale
Hi Dale,
I get that the dividend comes at a cost of a drop in share value. To my way of thinking in year one that would be a wash, It’s in subsequent years where I see an advantage. Let’s say I have 100 shares of a growth stock and a 100 shares of a dividend stock. When I sell the growth shares I get a one-time infusion to my cash account if my shares have appreciated. When I realize a dividend payout I get a cash infusion upon each payout which could continue for years down the road. Without giving up my 100 dividend shares I’m continuing to benefit from them for as long as I hold them with the caveat that the dividend doesn’t get cut. I’m also simplifying the example by assuming prices only go up over time.
It’s like holding onto the goose that lays the golden egg instead of getting rid of it. Every year there are more golden eggs. What am I missing if you don’t agree?
Hi Jim when you are paid a dividend there is certainly a drop in value in your holding. The share price drops by equal. If you have a $100 stock that pays a $2 dividend, the share price drops to $98, and then experiences ongoing pricing.
There is nothing to agree on, as it’s not an opinion. Investors understand it, or they don’t. 🙂
So there is no relevant goose theory or ‘killing the cow’ theory. 🙂
There’s no value in retirement as well. See my example in this post using BlackRock.
https://cutthecrapinvesting.com/2022/09/17/living-off-of-the-dividends-you-gotta-sell-shares-to-not-sell-yourself-short/
Dale
Hi Dale, I am relatively new to dividend investing and I am on the fence on this topic. So if a company chooses to not offer a dividend, then that money is presumably used by the company for some purpose. Is it save to assume that it would be used to reinvest in the company to facilitate growth? If so, then there is the chance that the choices that are made do not result in growth – maybe there is no growth or even a loss as a result. It’s possible that there is no upside for the investors, particularly retirees with a shorter investment timeline. But if there is a dividend, you definitely see a benefit as the money is now under your control and you can use it as income or to reinvest through a DRIP. I’d love to hear your thoughts on this.
Hi Dennis, sorry for the delay in approving your first comment. Moving forward all of your comments will post immediately. 🙂
With free cash flow the company can pay a dividend, buy back shares, reduce debt, invest in company growth.
Here’s a breakdown of how a company can use its free cash flow:
Paying Dividends:
Companies can use FCF to distribute profits to shareholders in the form of dividends, which are payments made regularly to shareholders.
Share Buybacks:
Companies can repurchase their own shares in the open market, reducing the number of outstanding shares and potentially increasing the value of the remaining shares. Share buybacks increase your ownership of the profits.
Debt Reduction:
FCF can be used to repay outstanding debts, freeing up capital and potentially reducing future interest payments.
Investing in Growth:
Companies can reinvest FCF into new projects, acquisitions, or research and development to expand their business and increase profitability.
If you’re looking for greater total returns – the buyback index outperforms. We also know the growth indices outperform the broad market – those are companies that are typically reinvesting heavily in their own businesses and buying other businesses.
All said, companies that pay dividends and buy back shares are a great way to generate wonderful returns. That’s the shareholder yield, they’re returning value to shareholders in two ways.
There’s nothing wrong with a dividend except when it’s a tax drag. But we should remember they do not create wealth. They are simply a removal of value from a holding 🙂
Dale
Hi Dale,
Just wanted to pop in and say that you’re doing good work with this website. Have I ever seen your comments on the Millennial Revolution blog by any chance?
I know that blog and story, I have dropped by again to check things out. FIRE is an interesting space.