I have seen multiple questions on this site that mention how when a dividend is paid out, the price of stock drops by the same amount, which makes it so that getting the dividend does not actually amount to profit for the shareholder.

And aside from having the same net worth the day before and the day after the dividend is paid; you have to pay taxes on the dividend; as well as not having it automatically re-invested as regular stock growth would be.

Given that, why would you ever want a dividend? Certainly there's a "feeling" of getting regular income from the stock; but you couldn't get that same regular income from a non-dividend stock by selling a small portion of the stock at regular intervals? As far as I understand, the math on this should work out the same as getting a dividend in regards to how much your stock holdings are worth afterwords.

Are there any financial advantages to having a stock that pays dividends? If not, why do some companies bother doing it; and why don't people avoid the stocks that do it?


why would you ever want a dividend?

The main reason is if you want to get periodic cash from your equity position without having to sell any of it. You pay transaction costs when you sell (either direct or indirect through having to sell at the bid price), and it used to be harder to sell single shares, or even and number of shares that was not a multiple of 100. Now most brokers I believe will let you sell individual shares, but may still charge you a fee.

So yes, mathematically a 2% dividend is the same as selling 2% of your shares, but in reality the mechanics and costs involved are slightly different. I would still contend that if you don't care about getting cash periodically then dividends should be irrelevant to you. There's nothing wrong with getting dividends, so I wouldn't necessarily avoid them, but it shouldn't be a major decision point in that case.

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    The only "Wrong" thing with dividends probably worth noting is they force you to realise some of your investment as taxable income over time, which may be positive or negative depending on the situation (If you are in a low bracket realising some income over time may help lessen a large tax bill at the end when you sell), if you are in a high bracket but want to use the money in future when you will be in a lower bracket realising it all at the end is better. – Vality Nov 4 '19 at 19:45

You are correct, receiving a dividend provides zero total return and if received in a non sheltered account, you are paying taxes for the privilege of receiving some cash flow. In addition, you're paying taxes on the full amount of the dividend whereas if you sold an equal dollar amount of a non dividend paying stock for that same cash flow, you'd pay taxes on the gain (not the principal) and if LTCG, possibly at a lower tax rate.

Advantages of receiving a dividend?

  • It lowers your cost basis
  • If reinvested, it provides compounding if share price appreciates

The common rebuttal from the DGI crowd is that research indicates that the total return from dividend stocks exceeds that of non-dividend stocks. Based on that, one could conclude that one should invest only in companies that pay dividends. If that was true, then why not invest in the companies paying the highest dividend yields? Because the highest yielding companies are the dogs whose share price has been beaten down, possibly resulting in a yield that may be astronomical (and soon to be cut?). So which is it? Dividend stocks are terrific or dividend stocks are dogs?

The answer is that dividends are not causal. What you should be investing in is high quality companies that are leaders in their sector with strong and growing free cash flow, low debt, and good management. If they pay a dividend, fine. If not, no big deal. The goal is share price appreciation.

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  • "The goal is share price appreciation." That's not my goal, my goal is good ROI, if that comes via reliable profits/dividends and flat stock price, who cares? Otherwise I agree with this answer, a company that doesn't pay dividends better be putting profits to good use and growing, but a big old stable company might not have growth vectors that make as much sense as paying out dividends. Focus on the company more than whether they do/don't pay dividends. – Hart CO Nov 4 '19 at 16:27
  • @Hart CO - If you understand that the stock exchanges reduce share price by the exact amount of the dividend on the ex-div date then the problem with your reply is that a "flat stock price" requires share price appreciation. Without that recovery back to the closing price on ex-div eve, you have zero ROI. In fact, due to taxes, you'll have a negative ROI. Only share price appreciation will convert a dividend which is 'taxed as income' into actual income, aka positive total return. – Bob Baerker Nov 4 '19 at 16:38
  • @bob-baerker some time I have seen stocks returning capital as dividend, that part ( return of capital) of the dividend is not taxed – Raj Nov 4 '19 at 17:00
  • @Raj - Yes, that occurs but it's the exception rather than the rule. – Bob Baerker Nov 4 '19 at 18:22
  • @BobBaerker Of course there are periods of appreciation, but you wouldn't say your share price appreciated if after 10 years they were the same price as when you purchased them. – Hart CO Nov 4 '19 at 22:29

The macroeconomic reason is simpler than what most people realize.

Stocks in general have to pay dividend because if no stock paid dividend, what would the companies do with the money? The economy is growing perhaps by 2.5% in real terms or 4.5% in nominal terms. So, in general, you can expect a typical stock to yield 4.5% plus the average dividend yield. The 4.5% is the growth in stock value which in the very long term comes only from economic growth. The rest is dividends.

Now, if no stock paid dividend (or repurchased shares, which is equivalent to paying dividends), they would have the problem of what to do with the cash money. The retained cash money won't magically make the economy grow faster. The companies would have no useful use for the quickly growing cash, and thus, they would probably start buying other smaller companies. By buying shares of other companies, they would be effectively distributing money back to investors.

Thus, we're back to square one. The companies with accumulating cash reserves would distribute money back to investors in the form of corporate acquisitions.

It would be significantly simpler to just pay dividends and avoid the problem of what to do with the cash.

Now, a single quickly growing company can of course avoid paying dividends. Even some larger companies such as Berkshire Hathaway don't currently pay dividend. But that's the exception rather than the rule, and because of this, Berkshire Hathaway is growing faster than economy in general. Some day, even Berkshire Hathaway will have to start paying dividend or else its share of the world economy exceeds 100% (which is an impossibility, of course).

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