It's generally accepted that "income (dividends) and growth (capital gains) are perfect substitutes (tax and transaction costs aside)". i.e. "In financial theory, there is no reason for a difference in investor return to exist between dividend paying and non-dividend paying stocks, except for tax consequences."

How well does this hold up in market downturns and/or high volatility? A friend makes the point that you'd rather receive a $100 dividend than sell $100 worth of a security at a potentially low price due to transient market conditions. I can understand this for weakly-traded securities. To what extent does this affect my holdings of index funds tracking well-traded securities (FTSE Global All Cap Index and Bloomberg Barclays Global Aggregate Float Adjusted and Scaled Index)? Should I divesify to hold some "high-income" securities such that during downturns I have some income without needing to sell securities at potentially bad prices?

  • In the current downturn, you 'll see quite a few companies cut dividend. Royal Dutch Shell for instance lowered its dividend for the first time in decades. Some even decided to pay no dividend altogether. So the assumption that you can just buy "high-income" securities is already flawed.
    – MSalters
    Commented May 14, 2020 at 10:22

2 Answers 2


I would argue that there's no difference even in transient low times. The dividend drops the value of the stock equivalently, so there's no difference from a wealth standpoint.

Say you own 100 shares a stock that has a "natural" value of $100 for a total value of $10,000.

Then a pandemic occurs, and it drops in half to $50 for a total value of $5,000. Would you rather that the company pay a $10 dividend so you have $1,000 cash and $4,000 of stock (100 shares worth $40/share) or sell 20 shares for $1,000 cash and $4,000 of stock (80 shares worth $50/share)?

In either case, you have the same amount of cash and stock - whatever relative growth the stock has from there affects you equally either way.

  • Dividends received lower cost basis. I'd offer the possibility that the receiver of the dividend comes out ahead of the non dividend person after price crash. To simplify the math, assume dividend paid annually. Receiver has $1,000 in hand and 100 shares worth $90. Pandemic hits and 50% share price loss results in $45 stock ($1,000 in hand + $4,500 position value for total of $5,500). Non dividend position loses 1/2 its value, now worth $5,000. Commented May 13, 2020 at 14:28
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    @BobBaerker Wouldn't that be equivalent to selling 1k worth of shares, holding 9k, pandemic hits, and you still have 1k in hand + 4.5k in stock?
    – Cowthulhu
    Commented May 13, 2020 at 19:05
  • 1
    @Cowthulhu - LOL. You're right. I got sidetracked thinking about a dividend stock w/o reinvestment compared to a non dividend stock. I lost track of the thesis of the OP's question. Commented May 13, 2020 at 19:13

Remember the back-half of that financial rule - in financial theory, tax consequences aside, you can simply use dividends received to purchase back more stock. Therefore in either case, you have the ability to decide - do you want cash, or do you want to hold more equity?

Receiving the dividend means the value of your shares goes down [because the corporation has less cash and therefore less value], in theoretically the same amount as if you had sold that portion of your holdings.

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