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Are dividend-paying stocks superior to regular stocks for long-term investments?

I want to invest for my retirement 10 years away. Are dividend-paying stocks superior to regular stocks for long-term investments?

Retirement, Investing, Stocks
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March 2019

Dividend paying stocks are neither superior nor inferior for long-term investing. There are time periods when dividend paying stocks have done better and times when they have underperformed growth stocks or the market. Generally, there is the fallacy that dividends are free money (am not suggesting that you fall into this camp), by which I mean that many investors strictly buy dividend stocks to get the dividend "bonus". Dividends aren't a bonus, nor are they free money, rather a dividend is simply a transfer of wealth from the company's books to the shareholder. What does this mean? Well, when the company pays out the dividend, its book value drops by the amount of the dividend. Since the stock price will depreciate by the vaue of the dividend payout, your account balance will remain the same immediately post-dividend (except now you'll own more cash).

Going back to your question, when dividend stocks do well, it may not be because they pay dividends. It happens to be that dividend stocks are typically value stocks, rather than growth stocks. And it's been shown that over the very long term, value stocks have done better. Value is one of the identified "factors" or "dimensions" of higher expected returns. Also, dividend stocks may also sometimes be more profitable than non-dividend paying stocks. Profitability is another factor or dimension of higher expected returns. It could actually be that profitability is the underlying reason why dividend stocks do better. So, perhaps the dividend payouts aren't the direct reason at all why those stocks tend to sometimes do better.

In my opinion--backed by data, peer-reviewed research, and real-world evidence--picking sectors or stocks based on expected future outperformance is extremely difficult. No one has a crystal ball or magical powers to forecast what tomorrow will bring. Your best bet is still sticking with a globally diversified portfolio of low-management fee index funds (or etfs). Good luck.

March 2019
March 2019
March 2019