Why Dividends Are Trash

A high dividend may make a stock seem like a golden buying opportunity but it's still trash.

The sad thruth about dividends is:

  1. You're actually losing money by focusing your investment strategy on stocks that pay dividends.
  2. The higher the dividend yield the more money you're losing.

I'm sure you have already heard why taxes are eating up your dividends. While that's true you do have to pay a similar tax when you sell stocks to take profits, so that's not really a problem.

By focusing your portfolio on high dividend paying sticks you're literally missing out on building a fortune. The chart below shows how your money would have grown over the last five years in you invested it in the top ten holdings of the Fidelity Equity Dividend Income Fund (FEQTX). These ten stocks make up more than 25% of the portfolio and are among the most popular with investors chasing dividend income.

Tip: Click the chart to view it full size.

The stocks and their returns over the last five years are:

  • Chevron (-1.61%)
  • Wells Fargo (-10.22%)
  • Verizon (16.65%)
  • United Technologies (7.81%)
  • Comcast (62.11%)
  • British American Tobacco (-40.13%)
  • Bank Of America (85.2%)
  • Johnson & Johnson (38.07%)
  • Chubb (16.65%)
  • General Dynamics (44.98%)

To make matters worse, the red line with the dot in the chart, that's the S&P 500, which earned 50.12% over the same five years while paying out a dividend of roughly 2% along the way. Eight of the ten stops picked by professional dividend stock pickers couldn't even outperform the S&P 500!

But wait! It gets worse!

The stock with the most capital appreciation in my example was Comcast, which returned you 62.11% over the last 5 years. It's given you about a 2% dividend yield every year and if you've been holding it for the last five years that yield is even higher. Not too bad right?

So lets compare that return to the top ten holdings in my favorite growth fund, the Fool 100. The red line near the bottom, with the black dot, that's Comcast.

Things suddenly aren't looking so good for dividend investors are they? Their total returns are absolutely getting crushed by growth investors, and it's not even close.

Here are the top 10 holdings in the Fool 100 and their returns in the same time period.

  • Microsoft (223%)
  • Amazon (482%)
  • Apple (120%)
  • Alphabet (89%)
  • Berkshire Hathaway (64%)
  • Facebook (182%)
  • Visa (228%)
  • Johnson & Johnson (33%)
  • Mastercard (258%)
  • UnitedHealth Group (197%)

Honestly, how hard would it have been to pick at least five of those on your own? Was anyone not buying Facebook, Apple, Alphabet, and Amazon? Nearly every institutional growth investor in the world was putting them in their mutual funds. They were such popular buys that they made up 4 out of the 5 FAANG stocks. If you've been following the market at all for the last five years there's no way you could have missed them, and if you had bought them you'd be a much richer man today than if you had been collecting stocks for the dividens.

Stop the dividend madness! You're losing money every time you buy and hold a dividend stock instead of a growth stock.

Updated Jun 13, 2019 by Scott