June 12, 2025 • 32 mins
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Dividend investing is one of the most passionately followed strategies online - yet much of the enthusiasm is driven by misunderstandings of how dividends work.
In this episode, Evon Mendrin, CFP®, CSLP® of Optometry Wealth Advisors, dives deep into how dividends actually work, why they aren’t “free money,” and what ODs need to understand before chasing high-dividend stocks or funds - especially in taxable accounts. He also explores when, despite all of this, a dividend-focused approach might still be rational for the right investor.
In this episode, you’ll learn:
- What dividends actually are and how they function within public companies and your own optometry practice.
- Why dividends aren’t “extra” return, and how stock prices adjust for them.
- The real-world tax consequences of dividends - especially in taxable brokerage accounts.
- Why fewer companies pay dividends today, and how stock buybacks often take their place.
- How dividend investing can actually reduce diversification and tilt your portfolio away from global opportunities.
- What explains the performance of dividend-heavy portfolios (spoiler: it’s not the dividends).
- Why “I need X in dividends to retire” is a myth, and how to think about withdrawals and cash flow instead.
- When a dividend strategy can make sense - despite being suboptimal on paper.
Resources mentioned:
- Dimensional’s Research on Dividend Price Adjustments
- Meb Faber’s “Shareholder Yield” Book
- Ben Felix Video on Dividend Investing
Related Episodes:
- Ep 135: Beyond Indexing – An Optometrist’s Guide to Factor-Based Investing
- Ep 134: The Case for Index Funds – Why Optometrists Should Embrace Passive Investing
Stay Connected:
- Click here to Subscribe to the Eyes On The Money Newsletter for weekly financial insights tailored specifically to optometrists.
- Have Questions? CLICK HERE to schedule a short introductory call
The Optometry Money Podcast is dedicated to helping optometrists make better decisions around their money, careers, and practices. The show is hosted by Evon Mendrin, CFP®, CSLP®, owner of Optometry Wealth Advisors, a financial planning firm just for optometrists nationwide.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Evon (00:04):
Hey everybody.
Welcome back to The OptometryMoney Podcast.
We're helping ODs all over thecountry make better and better
decisions around their money,their careers, and their
practices.
I am your host, Evon Mendrin,Certified Financial Planner(TM)
practitioner.
And owner of Optometry WealthAdvisors, an independent
financial planning firm just foroptometrists nationwide.
(00:25):
And thank you so much forlistening.
I really appreciate your timeand your attention.
And onto today's episode, we aregonna dive into dividend
investing.
we're gonna dive into trying todemystify dividend investing and
tackle some of the, what I thinkare myths or misconceptions
around dividend investing andthere are a lot of approaches to
(00:45):
investing out there.
Few of them attract so manyextremely dedicated followers,
quite like dividend investing.
You don't have to search theinternet and social media for
very long to find bloggers andprofiles and, and, content
creators that have dedicatedtheir, literally their whole
identity.
(01:05):
To dividend investing or incomeinvesting in general.
This sort of this broadoverarching theme of, of income
investing, investing only forand for the sole purpose of the
cashflow, the income that'sgenerated.
also see opinions aroundretirement planning that when
planning for retirement you needto have X amount of dividends
(01:26):
from your investments in orderto retire before that you're not
quite ready.
And there are a lot of opinionsout there that can easily impact
your thinking and planningaround retirement and sometimes
the stress around retirement.
And as I look at these commentsand opinions and arguments
around dividend investing, theretends to be a misunderstanding
(01:46):
of what dividends are.
How they work and how theyimpact the price of these
businesses.
So today I'm gonna dive into howdividends work.
We're gonna tackle some mythsand misconceptions, and
ultimately talk about whydividend strategies may not be
the holy grail they are made outto be.
So with that in mind, let's divein.
(02:08):
So to start, let's talk aboutwhat are dividends?
How do they work?
a dividend is a cash payment.
It's a distribution of cash madeby a company to shareholders,
usually from profits.
So companies are distributingout profits to the owners and
companies like publicly tradedstocks, pay dividends, often,
(02:29):
quarterly or annually as a wayto return capital to
shareholders.
Think about an Optometrypractice.
If you own an Optometry practiceas the owner of the practice.
An important role that you haveis making decisions around cash
flow as revenues coming in, ascost of goods and operating
expenses are, are tackled, andyou have additional cash flow
(02:51):
left over after making debtpayments.
What do you do with thatadditional cash?
These are really importantfunctions of the owners, is, is
making decisions around what todo with cash flow.
And in your practice there'sreally only four decisions to
make.
There's investing, number one,investing back into the
operations of your practice.
So new equipment and technology,building out new lanes, hiring,
(03:13):
marketing.
Better frame board management orinventory management, et cetera.
So number one, investing backinto the current operations of
the practice.
Number two, expanding by buyingother practices or cold starting
new locations.
number three, paying down debt.
Or number four, distributingcash out to you, the owner,
(03:34):
which that, that distribution isthe equivalent of a dividend in
a corporation.
And depending on the needs andgoals of your practice and the
personal finance goals of youand your family, you're gonna
spend some time each yeardeciding how to use the precious
cash flow your practicegenerates.
This is what are the most commonquestions that I help practice
(03:55):
owners solve is figuring out,okay, what, what cash flow is
really available in thepractice, and what should we do
with it?
Well, the CEO of a publiccorporation is doing the same
thing just on a much largerscale.
So one of the most importantjobs of A CEO is deciding how to
put cash to use and a CEO canmake the same exact decisions,
(04:17):
with one additional one.
So they're going to invest intheir operations.
They're going to acquire otherbusinesses, they're gonna pay
down debt, they're gonna pay adividend to shareholders.
Or they're going to repurchasestock.
Stock buybacks.
The first of those two Investingin operations, Acquiring other
businesses are ways to use cashflow to reinvest internally and
(04:42):
improve the value of the shares,increase the value of the shares
over time.
The last three ways are ways todistribute value back to
shareholders.
Back to owners paying down debt.
You're probably wondering howdoes that.
Bring value back toshareholders.
Well, when you pay down debt,you are increasing owner's
equity.
(05:02):
so you're increasing the equityof shareholders.
That's the claim that you as theowner have on the assets and the
cash in the business.
And so, and the same thinghappens on your practice as
balance sheet.
When you decide to pay down debtin the practice, your owner's
equity is increasing.
dividends give cash directlyback to shareholders, back to
owners, and stock buybacks.
(05:23):
Give cash directly back toowners that want to sell.
And for ongoing shareholders,there are less shares
outstanding.
And with a similar marketvaluation, your price per share
is increasing.
It's effectively mathematicallythe same outcome as the
dividend.
some think of share buybacks as,as net share buybacks as a sort
(05:45):
of.
More tax efficient dividend or aflexible dividend.
And why do companies paydividends and distribute cash to
shareholders?
Well, again, think about yourown practice.
When deciding whether todistribute cash to yourself,
you're probably thinkingthrough, okay, are there
investment opportunities in thebusiness that are going to
generate a strong, reasonablerate of return?
(06:07):
If not, you're thinking aboutwhether you should be paying
down debt and making sure you'resetting, setting aside enough
for, for quarterly tax payments,there's a reasonable cash buffer
and if all of those things aremet, then you can distribute
cash to yourself and use it moreeffectively outside of the
business, reinvesting intoinvestment accounts and
retirement accounts, or realestate or whatever it may be.
(06:28):
There's only so much equipmentyou can buy and you may be
working with a certain amount ofsquare feet, where at some point
buying stuff in the business.
just doesn't provide the bestreturn on the asset.
And in the same way,corporations may not feel when
they're looking at their ownbusiness, they may not feel
there's reinvestmentopportunities in the business
(06:49):
that can provide value above andbeyond what maybe the general
stock market may provide.
maybe they have such strong cashflow that they just don't have
enough reinvestmentopportunities in the business.
And so they distribute profit toowners so the owners can make
their own investment decisions.
and on the other hand of that,there's corporations that may
(07:10):
feel like they can make betteruse of that cash internally, and
so they'll retain the cash andthey will not pay out dividends.
Berkshire Hathaway is a reallygreat example of this.
It's a long standing historicalcompany, and as Warren Buffet is
written about they believe theycan invest the cash more
effectively than shareholders,and so they retain it and
reinvest it internally.
(07:30):
it may also be a signal toinvestors about future
profitability.
So they may be doing this as anincentive, as a signal for
investors so they would buytheir stock.
So maybe there's a behavioralpart of that too, a signal.
not all companies pay dividends.
It's, as I mentioned earlier,globally, when you look at, when
you look at the global stockmarket.
Combined, roughly half of stockspay dividends last, last data I
(07:53):
saw and roughly half does not.
And over the decades, the numberof corporations paying dividends
has declined as well as thepercentage of their earnings
that are being paid out.
especially in the US since themid eighties or so, as stock
buybacks were made Much easierfrom a regulatory perspective.
(08:14):
And just like your practice,your practice generates cash
flow for you to use.
But it's also an asset on yourbalance sheet.
It has a value.
And returns from owning apublicly traded stock any
business come in two forms.
It's capital gain, which is theincrease in the price over time
and distribution of cash to theshareholders, often in the form
(08:36):
of dividends.
And so dividends are a part of acomponent of total return.
an important part, Mel Faber inhis book, Shareholder Yield
writes that when looking at theUS stock market from 1871 to
2023, US stocks would'verealized a 9.16% compound annual
(08:58):
return, average annual return.
When you exclude the dividendsso you don't reinvest the
dividends back into the market,and you only look at the price
change of the, of the, of the USstock market if you exclude
dividends, it would've reducedthe annual compound return to
4.67%, roughly cutting that inhalf.
Importantly, it's not thedividends themselves.
(09:21):
Capital gains tend to providemost of the return on just like
a year to year basis.
If you look at the components ofreturn, it's the, it's really
the fact that you're takingthose dividends and reinvesting
them back into the market,buying more shares, and those
shares then increase in priceover time, and those shares also
distribute dividends, and youjust keep that cycle going.
(09:43):
It's really an example ofcompounding growth.
If you don't re and if you don'treinvest the dividends, if you
just take the dividends,dividends as cash and let'em sit
as cash, or if you take it forspending, you've historically,
severely impacted your returnsover time relative to the broad
market.
And importantly, if, and this ishard to wrap your brain around,
(10:04):
but if, if the companies did notpay dividends The entire return
would just be reflected in theprice change over time.
We would not expect the lack ofdividend to impact the return
that you get as an investor.
The dividend may, the dividendjust changes the way that return
shows up as those corporationswould instead reinvest those
dollars back in the back in thebusiness.
(10:26):
So dividends themselves don'tnecessarily determine the
overall return of owning thebusiness.
It's ultimately the earnings andcash flow that drive the return
over time and how that cash flowis used.
And in terms of the timing ofdividends, so a corporate board
is going to, announce thedividend.
this may be paid out quarterly,for example, and then there's
(10:46):
going to be a dividend date.
This is the dates that theactual dividend is paid out to
those that are on record.
but before that dividend date,just before that is something
called the ex-dividend date, andthat is the date that the stock
trades without a right to thedividend, meaning if you buy the
stock on that day, you would notactually get the dividend.
(11:08):
You don't have a right to thatdividend, or you would've only
gotten it if you purchased itthe day before.
So there's sort of this orderthis, so there's this schedule
of how these things work out.
And it's the same thing actuallywith mutual funds and ETFs.
If you look at mutual funds andETFs that you have, those mutual
funds and ETFs are going to havean ex-dividend date, the date
that they trade without thedividend, and they're going to
(11:30):
have a dividend date, which isthe date the actual dividends
paid out.
And the first sort ofmisconception I want to talk
about here is that dividends areoften thought of as free money
or extra return from stocks.
There's sort of a celebrationsometimes when dividends hit
that brokerage account.
But this way of thinking is a,is a fundamental
(11:52):
misunderstanding of howdividends work.
because when a dividend, when acompany pays out a dividend.
Its stock price drops by thatamount on the ex-dividend date,
meaning that date, that when youbuy it, you no longer have a
right to the dividend.
You're not gonna be receivingit.
The stock price adjusts downwardto account for that dividend.
(12:13):
So, as an example, let's say youowned one share of stock that's
worth a hundred dollars.
Your total Wealth here is ahundred dollars, right?
It's just, it's all in stock.
If the stock that you own isgoing to pay a dividend of$10 on
the X dividend date, your stockprice will drop by that$10
(12:34):
amount and it'll be worth$90.
So what you have in yourbrokerage account is$90 worth of
stock and$10 of cash from thedividend.
And when you add those twotogether.
It's a hundred dollars.
You have the same amount ofoverall Wealth.
You've just changed thecomposition of it from all stock
(12:55):
to, to mostly stock and somecash.
And if you're in a taxablebrokerage account, this is
important because thosedividends are taxable income and
you're potentially left with alower amount of Wealth after
that tax is accounted for.
That's theoretically what wewould expect to happen, and this
is what we see empirically.
(13:15):
So this isn't just theoretical.
This is what we see empiricallythat happens on ex-dividend
dates, that the stock pricedeclines by the amount of the
dividend.
It's not always one for one,there's some academic work
showing that prices may adjustless than the dividend amount to
account for the fact that taxesactually leaves you with less
dollars from the dividend.
(13:36):
But this is what we wouldexpect, and this is what we
clearly see empirically.
This is a mathematical realitythat when stocks are paying a
dividend on that ex-dividenddate where they trade without a
right to that dividend, theprices go down to reflect the
economic reality of thatdividend.
As an example of this without hahaving to dive into any thick
(13:57):
academic work here.
Dimensional Fund Advisors, I'll,I'll link to this in the show
notes, but Dimensional FundAdvisors looked at the 10
largest companies in the S&P 500High Dividend Index.
So 10 of the largest, highestdividend paying companies in the
United States.
And from, from roughly a fiveyear period, from, from
December, 2018 through October,2023, there was an average
(14:21):
dividend per share of$1, andthere was an average share price
decline of$1 and 15 cents onthat ex-dividend date.
So that's, that's a relativelyshort term example of what we're
talking about here.
You may not see this if youlooked at, if you have
individual stocks in youraccount, and if you looked at
one of'em, well, you may not seethis exactly as clearly as that.
(14:45):
We're laying it out because atany moment in time, really
there's an unknowable amount offactors impacting that stock
price on, on a day-to-day,minute to minute basis.
But when you look across, whenyou look across these dividend
events, this is what you wouldsee empirically.
And it's often said thatdividends are safer during stock
declines, because when declinesare happening, you still get the
(15:07):
dividend income, but.
As we just talked about, thosedividends also negatively impact
that stock price.
So it's, it's sort of a doublewhammy there on the stock price.
And why is that?
Why, why does this declinehappen?
Well, it's because that value,all of that cash is being
removed from the company, andsent to shareholders.
Just from a market perspective,you're, if you're buying shares
(15:29):
of that company on that day andyou don't have a right to that
dividend, you wouldn't expect tobuy the company for the same
price, you would expect adiscount to account for that.
And from a a, from a valuationperspective, those dollars are
no longer on the balance sheet.
It's not a part of equity, andthose dollars are not going to
be reinvested back into thebusiness to potentially increase
(15:51):
the share price over time andEarn a return on equity for
owners.
And so prices adjust to reflectthat.
So dividends are not a bonus.
It's not free money, it's notadditional income on top of what
you're usually getting.
They're a slice of the pie thatyou already own.
It's just rearranging yourWealth from shares of stock to
(16:12):
cash, and then you have todecide what to do with those
dividends.
If you want the overall returnsof the market, you have to make
sure that you are reinvestingthe dividends.
And incurring trading costs andpotentially taxes in a
non-retirement account along theway.
And in extremes, if a lot ofpeople are diving into dividend
(16:32):
stocks or dividend funds, thatcan very well push up the stock
price.
Likely lowering the expectedreturns in the future.
So in extremes that can actuallynegatively impact the returns
you're gonna be getting on thosestocks, even if the dividend
yield is high.
And lastly, on this point, it'spossible that very high yield
(16:55):
dividend stocks are signs ofdistress where the stock price
has declined due to actual Iissues in the business or in the
industry.
But the leadership are hesitantto cut the dividend due to
signaling to investors thatthere are in fact issues with
cash flow.
And so high dividend yield doesnot necessarily mean that this
is a, a healthy, robust, highprofitable company.
(17:17):
The next point I wanna talkabout is that there are tax
implications for dividends.
As I just mentioned before, whenyou are focusing on dividend
investing and you are trying totarget companies or funds.
With really high dividend yieldswhen you're doing this in a
taxable investment account.
So not a retirement account, nota 401k, not an IRA, but in a
(17:40):
taxable investment account.
Those dividend dollars aretaxable income in that year, and
if they're, and they can betaxed at, and depending on the
type of dividend, if they'reconsidered qualified dividends.
they'll be taxed at qualified orcapital gains tax rates, so 0%,
15%, 20%, with potentially up to23.8%, or they may be taxed if
(18:04):
they're non-qualified dividendsat ordinary tax rates.
So, so the same tax rates as therest of your income, 10, 12, 22,
24%, 32, and so on.
And the state taxes may vary thestate tax.
from a state tax perspective,your state may tax it just like
any other income that you'reearning.
And so by focusing on income,you are forcing more income onto
(18:26):
your tax return, and that taxdrag on your returns is a real
expense to the returns overtime.
When you contrast that tobuybacks, for example, buybacks,
if you continue to hold thestock.
That gives you more control.
It allows you to choose when youwant to sell that company and
incur that capital gain cost.
So, so for, again, foroptometrists and often
(18:47):
relatively high tax brackets,that tax drag can be meaningful,
and can leave you with lessWealth than you started out with
before that dividend.
This is something when I'mreviewing a, a tax return for a
new client, this is one of thethings I'm looking at is how
much dividend yield, how muchdividend income is getting
kicked off onto thatoptometrists tax return, and is
(19:07):
that reasonable?
Are there ways where we canrearrange the, the investments
into different accounts in orderto improve that tax efficiency?
that tax efficiency is reallyimportant.
One other misconception aboutdividend investing is that it
can potentially lower thediversification your investment
accounts.
As we talked about when lookingglobally, roughly 50% of stocks
(19:29):
do not pay dividends, andespecially again, since the
eighties in the United States.
More and more companies have a,have been adopting stock buyback
policies as a more flexible wayto distribute value back to
owners and can very well be muchmore tax efficient to you, the
shareholder.
And so less and less companiesare using dividends as a way to
distribute dollars back to theback to shareholders.
(19:51):
If you're focusing on highdividend yield funds, you may
very well be lowering yourdiversification.
which is a foundational way ofmanaging risk and making sure
that you are opening yourself upto the full opportunity set
available to you not only in theUnited States, but globally.
In addition to that, this focuson dividends and income
investing is often an excuse forinvestors to go to try their
(20:14):
hand at individual stock pickingand it's just statistically so
unlikely that you are going tobe successful consistently
picking individual companiesthat are going to do better than
the market as a whole.
I've done episodes on thisalready.
Listen to my episodes aboutindex investing.
And factor-based investing.
But for some reasons, I, I'vebeen in conversations where I
(20:34):
explain to them the researcharound how unlikely it is that.
We as individual investors orprofessional fund managers are
going to be successfulconsistently picking individual
stocks and timing markets andoutperforming the broad
category, broad market as awhole.
And they'll listen to that andsay, you know what?
I agree, but they're not gonnafall in that trap because
(20:58):
they're investing in quoteunquote, high quality dividend
paying stocks.
And for some reason, the factthat they're going after
dividends is this, excuse whereit's okay to dip your toe into
individual stock picking.
I would be very cautious aboutthat.
Look at the research availableand evaluate carefully whether
(21:18):
that makes sense for you.
The next misconception I wannatalk about around dividend
investing is, that there ispotentially outperformance for
high yield dividend fundsrelative to the stock market as
a whole.
When we look at high dividendfunds or portfolios, there is
some evidence of outperformanceover the market as a whole.
(21:40):
So isn't that proof then thatdividends are this key to
investing?
Shouldn't we then pursuedividends?
Well, not necessarily.
The return of high dividendstocks are statistically
explained primarily by theirvalue and profitability
characteristics or the value andprofitability factors.
(22:02):
These stocks tend to be mature,slower growing companies with
strong earnings.
There is a high amount ofoverlap between dividend stocks
and value stocks, sort of valuestocks in disguise, And it's the
fact that they have valuecharacteristics and
profitability characteristicsthat explains this excess return
(22:22):
above the market as a whole.
And this is not something new.
This is something that's beenobserved as far back as 1992 in
Eugene Fama and Kenneth French'sresearch.
I can add a link to that in theshow notes too.
And I'll also link to a video bymy Canadian peer, Ben Felix, on
this topic where he looks atthis relationship with live fund
data and more recent data, soI'll, I'll put a link to that in
(22:44):
the show notes too.
The fact is when we look at highdividend funds or portfolios,
the outperformance that youmight see is explained almost
entirely by these stocks,exposure to value and
profitability factors orcharacteristics.
Once you account for those, thedividends themselves do not
(23:04):
explain or predictoutperformance.
they are not in and ofthemselves in investment
characteristics that we shouldbe tilting forward.
I did an episode on this, alittle bit back episode 135 An
Optometrists Guide to Factorbased Investing, talking about
the fact that there is clearresearch showing that there are
certain factors orcharacteristics that have been
(23:27):
shown to provide a higherexpected return relative to
their counterparts.
We would expect this to happentheoretically.
This is robustly shownthroughout historical data.
So this is, we see thisempirically across time, across
geography.
So there are certaincharacteristics that if you're
trying to improve the long-termoutcomes of your portfolio, it
(23:49):
may make sense to tilt towardsthose certain characteristics.
But dividends are not one ofthose characteristics.
So I'll say again as sort of aconclusion here.
If we want to tilt towardsrobust, well-documented
characteristics that we expectto provide a higher expected
return versus the market overlong periods of time, then we
should tilt towards thesecharacteristics themselves.
(24:12):
Namely value and profitabilityand smaller companies rather
than something that mimics them.
Just get the real thing.
If you want the thing, just gofor the real thing.
And then the last sort of set ofmyths and misconceptions is
around retirement planning andretirement income.
And there are many investorsthat say, I just want to live
(24:32):
off dividends or to a furtherextreme, I need X dollars of
dividends before I can retire.
And I think there's a lot offear around this.
I think there's sort of fear of.
Of, of having to sell shares ofthings during retirement, as if
that's going to destroyretirement feasibility.
I think there's this sort offear that drives this way of
(24:54):
thinking, but when you lookthrough research around
retirement planning and how wepractitioners actually do this
for clients in practice.
That's not the case.
You do not need X amount ofdividends to cover your full
amounts spending in inretirement.
Think about what you own Inthese investment accounts, you
(25:17):
own liquid assets.
You can sell shares whenever youwant and create your own
paycheck.
You own things that can varyeasily and quickly and reliably
be turned into cash in aninstant, in the snap of a finger
at prices that are reliable.
You can create your ownpaycheck.
You can create your own dividendsimply by selling shares.
(25:39):
A certain dividend yield is notnecessary for successful
retirement and at times can leadyou down a road where you feel
like you actually need to have amuch higher nest egg than is
actually necessary.
Where instead we can focus ontotal return and capital gains
are such a large part of thosereturns on a year to year basis.
(25:59):
It just makes no sense to ignoresuch a large part of the return
you're getting in your accounts.
What we're planning around isn'tdividend or interest or income
yield, but withdrawal rates.
How much of your total assetsare you withdrawing in any given
year and and how does thatchange over time?
That's our focus, and very oftenit's not static throughout your
(26:20):
entire lifetime, maybe higherearlier in retirements and lower
later on in retirement as socialsecurity starts and spending
decreases.
But it's those changes inwithdrawal rates that we really
wanna keep an eye on.
And when we're dealing withtaxable investment accounts,
this is gonna allow for bettertax management and better tax
planning without forcing thatdividend income onto their tax
(26:42):
return.
And it also just doesn't makesense for the policy of some,
disconnected group of corporateboards To dictate your spending
in retirement, especially whendividend income can be
inconsistent and can actually becut.
And lastly, on this point, thereis this thought that selling
(27:02):
shares to create cash forspending is some form of market
timing.
Where you're constantly lookingat the ups and downs in the
market and deciding whether orwhen to sell, like that's
dictating to you when you cansell to create cash.
But I think this is simply afundamental misunderstanding of
how we handle spending inwithdrawals in retirement.
(27:25):
There is no market timinginvolved.
And, and again, I think a lot ofthat is due to some fear or
uncertainty around the action ofselling stuff in your investment
accounts as markets are going upand down.
And so when thinking about howdividends actually work and some
of these sort of misconceptionsor really misunderstanding
around.
(27:45):
The impact that dividends haveon the, on prices of stocks and
overall returns.
The, from a purely financialstandpoint, I think the optim
optimal way to look at investingis total return, which is
dividends plus capital gains.
We as investors should beindifferent where our returns
(28:05):
come from, whether it's fromappreciation of the stock price,
whether it's from the dividendreturn, whether it's from
whatever it is we should beindifferent to that and whatever
way corporate leadership, theCEO and the board.
Whatever way they wanna handlethe cash flow of the business.
Let them make that decision inthe best interest of the
(28:26):
corporation and forshareholders.
Let them make that decisionwhether they see opportunities
to reinvest back into thebusiness.
That's great.
If they don't see thoseopportunities and what you
distribute cash as dividends.
That's great.
If they feel it's a better valuedue to the stock price and
because it's more tax efficientto shareholders instead to do
stock buybacks, even better.
(28:48):
Let them make decisions in thebest interest of shareholders.
And I will take returns inwhatever way, shape, and form
that it comes.
And if we're going to be skewingor tilting towards certain
characteristics, in order toimprove the long-term outcomes
or portfolios, I'm gonna do thatas I talked about in that
podcast episode based on clearlydocumented c haracteristics like
(29:10):
smaller companies and valuecompanies and more profitable
companies.
Not because of dividends.
I think this way of investingprovides more control over
taxation, I think this improvesthe diversification of our
portfolios and overall just theway we design our portfolios.
And, and we shouldn't letdividend policies of a corporate
board dictate how much you spendin retirement.
(29:32):
A dividend is not a plan.
So let's put a plan together tomake sure that your, that your
investment approach aligns withthe goals that you're investing
towards.
That'll being said.
I'm going to sort of contradictmyself and talk about why
dividend investing can makesense.
And this comes down to behavior.
If in underline, in bold, if, ifyou know yourself as an investor
(30:00):
and you know that just due toyour own behavior, your
psychology.
Dividend investing is the onlyform of investing that's going
to keep you invested over timeand allow you to retire, and you
understand the trade-offs thatwe talked about earlier.
Then dividend investing can be arational approach for you.
(30:21):
As I often say, the rightinvestment approach for someone
is one that we believe will worklong term.
There's, there's evidence tosuggest that it will be
successful long term.
I.
And it's one we can stick with.
If dividend investing is theonly thing that's gonna keep you
invested and keep you frommaking bad investment decisions
at the wrong time and it's gonnaallow you to feel, to feel like
(30:45):
you can retire and going toretire without a substantial
amount of stress, well, maybethat approach makes sense for
you.
So from a financial standpoint,it's not optimal.
I wouldn't suggest that as theoptimal way to invest.
But behaviorally, if that's whatis going to keep you invested
and give you a successfulretirement, and you are broadly
(31:05):
invested enough, meaning you'renot trying to pick individual
stocks, it, then it can makesense.
As a Planner, as someone whoworks with real people on a
day-to-day basis making allthese financial investment
decisions.
I understand that.
I think that can be a rationalchoice for you.
But, but do so understandingthose trade offs.
So with that said, hopefullythis is helpful for you as you
(31:26):
hear all these sort of opinionsonline, especially about income
investing and dividend investingand how everyone needs
dividends.
hopefully this helps you tounderstand some of the
misconceptions andmisunderstandings around that.
If you have any questions,please reach out to me, at
evon@optometrywealth.com.
If you want to review your owninvestment approach and make
(31:48):
sure that it's working for youbased on the goals that you're
investing for, please reach out.
We'd love to have a shortintroductory call with you, hear
what's on your mind financiallyand talk about how we help
optometrists navigate those samedecisions all over the country.
And you can also follow along asI write about this stuff and
more on a week to week basis inmy Eyes On The Money newsletter,
I'll throw a link in the shownotes so you can sign up for
(32:08):
that and when you do that,you'll also get a copy of 2025's
most important financial and taxnumbers you need to know.
So with that, appreciate yourtime and we will catch you on
the next episode.
In the meantime, take care.
Hey everybody.
Welcome back to The OptometryMoney Podcast.
We're helping ODs all over thecountry make better and better
decisions around their money,their careers, and their
practices.
I am your host, Evon Mendrin,Certified Financial Planner(TM)
practitioner.
And owner of Optometry WealthAdvisors, an independent
financial planning firm just foroptometrists nationwide.
(00:25):
And thank you so much forlistening.
I really appreciate your timeand your attention.
And onto today's episode, we aregonna dive into dividend
investing.
we're gonna dive into trying todemystify dividend investing and
tackle some of the, what I thinkare myths or misconceptions
around dividend investing andthere are a lot of approaches to
(00:45):
investing out there.
Few of them attract so manyextremely dedicated followers,
quite like dividend investing.
You don't have to search theinternet and social media for
very long to find bloggers andprofiles and, and, content
creators that have dedicatedtheir, literally their whole
identity.
(01:05):
To dividend investing or incomeinvesting in general.
This sort of this broadoverarching theme of, of income
investing, investing only forand for the sole purpose of the
cashflow, the income that'sgenerated.
also see opinions aroundretirement planning that when
planning for retirement you needto have X amount of dividends
(01:26):
from your investments in orderto retire before that you're not
quite ready.
And there are a lot of opinionsout there that can easily impact
your thinking and planningaround retirement and sometimes
the stress around retirement.
And as I look at these commentsand opinions and arguments
around dividend investing, theretends to be a misunderstanding
(01:46):
of what dividends are.
How they work and how theyimpact the price of these
businesses.
So today I'm gonna dive into howdividends work.
We're gonna tackle some mythsand misconceptions, and
ultimately talk about whydividend strategies may not be
the holy grail they are made outto be.
So with that in mind, let's divein.
(02:08):
So to start, let's talk aboutwhat are dividends?
How do they work?
a dividend is a cash payment.
It's a distribution of cash madeby a company to shareholders,
usually from profits.
So companies are distributingout profits to the owners and
companies like publicly tradedstocks, pay dividends, often,
(02:29):
quarterly or annually as a wayto return capital to
shareholders.
Think about an Optometrypractice.
If you own an Optometry practiceas the owner of the practice.
An important role that you haveis making decisions around cash
flow as revenues coming in, ascost of goods and operating
expenses are, are tackled, andyou have additional cash flow
(02:51):
left over after making debtpayments.
What do you do with thatadditional cash?
These are really importantfunctions of the owners, is, is
making decisions around what todo with cash flow.
And in your practice there'sreally only four decisions to
make.
There's investing, number one,investing back into the
operations of your practice.
So new equipment and technology,building out new lanes, hiring,
(03:13):
marketing.
Better frame board management orinventory management, et cetera.
So number one, investing backinto the current operations of
the practice.
Number two, expanding by buyingother practices or cold starting
new locations.
number three, paying down debt.
Or number four, distributingcash out to you, the owner,
(03:34):
which that, that distribution isthe equivalent of a dividend in
a corporation.
And depending on the needs andgoals of your practice and the
personal finance goals of youand your family, you're gonna
spend some time each yeardeciding how to use the precious
cash flow your practicegenerates.
This is what are the most commonquestions that I help practice
(03:55):
owners solve is figuring out,okay, what, what cash flow is
really available in thepractice, and what should we do
with it?
Well, the CEO of a publiccorporation is doing the same
thing just on a much largerscale.
So one of the most importantjobs of A CEO is deciding how to
put cash to use and a CEO canmake the same exact decisions,
(04:17):
with one additional one.
So they're going to invest intheir operations.
They're going to acquire otherbusinesses, they're gonna pay
down debt, they're gonna pay adividend to shareholders.
Or they're going to repurchasestock.
Stock buybacks.
The first of those two Investingin operations, Acquiring other
businesses are ways to use cashflow to reinvest internally and
(04:42):
improve the value of the shares,increase the value of the shares
over time.
The last three ways are ways todistribute value back to
shareholders.
Back to owners paying down debt.
You're probably wondering howdoes that.
Bring value back toshareholders.
Well, when you pay down debt,you are increasing owner's
equity.
(05:02):
so you're increasing the equityof shareholders.
That's the claim that you as theowner have on the assets and the
cash in the business.
And so, and the same thinghappens on your practice as
balance sheet.
When you decide to pay down debtin the practice, your owner's
equity is increasing.
dividends give cash directlyback to shareholders, back to
owners, and stock buybacks.
(05:23):
Give cash directly back toowners that want to sell.
And for ongoing shareholders,there are less shares
outstanding.
And with a similar marketvaluation, your price per share
is increasing.
It's effectively mathematicallythe same outcome as the
dividend.
some think of share buybacks as,as net share buybacks as a sort
(05:45):
of.
More tax efficient dividend or aflexible dividend.
And why do companies paydividends and distribute cash to
shareholders?
Well, again, think about yourown practice.
When deciding whether todistribute cash to yourself,
you're probably thinkingthrough, okay, are there
investment opportunities in thebusiness that are going to
generate a strong, reasonablerate of return?
(06:07):
If not, you're thinking aboutwhether you should be paying
down debt and making sure you'resetting, setting aside enough
for, for quarterly tax payments,there's a reasonable cash buffer
and if all of those things aremet, then you can distribute
cash to yourself and use it moreeffectively outside of the
business, reinvesting intoinvestment accounts and
retirement accounts, or realestate or whatever it may be.
(06:28):
There's only so much equipmentyou can buy and you may be
working with a certain amount ofsquare feet, where at some point
buying stuff in the business.
just doesn't provide the bestreturn on the asset.
And in the same way,corporations may not feel when
they're looking at their ownbusiness, they may not feel
there's reinvestmentopportunities in the business
(06:49):
that can provide value above andbeyond what maybe the general
stock market may provide.
maybe they have such strong cashflow that they just don't have
enough reinvestmentopportunities in the business.
And so they distribute profit toowners so the owners can make
their own investment decisions.
and on the other hand of that,there's corporations that may
(07:10):
feel like they can make betteruse of that cash internally, and
so they'll retain the cash andthey will not pay out dividends.
Berkshire Hathaway is a reallygreat example of this.
It's a long standing historicalcompany, and as Warren Buffet is
written about they believe theycan invest the cash more
effectively than shareholders,and so they retain it and
reinvest it internally.
(07:30):
it may also be a signal toinvestors about future
profitability.
So they may be doing this as anincentive, as a signal for
investors so they would buytheir stock.
So maybe there's a behavioralpart of that too, a signal.
not all companies pay dividends.
It's, as I mentioned earlier,globally, when you look at, when
you look at the global stockmarket.
Combined, roughly half of stockspay dividends last, last data I
(07:53):
saw and roughly half does not.
And over the decades, the numberof corporations paying dividends
has declined as well as thepercentage of their earnings
that are being paid out.
especially in the US since themid eighties or so, as stock
buybacks were made Much easierfrom a regulatory perspective.
(08:14):
And just like your practice,your practice generates cash
flow for you to use.
But it's also an asset on yourbalance sheet.
It has a value.
And returns from owning apublicly traded stock any
business come in two forms.
It's capital gain, which is theincrease in the price over time
and distribution of cash to theshareholders, often in the form
(08:36):
of dividends.
And so dividends are a part of acomponent of total return.
an important part, Mel Faber inhis book, Shareholder Yield
writes that when looking at theUS stock market from 1871 to
2023, US stocks would'verealized a 9.16% compound annual
(08:58):
return, average annual return.
When you exclude the dividendsso you don't reinvest the
dividends back into the market,and you only look at the price
change of the, of the, of the USstock market if you exclude
dividends, it would've reducedthe annual compound return to
4.67%, roughly cutting that inhalf.
Importantly, it's not thedividends themselves.
(09:21):
Capital gains tend to providemost of the return on just like
a year to year basis.
If you look at the components ofreturn, it's the, it's really
the fact that you're takingthose dividends and reinvesting
them back into the market,buying more shares, and those
shares then increase in priceover time, and those shares also
distribute dividends, and youjust keep that cycle going.
(09:43):
It's really an example ofcompounding growth.
If you don't re and if you don'treinvest the dividends, if you
just take the dividends,dividends as cash and let'em sit
as cash, or if you take it forspending, you've historically,
severely impacted your returnsover time relative to the broad
market.
And importantly, if, and this ishard to wrap your brain around,
(10:04):
but if, if the companies did notpay dividends The entire return
would just be reflected in theprice change over time.
We would not expect the lack ofdividend to impact the return
that you get as an investor.
The dividend may, the dividendjust changes the way that return
shows up as those corporationswould instead reinvest those
dollars back in the back in thebusiness.
(10:26):
So dividends themselves don'tnecessarily determine the
overall return of owning thebusiness.
It's ultimately the earnings andcash flow that drive the return
over time and how that cash flowis used.
And in terms of the timing ofdividends, so a corporate board
is going to, announce thedividend.
this may be paid out quarterly,for example, and then there's
(10:46):
going to be a dividend date.
This is the dates that theactual dividend is paid out to
those that are on record.
but before that dividend date,just before that is something
called the ex-dividend date, andthat is the date that the stock
trades without a right to thedividend, meaning if you buy the
stock on that day, you would notactually get the dividend.
(11:08):
You don't have a right to thatdividend, or you would've only
gotten it if you purchased itthe day before.
So there's sort of this orderthis, so there's this schedule
of how these things work out.
And it's the same thing actuallywith mutual funds and ETFs.
If you look at mutual funds andETFs that you have, those mutual
funds and ETFs are going to havean ex-dividend date, the date
that they trade without thedividend, and they're going to
(11:30):
have a dividend date, which isthe date the actual dividends
paid out.
And the first sort ofmisconception I want to talk
about here is that dividends areoften thought of as free money
or extra return from stocks.
There's sort of a celebrationsometimes when dividends hit
that brokerage account.
But this way of thinking is a,is a fundamental
(11:52):
misunderstanding of howdividends work.
because when a dividend, when acompany pays out a dividend.
Its stock price drops by thatamount on the ex-dividend date,
meaning that date, that when youbuy it, you no longer have a
right to the dividend.
You're not gonna be receivingit.
The stock price adjusts downwardto account for that dividend.
(12:13):
So, as an example, let's say youowned one share of stock that's
worth a hundred dollars.
Your total Wealth here is ahundred dollars, right?
It's just, it's all in stock.
If the stock that you own isgoing to pay a dividend of$10 on
the X dividend date, your stockprice will drop by that$10
(12:34):
amount and it'll be worth$90.
So what you have in yourbrokerage account is$90 worth of
stock and$10 of cash from thedividend.
And when you add those twotogether.
It's a hundred dollars.
You have the same amount ofoverall Wealth.
You've just changed thecomposition of it from all stock
(12:55):
to, to mostly stock and somecash.
And if you're in a taxablebrokerage account, this is
important because thosedividends are taxable income and
you're potentially left with alower amount of Wealth after
that tax is accounted for.
That's theoretically what wewould expect to happen, and this
is what we see empirically.
(13:15):
So this isn't just theoretical.
This is what we see empiricallythat happens on ex-dividend
dates, that the stock pricedeclines by the amount of the
dividend.
It's not always one for one,there's some academic work
showing that prices may adjustless than the dividend amount to
account for the fact that taxesactually leaves you with less
dollars from the dividend.
(13:36):
But this is what we wouldexpect, and this is what we
clearly see empirically.
This is a mathematical realitythat when stocks are paying a
dividend on that ex-dividenddate where they trade without a
right to that dividend, theprices go down to reflect the
economic reality of thatdividend.
As an example of this without hahaving to dive into any thick
(13:57):
academic work here.
Dimensional Fund Advisors, I'll,I'll link to this in the show
notes, but Dimensional FundAdvisors looked at the 10
largest companies in the S&P 500High Dividend Index.
So 10 of the largest, highestdividend paying companies in the
United States.
And from, from roughly a fiveyear period, from, from
December, 2018 through October,2023, there was an average
(14:21):
dividend per share of$1, andthere was an average share price
decline of$1 and 15 cents onthat ex-dividend date.
So that's, that's a relativelyshort term example of what we're
talking about here.
You may not see this if youlooked at, if you have
individual stocks in youraccount, and if you looked at
one of'em, well, you may not seethis exactly as clearly as that.
(14:45):
We're laying it out because atany moment in time, really
there's an unknowable amount offactors impacting that stock
price on, on a day-to-day,minute to minute basis.
But when you look across, whenyou look across these dividend
events, this is what you wouldsee empirically.
And it's often said thatdividends are safer during stock
declines, because when declinesare happening, you still get the
(15:07):
dividend income, but.
As we just talked about, thosedividends also negatively impact
that stock price.
So it's, it's sort of a doublewhammy there on the stock price.
And why is that?
Why, why does this declinehappen?
Well, it's because that value,all of that cash is being
removed from the company, andsent to shareholders.
Just from a market perspective,you're, if you're buying shares
(15:29):
of that company on that day andyou don't have a right to that
dividend, you wouldn't expect tobuy the company for the same
price, you would expect adiscount to account for that.
And from a a, from a valuationperspective, those dollars are
no longer on the balance sheet.
It's not a part of equity, andthose dollars are not going to
be reinvested back into thebusiness to potentially increase
(15:51):
the share price over time andEarn a return on equity for
owners.
And so prices adjust to reflectthat.
So dividends are not a bonus.
It's not free money, it's notadditional income on top of what
you're usually getting.
They're a slice of the pie thatyou already own.
It's just rearranging yourWealth from shares of stock to
(16:12):
cash, and then you have todecide what to do with those
dividends.
If you want the overall returnsof the market, you have to make
sure that you are reinvestingthe dividends.
And incurring trading costs andpotentially taxes in a
non-retirement account along theway.
And in extremes, if a lot ofpeople are diving into dividend
(16:32):
stocks or dividend funds, thatcan very well push up the stock
price.
Likely lowering the expectedreturns in the future.
So in extremes that can actuallynegatively impact the returns
you're gonna be getting on thosestocks, even if the dividend
yield is high.
And lastly, on this point, it'spossible that very high yield
(16:55):
dividend stocks are signs ofdistress where the stock price
has declined due to actual Iissues in the business or in the
industry.
But the leadership are hesitantto cut the dividend due to
signaling to investors thatthere are in fact issues with
cash flow.
And so high dividend yield doesnot necessarily mean that this
is a, a healthy, robust, highprofitable company.
(17:17):
The next point I wanna talkabout is that there are tax
implications for dividends.
As I just mentioned before, whenyou are focusing on dividend
investing and you are trying totarget companies or funds.
With really high dividend yieldswhen you're doing this in a
taxable investment account.
So not a retirement account, nota 401k, not an IRA, but in a
(17:40):
taxable investment account.
Those dividend dollars aretaxable income in that year, and
if they're, and they can betaxed at, and depending on the
type of dividend, if they'reconsidered qualified dividends.
they'll be taxed at qualified orcapital gains tax rates, so 0%,
15%, 20%, with potentially up to23.8%, or they may be taxed if
(18:04):
they're non-qualified dividendsat ordinary tax rates.
So, so the same tax rates as therest of your income, 10, 12, 22,
24%, 32, and so on.
And the state taxes may vary thestate tax.
from a state tax perspective,your state may tax it just like
any other income that you'reearning.
And so by focusing on income,you are forcing more income onto
(18:26):
your tax return, and that taxdrag on your returns is a real
expense to the returns overtime.
When you contrast that tobuybacks, for example, buybacks,
if you continue to hold thestock.
That gives you more control.
It allows you to choose when youwant to sell that company and
incur that capital gain cost.
So, so for, again, foroptometrists and often
(18:47):
relatively high tax brackets,that tax drag can be meaningful,
and can leave you with lessWealth than you started out with
before that dividend.
This is something when I'mreviewing a, a tax return for a
new client, this is one of thethings I'm looking at is how
much dividend yield, how muchdividend income is getting
kicked off onto thatoptometrists tax return, and is
(19:07):
that reasonable?
Are there ways where we canrearrange the, the investments
into different accounts in orderto improve that tax efficiency?
that tax efficiency is reallyimportant.
One other misconception aboutdividend investing is that it
can potentially lower thediversification your investment
accounts.
As we talked about when lookingglobally, roughly 50% of stocks
(19:29):
do not pay dividends, andespecially again, since the
eighties in the United States.
More and more companies have a,have been adopting stock buyback
policies as a more flexible wayto distribute value back to
owners and can very well be muchmore tax efficient to you, the
shareholder.
And so less and less companiesare using dividends as a way to
distribute dollars back to theback to shareholders.
(19:51):
If you're focusing on highdividend yield funds, you may
very well be lowering yourdiversification.
which is a foundational way ofmanaging risk and making sure
that you are opening yourself upto the full opportunity set
available to you not only in theUnited States, but globally.
In addition to that, this focuson dividends and income
investing is often an excuse forinvestors to go to try their
(20:14):
hand at individual stock pickingand it's just statistically so
unlikely that you are going tobe successful consistently
picking individual companiesthat are going to do better than
the market as a whole.
I've done episodes on thisalready.
Listen to my episodes aboutindex investing.
And factor-based investing.
But for some reasons, I, I'vebeen in conversations where I
(20:34):
explain to them the researcharound how unlikely it is that.
We as individual investors orprofessional fund managers are
going to be successfulconsistently picking individual
stocks and timing markets andoutperforming the broad
category, broad market as awhole.
And they'll listen to that andsay, you know what?
I agree, but they're not gonnafall in that trap because
(20:58):
they're investing in quoteunquote, high quality dividend
paying stocks.
And for some reason, the factthat they're going after
dividends is this, excuse whereit's okay to dip your toe into
individual stock picking.
I would be very cautious aboutthat.
Look at the research availableand evaluate carefully whether
(21:18):
that makes sense for you.
The next misconception I wannatalk about around dividend
investing is, that there ispotentially outperformance for
high yield dividend fundsrelative to the stock market as
a whole.
When we look at high dividendfunds or portfolios, there is
some evidence of outperformanceover the market as a whole.
(21:40):
So isn't that proof then thatdividends are this key to
investing?
Shouldn't we then pursuedividends?
Well, not necessarily.
The return of high dividendstocks are statistically
explained primarily by theirvalue and profitability
characteristics or the value andprofitability factors.
(22:02):
These stocks tend to be mature,slower growing companies with
strong earnings.
There is a high amount ofoverlap between dividend stocks
and value stocks, sort of valuestocks in disguise, And it's the
fact that they have valuecharacteristics and
profitability characteristicsthat explains this excess return
(22:22):
above the market as a whole.
And this is not something new.
This is something that's beenobserved as far back as 1992 in
Eugene Fama and Kenneth French'sresearch.
I can add a link to that in theshow notes too.
And I'll also link to a video bymy Canadian peer, Ben Felix, on
this topic where he looks atthis relationship with live fund
data and more recent data, soI'll, I'll put a link to that in
(22:44):
the show notes too.
The fact is when we look at highdividend funds or portfolios,
the outperformance that youmight see is explained almost
entirely by these stocks,exposure to value and
profitability factors orcharacteristics.
Once you account for those, thedividends themselves do not
(23:04):
explain or predictoutperformance.
they are not in and ofthemselves in investment
characteristics that we shouldbe tilting forward.
I did an episode on this, alittle bit back episode 135 An
Optometrists Guide to Factorbased Investing, talking about
the fact that there is clearresearch showing that there are
certain factors orcharacteristics that have been
(23:27):
shown to provide a higherexpected return relative to
their counterparts.
We would expect this to happentheoretically.
This is robustly shownthroughout historical data.
So this is, we see thisempirically across time, across
geography.
So there are certaincharacteristics that if you're
trying to improve the long-termoutcomes of your portfolio, it
(23:49):
may make sense to tilt towardsthose certain characteristics.
But dividends are not one ofthose characteristics.
So I'll say again as sort of aconclusion here.
If we want to tilt towardsrobust, well-documented
characteristics that we expectto provide a higher expected
return versus the market overlong periods of time, then we
should tilt towards thesecharacteristics themselves.
(24:12):
Namely value and profitabilityand smaller companies rather
than something that mimics them.
Just get the real thing.
If you want the thing, just gofor the real thing.
And then the last sort of set ofmyths and misconceptions is
around retirement planning andretirement income.
And there are many investorsthat say, I just want to live
(24:32):
off dividends or to a furtherextreme, I need X dollars of
dividends before I can retire.
And I think there's a lot offear around this.
I think there's sort of fear of.
Of, of having to sell shares ofthings during retirement, as if
that's going to destroyretirement feasibility.
I think there's this sort offear that drives this way of
(24:54):
thinking, but when you lookthrough research around
retirement planning and how wepractitioners actually do this
for clients in practice.
That's not the case.
You do not need X amount ofdividends to cover your full
amounts spending in inretirement.
Think about what you own Inthese investment accounts, you
(25:17):
own liquid assets.
You can sell shares whenever youwant and create your own
paycheck.
You own things that can varyeasily and quickly and reliably
be turned into cash in aninstant, in the snap of a finger
at prices that are reliable.
You can create your ownpaycheck.
You can create your own dividendsimply by selling shares.
(25:39):
A certain dividend yield is notnecessary for successful
retirement and at times can leadyou down a road where you feel
like you actually need to have amuch higher nest egg than is
actually necessary.
Where instead we can focus ontotal return and capital gains
are such a large part of thosereturns on a year to year basis.
(25:59):
It just makes no sense to ignoresuch a large part of the return
you're getting in your accounts.
What we're planning around isn'tdividend or interest or income
yield, but withdrawal rates.
How much of your total assetsare you withdrawing in any given
year and and how does thatchange over time?
That's our focus, and very oftenit's not static throughout your
(26:20):
entire lifetime, maybe higherearlier in retirements and lower
later on in retirement as socialsecurity starts and spending
decreases.
But it's those changes inwithdrawal rates that we really
wanna keep an eye on.
And when we're dealing withtaxable investment accounts,
this is gonna allow for bettertax management and better tax
planning without forcing thatdividend income onto their tax
(26:42):
return.
And it also just doesn't makesense for the policy of some,
disconnected group of corporateboards To dictate your spending
in retirement, especially whendividend income can be
inconsistent and can actually becut.
And lastly, on this point, thereis this thought that selling
(27:02):
shares to create cash forspending is some form of market
timing.
Where you're constantly lookingat the ups and downs in the
market and deciding whether orwhen to sell, like that's
dictating to you when you cansell to create cash.
But I think this is simply afundamental misunderstanding of
how we handle spending inwithdrawals in retirement.
(27:25):
There is no market timinginvolved.
And, and again, I think a lot ofthat is due to some fear or
uncertainty around the action ofselling stuff in your investment
accounts as markets are going upand down.
And so when thinking about howdividends actually work and some
of these sort of misconceptionsor really misunderstanding
around.
(27:45):
The impact that dividends haveon the, on prices of stocks and
overall returns.
The, from a purely financialstandpoint, I think the optim
optimal way to look at investingis total return, which is
dividends plus capital gains.
We as investors should beindifferent where our returns
(28:05):
come from, whether it's fromappreciation of the stock price,
whether it's from the dividendreturn, whether it's from
whatever it is we should beindifferent to that and whatever
way corporate leadership, theCEO and the board.
Whatever way they wanna handlethe cash flow of the business.
Let them make that decision inthe best interest of the
(28:26):
corporation and forshareholders.
Let them make that decisionwhether they see opportunities
to reinvest back into thebusiness.
That's great.
If they don't see thoseopportunities and what you
distribute cash as dividends.
That's great.
If they feel it's a better valuedue to the stock price and
because it's more tax efficientto shareholders instead to do
stock buybacks, even better.
(28:48):
Let them make decisions in thebest interest of shareholders.
And I will take returns inwhatever way, shape, and form
that it comes.
And if we're going to be skewingor tilting towards certain
characteristics, in order toimprove the long-term outcomes
or portfolios, I'm gonna do thatas I talked about in that
podcast episode based on clearlydocumented c haracteristics like
(29:10):
smaller companies and valuecompanies and more profitable
companies.
Not because of dividends.
I think this way of investingprovides more control over
taxation, I think this improvesthe diversification of our
portfolios and overall just theway we design our portfolios.
And, and we shouldn't letdividend policies of a corporate
board dictate how much you spendin retirement.
(29:32):
A dividend is not a plan.
So let's put a plan together tomake sure that your, that your
investment approach aligns withthe goals that you're investing
towards.
That'll being said.
I'm going to sort of contradictmyself and talk about why
dividend investing can makesense.
And this comes down to behavior.
If in underline, in bold, if, ifyou know yourself as an investor
(30:00):
and you know that just due toyour own behavior, your
psychology.
Dividend investing is the onlyform of investing that's going
to keep you invested over timeand allow you to retire, and you
understand the trade-offs thatwe talked about earlier.
Then dividend investing can be arational approach for you.
(30:21):
As I often say, the rightinvestment approach for someone
is one that we believe will worklong term.
There's, there's evidence tosuggest that it will be
successful long term.
I.
And it's one we can stick with.
If dividend investing is theonly thing that's gonna keep you
invested and keep you frommaking bad investment decisions
at the wrong time and it's gonnaallow you to feel, to feel like
(30:45):
you can retire and going toretire without a substantial
amount of stress, well, maybethat approach makes sense for
you.
So from a financial standpoint,it's not optimal.
I wouldn't suggest that as theoptimal way to invest.
But behaviorally, if that's whatis going to keep you invested
and give you a successfulretirement, and you are broadly
(31:05):
invested enough, meaning you'renot trying to pick individual
stocks, it, then it can makesense.
As a Planner, as someone whoworks with real people on a
day-to-day basis making allthese financial investment
decisions.
I understand that.
I think that can be a rationalchoice for you.
But, but do so understandingthose trade offs.
So with that said, hopefullythis is helpful for you as you
(31:26):
hear all these sort of opinionsonline, especially about income
investing and dividend investingand how everyone needs
dividends.
hopefully this helps you tounderstand some of the
misconceptions andmisunderstandings around that.
If you have any questions,please reach out to me, at
evon@optometrywealth.com.
If you want to review your owninvestment approach and make
(31:48):
sure that it's working for youbased on the goals that you're
investing for, please reach out.
We'd love to have a shortintroductory call with you, hear
what's on your mind financiallyand talk about how we help
optometrists navigate those samedecisions all over the country.
And you can also follow along asI write about this stuff and
more on a week to week basis inmy Eyes On The Money newsletter,
I'll throw a link in the shownotes so you can sign up for
(32:08):
that and when you do that,you'll also get a copy of 2025's
most important financial and taxnumbers you need to know.
So with that, appreciate yourtime and we will catch you on
the next episode.
In the meantime, take care.
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