There are a lot people who think that investing for dividends is great. They work hard, very hard, to accumulate the investment corpus enough for them to live on dividends for rest of their life.
There’re at least two problems with it. The first is that dividends are just one of the components of the total return. The other, often the major portion, is capital gains.
Generally, dividend paying firms do not have much growth left in them; and high-growth firms generally do not pay out any dividends because all internal profits are ploughed back into the business to generate growth. For high growth firms, increase in market price reflects capital gains which will be quite high too.
So this obsession with dividends is laughable. More so because even for people who need cash, they can sell some portion of their portfolio as capital gains. There may be times when market price may not be the best to sell, but investing in stocks is that game. For fixed income, it’s better to stick to fixed currency investments.
The second is that considering dividend yield based on cost (past purchases) isn't a great idea. It's the opportunity cost on current market price what matters.
There’s another problem too. Somehow these people like to grind all their life only to live on a teeny portion of their wealth; dividends. They’ll be glad to leave their wealth for someone else to enjoy. Freakish, perverse, or masochist, how do we define them?
Try telling this to dividend buyers...
