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The dividend approach to investing has its appeal. But a well-researched critique at the Independent Investor website challenges that view.

The first part is an overview. The second part is a critical review of the advantages and concludes: "The arguments seem compelling, but on second look, lose some of their luster." The third part takes a look at the disadvantages.

Some main points:

  1. According to the Miller and Modigliani thesis, dividends don’t matter (retained earnings produce growth)

  2. John Bogle says studies finding better returns from dividend investing are examples of data-mining

  3. Some studies did not find dividend stocks provided superior returns

  4. If dividend stocks did offer superior returns, efficient markets would discount the opportunity until the “abnormal returns” were eliminated

  5. “Dividend-based investing runs up against the rock of Gibraltar of modern investing: Diversification”

  6. “In practice this technique starts looking like old fashioned stock-picking”

  7. “An investment policy that focuses exclusively on receiving regular income is not necessarily a protection over the long term against losses of capital caused by the effect of inflation or by stock market corrections”

  8. “This reduced volatility is criticized by some, who note that even dividend-paying stocks were hit hard during the recent stock market correction”

  9. “It is typically more efficient tax wise to generate a cash flow from share dispositions rather than from receiving dividends”

The website doesn’t have a spot for accepting comments, but it sure would be interesting to hear what dividend investors think of the critique.