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Why Income? How Dividends Bring Wealth

Oct. 06, 2021 8:35 AM ET136 Comments


  • Investing philosophies need to be grounded in history.
  • We look at how wealth was created through the ages.
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Co-produced with Treading Softly

Today, I want to take a step back and look at why we do what we do. As many of you know, we focus on what we call "historical wealth generation." This is a return to how wealth was generated or

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This article was written by

Rida Morwa profile picture

Rida Morwa is a former investment and commercial Banker, with over 35 years of experience. He has been advising individual and institutional clients on high-yield investment strategies since 1991.

Rida Morwa leads the investing group High Dividend Opportunities where he teams up with some of Seeking Alpha's top income investing analysts. The service focuses on sustainable income through a variety of high yield investments with a targeted safe +9% yield. Features include: model portfolio with buy/sell alerts, preferred and baby bond portfolios for more conservative investors, vibrant and active chat with access to the service’s leaders, dividend and portfolio trackers, and regular market updates. The service philosophy focuses on community, education, and the belief that nobody should invest alone. Lean More.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Treading Softly, Beyond Saving, PendragonY, and Preferred Stock Trader all are supporting contributors for High Dividend Opportunities. Any recommendation posted in this article is not indefinite. We closely monitor all of our positions. We issue Buy and Sell alerts on our recommendations, which are exclusive to our members.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (136)

Cuip99 profile picture
Yes, I am a dividend man. I call it my cash flow, cash flowing into my coffers. It allows me to reinvest in new positions or to expand existing positions. That is my kind of growth.
Rida Morwa profile picture
@Cuip99 Thank you for reading and commenting! Always nice to see you.

And me.
Thoughts on psldx
Rida Morwa profile picture
@steve fishman It is an interesting mutual fund with a long history of strong performance. Personally, I do not hold any mutual funds nor look too closely at them. However PSLDX does seem like an extremely well run one.
A great article. Thanks!
Rida Morwa profile picture
@Qiam You are very welcome.
I am primarily a high dividend investor who DRIPs (reinvests dividends) but I wonder at times what really is the difference between dividend and non-dividend paying stocks. If you own EPD for example which pays around 8%(2% a quarter) it is my understanding that when you are paid that 2% dividend the price of the stock is then reduced 2%. It would seem that if you owned AMZN instead which pays no dividend you could just decide to pay yourself an 8% dividend and sell 2% of the stock four times a year and it would basically be the same as owning EPD in terms of getting money out of your position anyway. DRIPing (which I usually do for convenience and to keep my money working) does seem like a strange process when you think about it. Again using EPD my understanding is that you are paid the 2% quarterly dividend, the value of the stock is simultaneously reduced 2%, and then your brokerage firm buys back stock with the 2% dividend, so you end up with more shares at a lower price and are basically back where you started from. I have always wondered if some money is lost in the transactions. I am with Schwab and they seem to take a day to reinvest your DRIP so it probably depends primarily on whether the stock price shifts during the lag time. Please let me know if I am seeing this whole process correctly and if you see any fundamental differences between dividend paying and non-dividend paying stocks.
PendragonY profile picture

The dividend is paid out of the company's cash flow. It doesn't come out of share price. Also don't mistake an action by the exchange to account for who gets the dividend for a permanent reduction in the share price.
allday1234 profile picture
@twilight4 I actually have brokerage accounts with 2 different companies and I do not drip but I do reinvest the money, its just that I choose to pick where The 2 companies are Schwab and Merrill Lynch so I can speak only for those 2. With the Schwab they do not pay on the day of the dividend pay and I believe it has to do with when they run their batch jobs to consolidate the brokerage totals, thus dividend pays do normally occur the day after the supposed payment. With Merrill Lynch the money appears usually 2 or 3 hours before market open on the day of payment With Schwab there has been an occasion when the payment shows up 2 days after payday , but very seldom, thus as someone who drips you would see the delay. I prefer the payment on the day of payment as in certain circumstances it could make a difference in your bur price. Since I do not drip I do not know if the price you would get is reflected on the shares that are dripped at open on the date of payment or the date it shows it was added.
How one uses the reinvestment program is of course personal choice and as one who only has dividend paying stocks. An investor should make up his/her own mind if they want to use it. II say use what ever you are comfortable with.

Wishing you the best

“but I wonder at times what really is the difference between”

You don’t have to wonder, this question has been answered hundreds of times in empirical research and the answer is that once controlling for known equity market factors, dividend yield (and growth thereof) is irrelevant.

In older time series dividend growers outperformed, but it was due to their loadings on the value factor. More recently they have underperformed, mostly due to their very low loading on momentum and the fact that the value premium has disappeared for almost 15 years now.

Dividends are very inefficient, thus most of the best stocks won’t use them. Requiring stocks to pay dividends would have meant missing out on AMZN, GOOG, FB, NFLX, TSLA, for a whole decade and counting. And today you’d be adding to that list many other names that are growth stories of the next decade.

There is nothing bad about dividends, but it is a very poor portfolio selection criterium because it implicitly excludes a large portion of the market with the best growth opportunities (by construction).

Focus on income if you need the income *now*. In any other case the only thing that matters is total return, and it is a mathematical fact. It is even more true in a tax shielded account, where switching allocation does not incur a capital gain tax.

P.s. I own several stocks for their dividends, it is a perfectly reasonable reason to own them; just do not expect them to give you alpha.
The rock and sand story was told by Jesus centuries ago:

"Therefore everyone who hears these words of Mine, and acts upon them, may be compared to a wise man who built his house upon a rock. And the rain descended, and the floods came, and the winds blew, and burst against that house; and yet it did not fall, for it had been founded upon a rock. And everyone who hears these words of Mine, and does not act upon them, will be like a foolish man, who built his house upon the sand. And the rain descended, and the floods came, and the winds blew, and burst against that house; and it fell, and great was its fall." [Matthew 7:24-27]
Rida Morwa profile picture
@usiah Very true it finds its origins among the pages of the Bible.
@Rida Morwa

Yes, specifically, with Jesus Christ Himself.
Buyandhold 2012 profile picture
Why income?

Because the grocer will not accept a smile as payment.

You need income to pay the bills.

And the bills keep on going up.

So your income needs to keep on going up.

A friend of mine just retired at age 75. He phoned me today telling me that he's worried he might run out of money before he turns 90.

"Don't worry about it," I told him. "If you go broke, you can always move in to one of my spare bedrooms."

"That's not funny," he said. "I'm down to my last 2 million dollars because of required minimum distributions."

"Look on the bright side. You might kick the bucket before you turn 90."

"I should have kept my job until I was at least 80."

"Better yet, work until they carry you out on a stretcher."

I think I'll ask my mother to call him.

She keeps telling me that she could live on 20 bucks a day.

And she probably could. She should write a book.

The bottom line is that a portfolio of high quality dividend paying stocks generates an income of about 3% a year.

So do the math.

If you need an extra $30,000 a year when you retire, you need a portfolio worth one million dollars.

If you need an extra $150,000 a year when you retire, you need a portfolio worth five million dollars.

It isn't rocket science.
Rida Morwa profile picture
@Buyandhold 2012 Thank you for sharing your thoughts! Let him know about HDO, we can make that $2 million stretch his lifetime
Mozman profile picture
@Buyandhold 2012

what a nightmare. 2 million not close to enough with his time horizon.
@Buyandhold 2012 And one can easily get more then 3% divs. Plenty of industries (energy, pharmaceuticals, grocery stores to name a few) pay quite a bit better than that, and even if the stock fluctuates during things like the 'covid scare' as most did, the underlying business model is stable and you'll keep getting the divs. I'm getting 7.13% on my investments presently and I'm not just chasing dividends - Rida has given me some great ideas for industries and stocks to buy into.
BM Cashflow Detective profile picture
How was wealth created originally?

The best question ever.

Quite simply through constant accumulation.

Something for hunters and gatherers.

Nowadays called investors. ;-)

Accumulation is a stylistic device of rhetoric and can be identified in texts of all kinds and literary genres. The accumulation describes the ranking of several terms to form a generic term that is not mentioned or mentioned, which makes it more detailed and reinforced.

In the economy and on the stock exchange especially the accumulation of capital, means of production and wealth. ... and of course dividends too.

It is my passion and conviction to hunt and collect stocks as well as owning excess wealth well beyond my needs.

A healthy greed for wealth-increasing accumulation.

Personal responsibility is in my DNA and being rich is my right as a free and independently thinking citizen.

Decisions are not based on possibilities, possibilities are created through decisions.

Think in terms of solutions and create clarity in your life.
Rida Morwa profile picture
@BM Cashflow Detective Thank you for sharing your thoughts and reading our article.
@BM Cashflow Detective "Think in terms of solutions and create clarity in your life."

I've run a business for 32 years that's been a one-man show.

I learned very quickly that if I didn't think in terms of solutions that I was the problem.

Re-read the quote because it is very profound and yet one that could easily be passed over while doing our daily reading

I really appreciate the articles that you produce.
The articles that don't have any specific recommendation usually are the ones that leave me with the deepest thought; the result is due diligence not specifically focused towards my portfolio but towards my entire life ; present and future

Your thought-provoking articles have changed my life and allow me to see a future that includes retirement before I reach 60 years old.

I use the income method personalized to my individual needs

Thanks your efforts 🎁

Rida Morwa profile picture
@Overfished Thank you for your kind note! I'm glad we've helped change your outlook and I'm proud to be part of that process.
Outstanding article, Rida! And yes, I sang that song as a child; my grandchildren know it now and it's sound advice - for income, for life and for eternity. I've been working with several of my clients to recognize that the prospect of rising interest rates that has "taken the shine off" a few investments made earlier this year is actually an opportunity, not an obstacle, to an income investor. Writing to one this morning I commented that DCA'ing is the friend of an income investor even more so than a growth investor because the higher income starts the next quarter - and continues - while, for a growth investor, he has to wait for Mr. Market to, someday; hopefully, reward the added investment. Thanks for the great column.
Rida Morwa profile picture
@RASN Thank you for your kind comment! I agree it is applicable to many important aspects of life.
PendragonY profile picture
I find it far easier to predict dividends than share prices. After all, dividends are determined by about a dozen people who coordinate their actions, while share prices are determined by thousands to millions of people who by law are restricted in how much they can coordinate.
Thanks Rida. Great article per usual. Your analysis is spot on, as my approach to high dividends is 7% or greater which I own over 40 at this time. Being 77 years old I may differ from others as my main objective is preservation. If I can collect 7% or better and at least maintain my cost basis and inflation I'm a happy camper. Capital gains are a bonus. I'm curious if I'm on the right path. Dean3084
ron2004 profile picture
I too enjoy reading Rida.
You are 77. You state (conceptually) how you are investing but at the end you state: ". . . I'm curious if I'm on the right path". IMHO, that's a curious thing to say. Why, are you not sure or confident in your own investments?
NO ONE's investment strategy is or can be perfect. Investments may require change over time.
Oh, BTW, I'm 73 and my portfolio is working fine for me.
PendragonY profile picture

Looks like a good path to me. Rather than just looking at yield, you need to make sure your holdings can continue to pay the cash dividend they are now paying, and over time increase it some as well. But otherwise, you look to be doing great.
Rida Morwa profile picture
@dean3084 To me, it sounds like you're on the right track. I personally do not like owning anything that yields less than 6% as a general rule of thumb, occasionally I do if the opportunity is stellar.
clintonc profile picture
The dividends earned the first full month paid for my yearly subscription. And. Has produced the same amount or more every month since. You talk about “recreated” or “ rediscovered”. When I read your thoughts on investing it was “revolutionary”. So happy I joined and looking forward to a long and profitable partnership. Can’t think you and your team enough.
PendragonY profile picture

Until fairly recently the way to amass wealth was to have assets that generated a good income. Selling assets to cover expenses was seen as the path to ruin. So yes, this is not new even if it has been out of vogue recently.
Rida Morwa profile picture
@clintonc I'm glad you're seeing such great success. Thank you for being part of our HDO family!
Phil in OKC profile picture
@PendragonY Another way of saying that is this: “The more you handle your bar of soap, the smaller it gets.”
Rida, thank you for your guidance, information, and wisdom. Dividends are like money falling out of trees. And, with dividend reinvesting, compounding dividends are one of the greatest wonders of the world. Start dividend reinvestment early, and sit back and watch your wealth grow over time.
Rida Morwa profile picture
@gort9999 You are very welcome! I agree the longer you have to build your income in-flow the better
@Rida Morwa When I was 25 my employer's company changed hands and they closed out my 401k and sent me a check. At the time I was strapped for cash and the money did not get re-invested. Had I put it into investments earning 10%, between then and age 65 I'd have seen that $10,000 grow to nearly a half million.
PendragonY profile picture
Buy assets that pay you to own them. It's a very old way to gain wealth. And it still works today.
racerkeith profile picture
@PendragonY taking advantage of compounding!
Excellent perspective. It works
Rida Morwa profile picture
@Lance g Thank you, I agree it truly does.
billinsd profile picture
@billinsd As a retiree, I have been using some components of the income method and have been buying bit by bit on some of the recent CEF dips. Though with the recent volatility, my accounts are down on average 6% since August. That’s because much of the market has been in a quasi correction for a few months —-and that’s across all asset classes! But at this month’s end and on November 1st I will receive most of my monthly distributions , which

now will be 16% higher than the previous month because I’ve been in buy mode and I’m dripping everything, which guarantees me a raise every month unless a distribution is cut. That 16% will be part of my ordinary everyday money used for personal expenses such as dining, boozing , shopping etc.
Admittedly, it does hurt to see my “net worth” or principal down because it is a six-figure sum. But I don’t plan on using that money-yet. However, due to the income it’s providing me, I AM using that money !! At 63, I don’t collect SS yet, but I am considering it shortly. My break even point if taken now is 80——and if I need that extra 10,000 a year at 81 the experts say I’m screwing myself for by not waiting til 70 , so be it. That would mean something terribly would have gone wrong investing in the next 17 years. I want to travel more and enjoy my vacation home more while I can——SS is not money in the bank like some claim it to be and you can’t pass it to heirs—-so use it for longer with less while you can.
Rida Morwa profile picture
@billinsd You are very welcome!
Phil in OKC profile picture
@Sane Man You can pass on your SS to your spouse, if it is a higher amount
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