Dividend Investing Is a Brain Fart

Dividend investing is a brain fart!

The entire concept is your brain playing tricks on you.

I know that thousands of people like dividend investing. In fact there are hundreds of blogs dedicated to it.

Dividend investing may sound like a solid and steady way to invest.

But it’s a brain fart!

In my latest YouTube video, podcast episode and blog post, you’ll learn:

• Why is dividend investing a brain fart?
• Why a dividend = selling shares.
• Why a reinvested dividend = No dividend.
• Why dividends are not new money.
• Fact check: Logic errors of dividend investors.
• What is the difference between a dividend & selling shares?
• Why dividends are a payment frequency.
• How can we get out of the Brain Fart?
• How can you perfect dividend investing?
• What are self-made dividends?
• How to invest effectively for “Income”.
• Why are self-made dividends a perfect fit for your life?

Definition: Dividend investing:

“The odd belief that taking money out of your investments does not take money out of your investments.” – Ed Rempel

Sell shares:                                            Dividend:

Money from left pocket.          Money from right pocket.

Number of shares.                                         Share price.

Key concepts:

Dividend = Selling Shares

Dividend vs. selling shares for same amount:

• Both are withdrawals from your investments.
• Ex-dividend date”: Stock goes down by the amount of the dividend.

1. Dividend = Selling shares. Both are withdrawals.

• Stock $10/share. 100 shares. 5% dividend. Price drops to $9.50/share.
• Dividend 5%   : 100 shares x $9.50  = $950.
• Sell shares 5%:  95 shares x $10.00 = $950.

2. Reinvest dividend = No dividend. Both you stay invested.

• Use 5% dividend to buy more shares.
• Reinvest:105 shares x $  9.50 = $1,000. Tax on dividend. 
• No dividend: 100 shares x $10.00 = $1,000.   No tax.

Dividend reinvestment plan (DRIP) = No dividend (+ pay tax).

Fact check: Logic Errors of Dividend Investors

1. Dividends are income. They are new money to you. False.

Cash from your investments sent to you.

2. Receive income. You keep your shares. Keep “principal”. False.

There is no “principal” with equity investing.

Dividend = Withdrawal from your investments. It’s not income.

3. Not selling during corrections & bear markets. False.

Dividend = Selling investments.

4. Reinvesting dividends is buying low (dollar cost averaging). False.

It is both a withdrawal & a new investment.

5. Dividend compounding if you reinvest dividend. False.

Reinvesting dividends is NOT new money.

Reinvest dividend = No dividend (+ tax).

6. Dividends are forever. Selling shares will run out. False.

With no dividend, share value keeps rising.

You can sell 5% of shares exactly as long as you can take a 5% dividend.

Dividends = Withdrawals from investments 

Difference: Tax & Who Decides

Dividend of $1,000 vs. selling $1,000 of shares:

                       Dividend         Selling Shares

Investment value     Down $1,000    Down $1,000

Cash                 Up $1,000         Up $1,000

Tax                    Taxed now        Tax deferred till you sell

                           Dividend           Tax-free capital + capital gain

Who decides        Company          You

Dividend: Taxable income forced onto you.

Dividends are a payment frequency.

Dividend: The company decides how much of your investment to sell & send you.

• Quarterly (usually)

Dividends vs. no dividends is like Quarterly-pay GIC vs. compound GIC.

GIC options to pay interest:

Monthly                                                                                 Tax.

Quarterly Dividend-paying stock Tax.

Annually                                                                    Tax.

At maturity – Compound GIC  Growth stock       Defer tax.

What payment frequency do you want?

How can we get out of the Brain Fart?

Focus on your investment value (not the dividend):

105 shares  x  $9.50  = $1,000.

100 shares  x  $10.00  = $1,000.

Dividend = Cash withdrawal.

Be “agnostic about dividends”. (Warren Buffett)

• Unaware of the dividend payout of my investments.
• Dividends: Not one of the top 20 criteria for choosing the best stocks.
• Your universe should be 100% of stocks globally.
• Not limited to Canadian dividend stocks. 

How can you perfect dividend investing?

Self-made dividends.

Dividend investing perfected.

Keep all advantages.

Avoid all disadvantages.

What are self-made dividends?

1. Simply sell a bit of your investments:
2. Can be every month.
3. You choose the amount.
4. Can be automatic with some investments.
5. E.g., mutual funds or portfolio managers.
6. Only withdraw when you need cash.
7. Very tax-efficient.
8. You need cash flow, not income.
9. Income is taxable cash flow.

Effective Investing for “Income”

1. Invest in equities based on the maximum reliable long-term return.

• Ignore dividends. Just reinvest them all.

2. Take “self-made dividends” only when you need cash flow.

• You need cash flow not income. Income is taxable cash flow.

3. When saving for retirement (“accumulation”):

• Choose “self-made dividends” of zero.
• Zero cash flow needed from your investments.
• Avoid tax on dividends.

4. When you retire, start “self-made dividends” for a sustainable withdrawal amount to provide the retirement lifestyle you want.

• “Decumulation”: Probably invest the same as “accumulation”.
• You or your spouse probably have 30+ years left. It’s long term.
• “4% Rule” works if you invest 70-100% in equities.
• Low “2.5% Rule” works for bond investors.

Perfect fit for your life.

Self-made dividends are better than ordinary dividends

in every way.

1. Better investment returns. (Invest for return/risk, not just dividend stocks.)
2. Diversify globally.
3. Complete control of timing, frequency & amount.
4. Lower tax (tax-free capital + capital gain).
5. Deferred tax until you sell. (Deferred capital gains – the lowest taxed investment income.)
6. Lower clawbacks of government benefits (not grossed up).
7. Cash flow only when you need it. (Not forced to pay tax when you don’t need it.)
8. Provides cash flow, not income (taxable).

What you learned:

• Why is dividend investing a brain fart?
• Why a dividend = selling shares.
• Why a reinvested dividend = No dividend.
• Why dividends are not new money.
• Fact check: Logic errors of dividend investors.
• What is the difference between a dividend & selling shares?
• Why dividends are a payment frequency.
• How can we get out of the Brain Fart?
• How can you perfect dividend investing?
• What are self-made dividends?
• How to invest effectively for “Income”.
• Why are self-made dividends a perfect fit for your life?

Ed Rempel