The Dangerous Illusion of ‘Free Money’ as An Investor
Why dividends are not what you think
The rational investor cares about one thing; total investment returns.
Total returns for stock market investors = capital gains + dividends — investment fees & taxes
All that matters is, what is my account balance? If you have a $100,000 portfolio, the $100,000 is all we should care about. We shouldn’t care whether that $100,000 came from dividends or capital gains (increase in share prices).
Except we do care. We care a lot.
Investors love using dividends to buy stuff
A 2021 paper titled “consuming dividends” written by Konstantin Bräuer (University of Frankfurt), Andreas Hackethal (University of Frankfurt), and Tobin Hanspal (Vienna University) examined why investors are drawn to dividend-paying stocks and how some investors plan their entire financial life around dividends.
The Researchers used bank data, portfolio data, and survey data to measure how investors’ spending habits changed around days of receiving dividend income from a portfolio. Their findings show that many investors allowed their spending to be dictated by the dividend policies of the companies they invest in.
