To some, the concept of dividends is pointless. They say, “Share values and stock values go down when dividends are distributed, so no value is gained.” People holding this view double down during bull markets saying, “If I don’t reinvest my dividends, I’m losing potential performance by not having all my money participating in the market.” Viewing dividends through this lens would lead one to believe, dividends don’t matter.1
If dividends don’t matter, why do portfolio managers use them in building investment strategies? I’d like to offer you some ideas why I believe dividends do matter and how they can provide potential value.
A dividend is a portion of a company’s profits distributed to its shareholders. These payments are often distributed on a set schedule ranging from monthly to annual.2 Some investors and advisors may be thinking, “Shouldn’t the company reinvest excess profits back into the company to create potential higher future returns for their shareholders?”
If a company is offering dividend payments, it has likely reached a measure of maturity and has already reinvested excess profits to maximize growth. The company believes it doesn’t need the excess profits for additional growth and would rather offer payments in the form of dividends to its owners.
The point is, if a company offers a dividend, it says a lot about the company. When a company is paying a dividend it generally means they are profitable. If the company has a history of paying consistent dividends, it can mean they are potentially more stable than another company that doesn’t pay dividends. Knowing they are investing in a mature company that has a history of profitability can go a long way to calm nervous investors. The trade-off is that dividend-paying companies may have a lower total rate of return compared to companies who are still maturing and reinvesting their profits for future growth. But that’s not always true. In some market environments, dividend-paying companies have outperformed non-dividend companies.3 Generally, non-dividend companies offer potentially higher growth but also include additional risk since the company hasn’t reached that point of maturity yet.
The debate shouldn’t be about which one is better. Both dividend and non-dividend companies can offer shareholder value, depending on what the investor regards to be important. Most likely, an investor who wants a diversified portfolio would benefit by having both dividend and non-dividend holdings in their portfolio.
Other than knowing that dividends can help you identify profitable companies, how else can dividends be used to provide value to investors?
For investors who prefer a more proactive method of managing market volatility, dividends could be beneficial. Instead of automatically reinvesting dividends back into the market, consider a scenario in which dividends are temporarily harvested and placed in the cash allocation of the portfolio. Some may argue that the investor would have a lower overall return compared to a fully invested portfolio. However, for investors that become fearful during market downturns, this step of maintaining a growing cash allocation could potentially give them the courage to keep the majority of their portfolio invested. Using the cashflows provided by dividends can be an effective way to help nervous investors manage potentially damaging fear-based behaviors such as selling all their investments and planning to reinvest when the market appears less risky. On the other hand, having a growing cash allocation can also help the investor shift their mindset from being scared of market downturns to seeing a downturn as an opportunity to reinvest excess cash. This behavioral shift is difficult to quantify, but I believe the dividend harvester has a higher likelihood of achieving a more favorable outcome than a fully invested non-dividend investor. The cost of selling investments due to scary market events can be significant. 4
Here’s something else to consider. Dividends can also be valuable for investors in the retirement distribution phase. In addition to managing their emotions to stay invested, retirees have a new worry – “What if we run out of money?” Most retirees begin taking monthly income distributions. Meanwhile, every day, they watch their account balance go up and down with the market. Many of these investors may not have worried about market volatility during the accumulation phase, but entering retirement feels different. In retirement, they know their income is dependent on their investments, and that knowledge can be terrifying. For many retirees, these emotions are too stressful. So how can dividends help these investors?
Financial advisors have the opportunity to help investors shift their perspective. I believe investor confidence is closely connected to how the investor gauges success. In my experience, investors who measure success only by their account value are more likely to grow fearful during market downturns. On the other hand, I’ve
seen investors gain a new peace of mind by simply observing distributions being replenished by cashflows from their mutual funds and ETFs. I have had clients tell me, “I used to check my account balance every day, now I maybe check it once a month.” These clients had implemented the Portfolio Waterfall investment strategy, which focuses on harvesting cash flows to replenish income withdrawals.
The debate on whether dividends truly matter will likely persist, regardless of the evidence presented by each side. The trade-off for advisors promoting non-dividend investment strategies for retirement income is to know they must convince their clients to remain invested while navigating the emotional ups and downs of investing. This group of advisors also needs to understand that a fully invested non-dividend strategy carries the risk of timing the market for income distributions. Selling equities or fixed income holdings at the wrong time can lead to unintended consequences. I’ve personally observed that this non-dividend approach can be more stressful for us advisors. By default, it encourages investors to focus solely on performance and gauge their success based on one factor – their account balance.
In contrast, a cash flow-focused strategy, such as the Portfolio Waterfall investment strategies, has helped clients gain a better understanding of how their portfolio generates income. This has reduced the urge to frequently check their account balances. I firmly believe that the peace of mind provided by a dividend cash flow focused strategy could potentially save them from resorting to all cash during market downturns. Helping an investor avoid a fear-based impulse could potentially offset any potential returns lost when compared to non-dividend strategies.
If you’re interested in learning more about implementing cash flow based investment strategies using the Portfolio Waterfall method, please reach out to me using the information provided below. The Portfolio Waterfall method includes both dividend and non-dividend holdings to meet the client’s objectives.
1 See the Modigliani-Miller theorem for this school of thought, from https://en.wikipedia.org/wiki/ Dividend_policy Accessed 9/8/2025.
2 https://www.investopedia.com/terms/d/dividend.asp
3 https://www.hartfordfunds.com/insights/market-perspectives/equity/do-dividends-matte-more-when-marketsfalter.html
4 Missing the top ten days over a 20-year time period could cut an investor’s total return nearly in half. https:// www.franklintempleton.com/planning-and-learning/learn-about-investing/investing-principles/cost-of-timing-themarket
