The Harmful Phantasm of ‘Free Cash’ as An Investor | by Ben Le Fort | The Startup | Dec, 2023

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Why dividends aren’t what you assume

Photograph by FLY:D on Unsplash

The rational investor cares about one factor; complete funding returns.

Whole returns for inventory market traders = capital beneficial properties + dividends — funding charges & taxes

All that issues is, what’s my account stability? If in case you have a $100,000 portfolio, the $100,000 is all we must always care about. We shouldn’t care whether or not that $100,000 got here from dividends or capital beneficial properties (improve in share costs).

Besides we do care. We care rather a lot.

A 2021 paper titled “consuming dividends” written by Konstantin Bräuer (College of Frankfurt), Andreas Hackethal (College of Frankfurt), and Tobin Hanspal (Vienna College) examined why traders are drawn to dividend-paying shares and the way some traders plan their complete monetary life round dividends.

The Researchers used financial institution knowledge, portfolio knowledge, and survey knowledge to measure how traders’ spending habits modified round days of receiving dividend earnings from a portfolio. Their findings present that many traders allowed their spending to be dictated by the dividend insurance policies of the businesses they spend money on.

Discovering #1: Traders are considerably extra snug spending dividends than their paycheck.

  • 14.4% of dividends an investor receives are spent on one-off purchases inside per week. The vast majority of that spending occurred on the day they acquired the dividend.
  • Solely 9.6% of labor earnings was spent on related purchases throughout the identical interval.

Discovering #2: Dividend bias exists for the younger & previous and the wealthy & not-so-rich.

  • Elevated consumption round dividend funds is important throughout wealth and age distributions.

Discovering #3: Supersavers are probably the most reliant on dividends to gasoline their spending

  • Previous analysis has instructed that those that depend on dividends lack self-control of their spending habits.
  • This research finds the other outcome; “those that would like to avoid wasting reasonably than spend, devour a bigger fraction of…

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