Investors love passive income. They fantasize about sitting on the beach, drinking pina coladas while their dividend checks roll in.
However, each dividend payment causes the stock price to drop by an equal amount. This is investing 101.
Unfortunately, many individual investors (and a non-zero amount of professional investors) do not understand this fundamental concept.
Most importantly, to achieve the history total equity market returns you have to reinvest those dividends. An argument could be made that in a taxable account, you don’t want dividends at all! Try marketing that “no yield” strategy (trust me, it’s hard…)!
Given the amount of funds launching with a magical 25%, 50%, or even 100% yields, it is hard not to get too cynical about our industry.
Here is a simple graphic inspired by HonestMath.com.
Just don’t post this to Reddit.
