Income vs growth securities in a downturn
It's generally accepted that "income (dividends) and growth (capital gains) are perfect substitutes (tax and transaction costs aside)". i.e. "In financial theory, there is no reason for a difference in investor return to exist between dividend paying and non-dividend paying stocks, except for tax consequences."
How well does this hold up in market downturns and/or high volatility? A friend makes the point that you'd rather receive a 0 dividend than sell 0 worth of a security at a potentially low price due to transient market conditions. I can understand this for weakly-traded securities. To what extent does this affect my holdings of index funds tracking well-traded securities (FTSE Global All Cap Index and Bloomberg Barclays Global Aggregate Float Adjusted and Scaled Index)? Should I divesify to hold some "high-income" securities such that during downturns I have some income without needing to sell securities at potentially bad prices?
(2)2 Comments
Sorted by latest first Latest Oldest Best
I would argue that there's no difference even in transient low times. The dividend drops the value of the stock equivalently, so there's no difference from a wealth standpoint.
Say you own 100 shares a stock that has a "natural" value of 0 for a total value of ,000.
Then a pandemic occurs, and it drops in half to for a total value of ,000. Would you rather that the company pay a dividend so you have ,000 cash and ,000 of stock (100 shares worth /share) or sell 20 shares for ,000 cash and ,000 of stock (80 shares worth /share)?
In either case, you have the same amount of cash and stock - whatever relative growth the stock has from there affects you equally either way.
Remember the back-half of that financial rule - in financial theory, tax consequences aside, you can simply use dividends received to purchase back more stock. Therefore in either case, you have the ability to decide - do you want cash, or do you want to hold more equity?
Receiving the dividend means the value of your shares goes down [because the corporation has less cash and therefore less value], in theoretically the same amount as if you had sold that portion of your holdings.
Terms of Use Privacy policy Contact About Cancellation policy © freshhoot.com2025 All Rights reserved.