Singaporeans love dividends. It is always reassuring to see a little stream of money going into our accounts every month, without us doing anything. It is no secret that REITs are the most popular investment among Singapore retail investors.

I too liked constant passive income in the beginning and invested in dividend names such as Starhub, Singtel, and Keppel.

After a decade or so, I get the feeling that dividends are a gimmick, or worse, a trap. They attract you in with supposedly guaranteed dividends, but you fall into the trap of a declining share price.

Those names I mentioned have all tanked and have been in a downward spiral for years. There are too many others to mention, including the entire banking industry.

Dying Companies

Yes, dividend paying stocks are less volatile than growth stocks. But growth stocks eventually go up. Most dividend paying stocks, especially those that are based in Singapore, eventually go down.

And it comes down to one fundamental reason.

Dividends are often paid because the management is unable to generate a higher return with its cash themselves. In other words, they have no good ideas how to generate new business.

Thus, dividends are paid to shore up their sagging stock prices. To keep it high, they sell their assets or use debt. But any 12 year old can tell what that eventually leads to. A dying business. Most people are foolishly paying high prices for the illusion of stability and safety.

I should expect CEOs like Elon Musk and Lisa Su to generate a higher return than I would myself. Their record of building value is much better than the vast majority of people. Instead of returning cash to me, I much prefer they keep it to grow their business and share price.

An Unreliable and Low-tier Source of Income

Dividends aren’t even a reliable source of income. Stockholders are the lowest on the totem pole, and dividend payouts are the first to be stopped. The banks, bondholders and the remaining employees would still get paid over shareholders. In many situations, stockholders suffer from a double whammy, a cut in dividends and a declining stock price.

Given the choice, I would much prefer being a bondholder over a shareholder. Bondholders are among the first to be compensated. The penalties and reputation loss is much higher if a company chooses not to pay bondholders.

The higher the dividend, the stronger the sense of being a trap. High dividends, especially anything over 5%, is suspicious. No company worth its salt would have to resort to such a high dividend to attract investors.

When can Dividend Investing makes sense?

There is still a place for dividend investing, but its a much smaller role than what people would imagine.

It only sort of makes sense to move into dividend investing in the twilight years. The time you can wait for a share price to recover is much shorter. Compounding doesn’t matter as much anymore, and you simply wish to preserve wealth while getting a little something in return.

But I wouldn’t do dividend investing as most people do. I would avoid buying individual stocks. These are much too risky to rely on for cashflow. The people who relied on HSBC, Singtel, and DBS dividends were badly hit by both falling share prices and dividends.

Instead, I would buy an income or bond ETF. It’s impossible for these to go to zero, and if any one company fails or defaults, its barely felt.

So don’t fall into the trap of dividend investing, especially if you are young. Don’t get tricked by stable cashflow and “passive income”.

It’s comforting and feels good in the short-term. But in the end you would have lost out on compounders and multi-baggers like Apple, Tesla, Amazon, and any other growth stock.

After a lifetime of investing, don’t be left disappointed.

9 thoughts on “[Premium] Dividend Investing is a Trap

  1. I personally think it isn’t a binary black-or-white yes-or-no thing. Wealth mgmt & personal finance is much more nuanced.

    And you need to differentiate between dividend investing & lousy investing. Even growth oriented US has high dividend-paying melting ice cube value traps. GE comes to mind.

    A 30-something person focusing on get-rich portfolio can have more than 70% in growth assets.

    While someone who already has a large quantum may be more focused on stay-rich portfolio & not put more than 30% into growth assets.

    People like Prince William don’t need to swing for the fences. Similarly for those who feel that $1M or $2M is sufficient for them & have structured their portfolios for more or less sufficient income for the long-term.

    And for the majority of investors going for growth stocks, I’m also a firm believer that most of their growth pursuits should be done via diversified vehicles like growth or sector ETFs.

    Single stocks, just like cryptos, should be position-sized accordingly.

    1. Yeah, a good dividend stock beats a bad growth stock. So stock selection does matter.

      Just wanted to point out Singaporeans have tended to invest way too much to the dividend side, and most are disappointed, especially when compared to putting money in the Amazons and Apples. The main fallacy is exchanging potentially higher returns for “stability”. Short-term feel good, but long-term price drop. With time, the risk in growth stocks will even out, and it doesn’t matter what happens this year or the next if you hold for 5-10 years.

      Long-term wise, companies with innovative products will beat those companies with a landlord mentality i.e. sit and collect money.

      The results for Sg dividend stocks in wealth preservation is mixed.. I believe at best its flat, with only the dividends to compensate.

      1. Erm, you also need to differentiate between dividend investing & Singapore investing lol.

        There are many international dividend payers with strong or stable long term performance. 😉

        Growth or value, dividends or capital gains, they all have their place in a portfolio. Risk adjusted returns & portfolio volatility is also important. Most can’t take even a -20% correction without making emotional mistakes.

        Don’t know about you, but I’ve gone thru -50% drawdown in my entire cash networth (excluding only CPF & residential home). From 7 figures to 6 figures. Did not recover to previous highs until 3 years later. That’s the price of being overweight in growth stocks.

        I’m still >50% in growth — only becoz it works for me & I can go thru another -50%. Not many people can, and they need to realise that.

      2. Oh I was referring to Singapore dividend investing.. internationally I agree that can be many other good companies that I’m not aware of. Doesn’t make sense to do dividend investing in U.S due to withholding taxes.

        I’ve gone thru 30%-40% drawdown, with a lot in margin, back in Mar 2020. But luckily the recovery was rapid. I’m not sure how I would have handled it if it lasted 3 years or more. Mind if I ask what were the years that your growth stock portfolio recovered?

        It’s true that most people can’t take a 50% drawdown, or even 20%. So you’re right, it’s not for everyone. I’m not 100% in growth investing either… about 20% is in a bond, income fund, and an annuity. All leveraged at about 1% interest.

        I think the people who can stomach the ride in growth stocks will eventually come out better. Like Marilyn Monroe says “If you can’t handle the worst of me, you don’t deserve the best of me”. Time will smoothen things out, and I would guess that your growth side would be outperforming now.

  2. Haha, what else … the GFC.

    And come to think about it … it took more than 3 years, from 2009 to mid-2012 to break even, including dividends.

    And yeah, my total portfolio is now 3X the peak in 2007, just before I quit my job for good in 2008.

    Unfortunately many friends & acquaintances who panic sold & never re-entered (or who re-entered many years later) couldn’t recover their original portfolios. If not for the fact that they still have jobs & can re-save their losses, they’d be in a bad spot seeing that they are now in their 50s and early-60s.

    1. Nice! Glad you held on and benefited greatly. For someone who is retired, you still sound like you are significantly into growth stocks. When would you start selling those and move to less volatile investments?

      1. I’m already quite pared down on growth stocks, from 80% over ten years ago to roughly 55% today.

        Have been taking profits over the last few years whenever my growth allocation exceeds 60%, which have been happening regularly since 2017.

        My gut feel is that stocks in general still have a longish runway for a bull market. But don’t be surprised to experience -25% corrections every couple of years.

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