Are Dividends Income? (Part 4)

One problem I have with the whole dividend concept is the belief they are “free money,” which I just debunked.

Remember that I began this blog mini-series with the question of whether dividends are income and YES took an early 3-0 lead. The score is now 3-3. If you survey many investors about dividends then I would guess very few realize dividends received now come at the cost of total stock price appreciation later. In financial terms, “income” does not imply offsetting loss.

One theme we occasionally see in Finance is that of “synthetic equivalents.” These are things that seem different but are actually the same. Sometimes they are workarounds: other ways of doing the same thing. In option trading, covered calls and cash-secured puts are exactly the same thing. Time and implied volatility are also synthetically equivalent or substitutes for each other. Far more pairings in Finance strike me as having trade-offs subject to different pros/cons rather than one being definitively better/worse than the other. I believe dividend payments (income) vs. capital appreciation (growth) falls under this umbrella too.

When we have multiple ways of doing the same thing, the problem for me arises when someone tries to assert a difference and advertise why one is better than the other. This is persuasion and propaganda along with marketing and advertising. This is sales and how to make a buck. This is optionScam.com.

When it comes to dividends, people do accentuate a difference and people do assert differences between “income” stocks and “growth” (no dividend) stocks. I will resume there in the next post.