Rethinking Dividends
A Conversion to Liquidity
The Growth vs. Dividend Investing Debate
Over the years, there has been a disconnect between growth investors and dividend investors. In fact, some growth investors (particularly content creators) have argued that dividends are “fake income.”
As someone who has spent a lot of time studying philosophy over the past decade and a half, it seems to me that the disconnect between these two camps is a result of unclear definitions. As far as I am concerned, however, both growth and dividend investors are ultimately income investors. A principal difference between the two is how they convert their portfolios to cash.
Rethinking What a Dividend Is
It is often said that a dividend is a share of profit in the form of a cash payment. I, however, do not see it that way. If a company is not profitable and still pays a dividend (as does often occur), are they sharing profits? How can they share profits if there is no profit to share? Such a definition seems incoherent to me.
The truth is, there are many forms of income, and unless you are the Federal Government, any money that is paid to someone has to come from somewhere. If you sell shares, the dollar amount comes out of your portfolio. If you collect dividends, the dollar amount comes out of your portfolio. If a company pays you a salary, that money comes out of their balance sheet. So all of us who seek to participate in the economy are seeking income.
And why do we seek income? Because we need liquidity. Cash can be exchanged for goods and services in a way that stocks, bonds, or real estate cannot. This distinction between liquid and illiquid assets is foundational to understanding what a dividend actually does.
And certainly, growth investors can produce income by selling their shares. However, dividend investors do not have to sell their shares in order to convert their portfolio to cash. Thus, not only are dividends conversions to liquidity, they are conversions to liquidity without selling shares.
Advantages of Dividend Investing
When growth investors sell their shares, they are losing the opportunity for the shares they sold to make them money. Certainly, their other shares may have increased in value, but there are only so many shares to sell. Dividends sidestep this problem entirely. As we’ll see in future articles, dividend strategies can safely support withdrawal rates above 4% per year, a threshold that becomes far riskier for growth investors relying on share sales.
This doesn't mean growth investing is a bad strategy. Certainly, it has its advantages. Selling shares offers tax control, timing flexibility, and potentially access to faster-growing companies. But for those prioritizing income in the distribution phase of investing, dividends offer a compelling alternative.
Conclusion
This definition, dividends as conversions to liquidity without selling shares, is the foundation for everything else we’ll explore in this newsletter. It changes how we evaluate ultra-high-yield ETFs, how we think about sustainability, and how we construct portfolios for income. If you’re rethinking dividends, you have to start by rethinking the definition itself.