The Informed Investor: What's the Deal with Dividends?

Many investors may choose dividend-paying stocks with the hopes of earning consistent income through payouts that aren’t tied directly to a stock’s performance. But what are dividends, exactly? A dividend represents a portion of a company’s value being distributed to shareholders. However, some investors may not realize that a company’s share price typically declines by the amount of the dividend it pays. Put another way, the dividend doesn’t come out of thin air. This is a reminder about the importance of focusing on total return, which incorporates dividends and changes in share prices. For investors seeking stable income or reduced volatility from dividend-paying stocks, keep in mind that a dividend-focused strategy does not necessarily meet those goals because changes in dividend policy are common, especially during times of higher uncertainty, and the data do not suggest that dividend-paying stocks are significantly less volatile than non-dividend-payers. It’s also important to note that the percentage of firms paying dividends has declined significantly in the past several decades. That means diversification may be sacrificed when investors focus solely on dividend payers. Dimensional’s Mark Gochnour, Wes Crill, and Jake DeKinder discuss the effectiveness of dividend strategies and their potential downsides.