A dividend is your own money coming back, and that is not the end of the argument
The theory that dividend policy is irrelevant has never been beaten on its own terms. It also rests on assumptions, and three of them fail: one because Australia legislated against it on purpose.
This site has been fairly insistent that a dividend is a withdrawal. The share is worth less afterwards by roughly what left. You have not been paid, you have been handed change.
Which invites a reasonable question, and it deserves a straight answer rather than a change of subject: if that is true, why arrange an entire portfolio around it?
The objection, at full strength
It is not a fringe position. Miller and Modigliani set it out in 1961 and the argument has never been beaten on its own terms. Under a set of clean assumptions, dividend policy does not affect what a shareholder is worth. A dollar paid out is a dollar off the price.
It follows that anyone wanting income can manufacture their own by selling a slice of the holding each year, in whatever amount suits them, on whatever schedule they like. A homemade dividend, identical in substance and more flexible in practice.
That is correct. There is no arithmetic trick hiding in a dividend, and any article claiming otherwise is either confused or selling something. The interesting part is that the assumptions the argument rests on are not descriptions of the world, and three of them fail in ways that matter.
One. The tax assumption fails hardest here, on purpose
The theory assumes dividends and capital gains are taxed identically. Australia looked at that assumption and legislated deliberately against it.
Under imputation, company tax already paid comes back to you attached to the dividend, and the credit is refundable, so for an investor on a low rate or in pension phase a distributed dollar can genuinely be worth more than a retained one. That is the policy doing exactly what it was designed to do. An imported argument that dividends are tax neutral is describing a country this is not.
Show the numbers
| Paid as a franked dividend | Kept, sold as a discounted gain | |
|---|---|---|
| Nil | A$1.43 | A$1.00 |
| 15% | A$1.21 | A$0.93 |
| 30% | A$1.00 | A$0.85 |
| 37% | A$0.90 | A$0.82 |
| 45% | A$0.79 | A$0.78 |
Two. The cash arrives without anybody having to decide anything
The homemade dividend is flawless on paper and requires a person to execute it. Every year, choosing which holding to trim and how much, paying brokerage, and doing it again in the year the market is down 30% and every instinct says wait.
A dividend requires nothing. It arrives whether or not you were feeling decisive that month. The difference between the two is not financial and it is not small: one of them gets done and the other gets postponed, and the postponing happens hardest in exactly the conditions that make it most expensive.
This is usually dismissed as psychology, as though psychology were not the main determinant of what actually happens to a portfolio over thirty years.
Three. Cash is harder to fake than earnings
A profit figure is a set of judgements about timing, and honest people can reach different ones. A dividend is a bank transfer. It cannot be accrued, capitalised, restated next year, or presented on an adjusted basis.
Which makes a long payment record a genuine constraint rather than a marketing line. It is not a promise about the future, and reading it as one is its own mistake, but a company that has moved real cash out every year for twenty years has been unable to pretend for twenty years, which is more than can be said for its earnings statement.
The related effect is on management. Cash committed to shareholders is cash not available for an acquisition nobody asked for. A dividend narrows the range of things a board can do with your money without telling you, and that discipline is the argument most often left out by both sides.
What it costs, since none of this is free
Money paid out is money not compounding inside the business, which is straightforwardly bad when the business has good things to do with it. That is why the companies growing fastest pay little or nothing, and it is not a character flaw.
You also pay tax on income you might otherwise have deferred, and building an Australian portfolio for income tilts you towards a small number of sectors that already dominate this market.
Those are real costs. They are the reason this is a choice rather than an obvious answer.
Where that leaves it
The case for dividends is not that the arithmetic favours them, because it does not. The arithmetic is neutral, which is the part worth being honest about.
The case is that the tax code here is not neutral, that a payment which arrives without a decision is one you will actually receive, and that cash is the only part of a company's reporting nobody can rehearse. Three things pointing the same way, none of them a trick, and an arithmetic that declines to object.
Which is a smaller claim than most dividend writing makes, and considerably more durable.
The payment that arrives without a decision still has to arrive
Most of the argument above rests on the money turning up, so it is worth knowing whether it does. Dividend Guardian works from what your holdings have actually paid, shows what that comes to across a year, which months it lands in and which of your bills it covers. Start free, with no account and no broker login.
For A$6 a month or A$60 a year, Guardian keeps watching: every payment recorded per share, your income by company and by sector, and a note when a company confirms a change to what it pays. There's a 30 day money-back guarantee.
Build my Dividend PaycheckDividend Guardian provides information and estimates from public data, not personal financial advice, and nothing here is a recommendation to buy, hold or sell anything or to prefer one approach to income over another. What franking and capital gains are worth to you depends entirely on your own circumstances, which belongs with the ATO or a registered tax agent. Guardian reports confirmed changes; it does not predict them.