Wrong Approach to Dividend Investing

We're asking ourselves the wrong question about dividend stocks. That thought occurred to me while I was reading a USA Today column that highlighted the fact that dividend stocks currently give you a much better current return than other vehicles: "Dividends are especially important in these days of low interest rates. The average money fund yields 0.03%, according to iMoneyNet, which tracks the funds. And you'd be lucky to get more than 1% on a one-year CD."

That snippet, along with much of the rest of the article, is a good answer to the question: "Why should I buy dividend stocks?" But that's really an odd question for investors to be asking. The more appropriate question than "Why should I buy dividend stocks?" is "Why did we suddenly stop focusing on dividend stocks?" As the USA Today column rightly points out, in decades past the dividend was a primary, if not the primary, driver for equity investments. So what changed? Part of it was the increased focus on the academic view of efficient markets. From many an ivory tower in academia, the markets were viewed as a supercomputing mechanism that properly priced stocks to reflect all known information, which included capital-allocation decisions like a dividend payout. In essence, this said that the value of your investment ended up the same regardless of whether or not profits were paid out.

Source: Motley Fool

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