The Flaws of a Dividend Investing Strategy
Dividend investing is a popular strategy among investors seeking passive income. The idea of receiving regular cash payouts from investments is appealing but largely based on behavioural misconception that dividends are "free money" disconnected from capital value or share prices - a phenomenon known as the Free Dividend Fallacy ( Hartzmark et al., 2018 ). The Dividend Disconnect To begin, it's crucial to understand of what dividends truly is. At their core, dividends reflect the capital allocation decision made by companies' management on how to deploy their earnings. They constitute payments made by a company to its shareholders from a portion of its profits, typically disbursed in the form of cash or additional shares of stock. These payments are typically paid regularly, often on quarterly basis. Dividend investors view this as companies paying out "free money" as an independent source of income, similar to payment from a bond. What they may fail to re...