Who said dividends are "free money"? Not me.... you said it. You talk as if dividend growth investors don't know what they're doing. You are parroting talking points straight from Warren Buffet who himself enjoys dividends but argues against shareholders from BRK getting dividends even though they have stated they have so much cash they don't know what to do with it.
Selling shares if you are a multi-millionaire is fine... because you got plenty of money like Warren Bufett. But selling shares of fundamentally sound companies during a bear market is like a farmer eating his seed. For those that need income, your advise for someone with a $500,000 portfolio starting in 08 was to sell 4% for income.... by the end of the year, that $500,000 was cut in half and took 5 years to recover. In the mean time, he was selling 4% at a time.
During a recession, networth doesn't matter... it's cashflow/income that matters.
I'm on the move so I'll copy-paste some points I explained in another post on why I prefer dividend growth investing. You tell me what I've got wrong.
I want cashflow from my investments... not just paper value. Hard cash: Dividend income from companies that you have evaluated as fundamentally sound can be considered as a share in earnings from managers who work on the ground tending to your business and making sure you get those checks on time while also working to increase those rents atleast annually. For a retiree, networth won't matter during a recession or a down turn... it's cash flow that matters. Warren Buffet argues that you could just sell some of your shares and have the same function play out but I would argue that for the retail investor, why would they want to kill their geese that lays these golden eggs every quarter or month? It's such a bad idea to sell shares that have gone down in value for the sake of income. I've got some 35 years for retirement but I'm focusing on building enough cashflow to cover expenses by the time I turn 40. I invest only in stocks that have raised their dividends annually. I've got low yield, moderate yield and high yield investments and these are split between value and growth stocks... so I'm trying to capture increasing income and capital appreciation. Currently tthey provide 4% in income to our annual income. If I continue at this rate, I should be able to meet 100% of expenses within 10 years.
I want increasing cashflow from my investments: I want to beat inflation.... real inflation I face through increasing cost of living expenses (my rent went up by 7% last year).
It forces corporations to share profits with shareholders: It's proof that as a shareholder, the company is striving to give its part owners some of those earnings. It holds them to account. It's payment to hold the stock through thick or thin. And when they can't after they've committed and established a track record, it's evidence that they've got some issues in returning some of those profits and it's a sign for investors to take a closer look and make a decision on whether their objectives and goals are still being met.
Compensates for volatility and risk: since I have a diversified portfolio of dividend growth stocks, dividends from the portfolio can cover dips in the value of the stocks I hold. So when one stock dips for some reason by 10% or 20%, hey no need to break into sweat if the fundamentals are still intact... I easily make up for that paper loss through a quarter or two's worth of dividends. Or even if I hold a 3% position in a company that turns sour due to fundamental issues and drops by 50%, I can exit that position and within a quarter or two, make up for that loss through dividends. I held a 2% position in ARCP which was plagued by an accounting scandal. The stock dropped by some 40% and I had a loss of some 25% and decided to exited the position because it broke one of my fundamental rules - no accounting fraud or coverups. However I didn't worry at all - one quarter's dividend from the portfolio easily covered all those losses and better yet, the paper gains from the next day made up for that ~0.5% loss.
Helps you book profit without having to worry about timing or loosing shares: At some point you need to book profit. You don't realize a gain unless you sell. You could make a call on that if you feel the stock has run up quite a bit or if it's time to exit a position. Dividends help you book profit every month, quarter or year without selling shares automatically. Eastman Kodak was a 137 year old blue chip stock that paid increasing dividends to its owners. Eventually it went bankrupt in 2012. If you held $100,000 worth of kodak stock until bankruptsy, you would have $425,318.58 in total returns including being paid $173,958.18 in dividends (source: http://www.joshuakennon.com/eastman-kodak-example/)
Sure, you've got to pay tax (if held in a taxable account) but that's the cost of cashflow and it's the trade off long term investors make (unless they hold it in a tax advantaged account).
Bottom line is that I need increasing cashflow from my investments and not just capital appreciation. Warren Buffet who has been resisting dividends from his shareholders boasts about properties he bought during the downturn that fluctuated in value but he never cared and loved those investments as he kept getting those rent checks. Same principle when people buy investment real estate... they expect some rental income.