No, Virginia, a dividend and a harvested capital gain are not the same……..

12pm Feb 21, 2021 update: Got some thoughtful pushback from KPA on the assertion that selling shares can still be viewed as a business-owner action and contingent variable in the overall assertion. My answers:

1. Investors have the option of taking cash or reinvesting the dividend. There is a very modest cost to doing the latter, but there is a cost, so it drives academics nuts. You could say that the business owner who does not need the cash now is forced to take it and/or incur the minor hassle of dividend reinvest.
2. Clientele effects. People who want dividends buy stocks with dividends. People who don’t want dividends buy stocks without dividends. Everyone is happy.  My assertion is more about the philosophy on holding a stock without a dividend, that it is on a par with speculation. Lots of people are copacetic with that.
3. Selling shares of dividend-paying securities in retirement to slowly liquidate the position works perfectly well. At 90 years old, you don’t really want to “own” much of anything or have to think like an owner. So yes, selling out of a business slowly can make perfect sense.

There are many contingences and scenarios involved when bringing large numbers of people together in an exercise of decision-making under conditions of uncertainty. The main point below is that people should be aware of the implications of their choices. Too few investors are.


Interest rates are at or near record lows at the same time that millions of Baby Boomers are retiring every year. In that environment, it would seem natural for many investors to turn to income-producing and income-growing stocks to help fund their consumption.  And yet, that has not happened. Dividend paying stocks have been strongly “out of favor” since 2016 and more generally out of favor for the past decade or so. The S&P 500 Index’s payout ratio remains low, at 30-40%. The yield of the overall market is extremely low, around 1.5-1.6%, and at a level where there is simply no way to view broad market vehicles from an income perspective. And finally, to judge by the headline-grabbing entities–the EV companies of spectacular size and the SPACs of spectacular risk–there seems no relief in sight for the conservative, income-oriented investor.

Clearly, retirees are not clipping equity coupons as their parents or grandparents did to meet their consumption needs. They are instead taking capital gains from their many winnings. With the market at all time highs, both in nominal and real terms, that’s not been too hard. So bully for that strategy. It has worked.

But I want to address that supposed equivalence of a harvested capital gain and a dividend payment from a philosophical perspective. The University of Chicago finance profs, your MBA program, your CFA charter–all of these august sources of financial wisdom treat a dividend and a harvested capital gain of the same nominal value as exactly equivalent.

In contrast, I want to go on record to state that, as a matter of first principles, they are not the same. They are profoundly different. To suggest otherwise is to compare 2+2  with (18*325)*(2^2)/((log (base 10)1000)*(2000-50).   Yes, both formulas equate to 4. But how you get to one is very different from how you get to the other. The former is a function of business ownership, and receiving a share of company profits after other investment needs of the business have been met. Your effort is more metaphorical than real: it requires opening the post box to retrieve “the check in the mail.” The latter is far more complicated. It involves having an unrealized capital gain at a certain time, determining that it is sufficient or necessary to meet your income needs at that time, then going out into the market place, when it is open and when it is in a good mood, finding a buyer at your price (limit order) or an acceptable price (market order), having the trade settle without issue, and the funds making their way into your account.  Instead of business ownership, it is the diminution of your stake in the enterprise.

By the way, their are risks along the way at each step of that sequence. Individually, they may be large but they are there. For instance, failure of trades to settle happens more often than you imagine when buyers can’t produce the cash needed to complete the purchase or sellers turn out not to have the shares. “Fail to deliver” incidents are tracked by the SEC. You can look them up. They occurred frequently in recent trades involving a small, declining, video game bricks & mortar retailer. They happen less frequently for large, liquid brand-name companies. But they exemplify the philosophical difference between benefitting from the on-going ownership of an asset through receipt of a dividend, versus going out into the marketplace to raise cash by selling an asset.

Yes, it is true and I am well aware that there can be, under certain circumstances, differential taxation to the two types of activities. And there are obvious differences in timing of the payments. In the former, your payments occur on a stated schedule; in the latter, you have the luxury–for better or for worse–of timing your trades. For some investors, those details may matter, but over the long-term they are minimal compared to the profound differences in nature between a dividend and harvested capital gain.

While it’s my strongly held view that making investment policy subordinate to tax strategy is a **really** bad idea, it is still a very common approach. To highlight the difference between dividends and capital gains from a tax perspective, here’s an extreme way to think about them: In the capital gains only portfolio, you would hold only non-dividend paying stocks, commodities, bitcoin, and other businesses that make no distributions. The good news is that you will have no tax liability from your investments. You would only have a capital gain or loss to realize when you sell the investment. If you don’t sell the investment, you have nothing to show the tax man in that period. The bad news should be obvious. You could lose every penny. Asset prices can and do go down, especially in that specific period when you need to harvest a capital “gain” to fund consumption.

Contrast that with a portfolio of dividend-paying stocks, traditional (non-municipal) bonds, rental real estate, etc. Every quarter you will have a slew of taxable moments. These assets go up and down, but nowhere near as much as the more volatile “capital gains” portfolio.

You have a choice, as in so many other areas of investment. Make sure you understand the implications of that choice. From my perspective, one of those implications is that the supposed equivalence of a dividend payment and a harvested capital gain contributes mightily to the market being used as a casino by too many investors, rather than as a platform for business ownership.

It also underpins the great popularity of share repurchase programs. Corporate America packages both dividend payments and buybacks together and calls them  “returning cash to shareholders.”  Nonsense.  While they are both cash outflows from a corporate balance sheet, they have nothing else in common. One goes to business owners; the other goes to share sellers. The latter may or may not have a capital gain if they tender their shares to the corporation. Meanwhile, the former, the shareowners, benefit only in theory by the reduction in the number of shares outstanding. In too many instances, the company is issuing an equal number shares to employees as compensation or as part of acquisitions, so there is no accretion of ownership to the original shareholders.

Yes, it is of course true that dividends can also be cut, borrowed, and abused, but that simply does not occur with anywhere near the frequency of the antics of the casino.