Collecting dividends and selling stock are the two main ways to make money off of stock market investments. By investing in dividend stocks, you can collect cash income without having to sell down your holdings. By selling stock, you can sometimes cash out extremely high returns rarely found in the dividend universe.
The question of whether or not to pay dividends is one of the most hotly debated in finance. One theory, known as the “dividend irrelevance theory,” says that, ignoring taxes, it doesn’t matter whether or not a stock pays a dividend. This theory cites as support the fact that dividend stocks tend to fall in price right before the ex-dividend date. Other theories say that dividends provide a more stable source of income and provide a higher return when a company doesn’t have good investment opportunities in front of it.
In this article, I’ll explore how much money investors could have earned in the past by investing in two well-known Canadian stocks: one a dividend-free tech giant, the other a dividend growth stock.
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The case of Shopify
Shopify Inc (TSX: SHOP) is a Canadian e-commerce company that sells e-commerce software. Unlike Amazon and the big Chinese e-commerce companies, Shopify does not have a single one-stop shop that customers buy from. Instead, it provides the software that companies use to build their own e-commerce websites and take payments. Shopify is a pretty popular service among brands. The company has grown its revenue and earnings at high rates over the years, and risen an astonishing 5,923% since its IPO date.
If someone had invested $10,000 in Shopify on its IPO date and held to today, he/she would have about $602,000 today. This would create an opportunity to cash out $592,000 and still have the original $10,000 remaining! This sort of result is not generally obtainable with dividends. However, it should be said that Shopify has been a rare case, performing much better than the average stock during the same period when Shopify was beating the market.
The Fortis case study
As for what’s possible with dividends, we can look at Fortis Inc (TSX: FTS). Fortis is a well-known Canadian utility company with one of the best dividend track records in the Canadian markets, having raised its dividend for 52 consecutive years. The company’s yield is currently 3.1%. So, if you invest $100,000 into it, and the dividend doesn’t change, you get $783.37 per quarter or $3,133.48 per year. That’s a fair bit of money, especially when you take into account likely future dividend increases. But it’s not as much as what our hypothetical Shopify investor would have earned.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Fortis | $84.91 | 1,178 | $0.665 per quarter ($2.66 per year) | $783.37 per quarter ($3,133.48 per year) | Quarterly |
What Warren Buffett said on the matter
As a concluding note, it’s worth mentioning what Berkshire Hathaway CEO Warren Buffett had to say on the matter of dividends vs buybacks. Buffett is famous for never having paid a dividend, and his successor Greg Abel appears content to keep that track record going.
In a famous speech, Warren Buffett showed that a company with good opportunities to invest its retained earnings would generate more wealth for shareholders than it would by paying dividends. The reason was that retained earnings would go on to generate compounding income, while the dividends would sit as cash or be spent. Ultimately, if the company’s stock followed its earnings trajectory, then the investor would make more money by periodically selling stock. So, in a world full of good re-investment opportunities, re-investment beats paying dividends. The only question is whether that’s the world most companies live in.
