A screen displays the trading information for Berkshire Hathaway Inc. as traders work on the floor at the New York Stock Exchange in October, 2025.Brendan McDermid/Reuters
“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” – John D. Rockefeller.
Mr. Rockefeller’s dividend cheques may have had a few more digits than everyone else’s, but his sentiment is shared by many investors. What is not to like about a company paying you? Well, there are a few things to consider.
One is that dividends are a distribution of income earned by a company, which could have done other things with this money, such as reinvesting it for future growth, repaying debt, or repurchasing outstanding shares. All of these alternatives can be more financially productive than simply distributing the cash.
The other thing to consider is the tax treatment of dividend income. In Canada, dividend income is taxable if it is received in a non-registered account. Initially, it sounds like it’s not a problem because you’re also getting the cash payment. But there’s a catch. The payment is not new wealth for the investor. It’s a distribution of the company’s value, so share prices tend to adjust downward by roughly the amount of the dividend.
Companies with sustainable dividends that are under pressure from activist investors
An investor would often have been better off if the dividend had never been paid because the portfolio value would have remained the same, and no tax liability would have been incurred. This is why Warren Buffett famously refused to pay dividends on Berkshire Hathaway shares. If an investor needed cash, he thought they should sell some shares rather than have a company impose an unwanted tax liability.
So, why does Berkshire Hathaway invest in dividend-paying companies when it chooses not to pay one itself? The answer to this is the dividend paradox. In the long run, dividend-paying stocks generally outperform stocks that do not pay dividends. This is not because of the dividend but rather other characteristics of the companies. A company that committed to paying dividends into the future must have a long record of positive income and cash flow. Companies with marginal income or variable cash flows generally will not want to commit to making dividend payments. Accordingly, it would be reasonable to expect that large, cash flow-positive companies would outperform businesses with much more volatile income levels.
Committing to a dividend payment schedule also keeps management on its toes. If they fail to meet their dividend commitments, it will have a dramatic impact on the stock’s share price because of the negative signal it sends. Accordingly, the dividend payment acts as a concrete commitment to achieve their published income targets.
There are also other risks of having too much cash on hand. When cash is limited, then investment decisions are scrutinized in detail. However, when it’s plentiful, it opens the door for some mediocre investments or pet projects. The payment of a dividend each quarter consistently helps limit the cash available for discretionary investments and, hence, can act as protection against low-performing projects.
So then, can we say that dividends are good for investors? A better way to make the statement would be to say that dividends themselves do not create wealth but companies that pay them often do. They generally perform well in the long run and offer much greater stability because of their positive cash flow, and they buffer negative periods much better than companies that don’t pay dividends.
If you’re a conservative investor interested in long-term growth and want to avoid excessive stock price volatility, then investing in these dividend-paying companies makes sense. If you’re a growth investor focused on capital appreciation, then you should consider investing in companies that reinvest their income rather than paying dividends. In either case, it’s helpful to understand the pros and cons of receiving the dividend itself when making financial and tax decisions.
Anwar Husain is an award-winning finance professor at the University of Toronto and a senior investment advisor and wealth advisor with Richardson Wealth. He is also a published author in several peer-reviewed academic journals in the areas of finance and economics. He can be reached at Anwar.Husain@RichardsonWealth.com