Less Dumb Investing

There is a WSJ article today talking about the benefits of dividend stocks.

Turns out caring about dividends can actually pay off—literally and figuratively.

For years, finance professors have looked down on dividend investors. The standard academic take was that dividends don’t matter—what matters is total return. A company paying out cash supposedly just reduces its value by the same amount, so you’re no better off. In theory, you’re just shuffling money from one pocket to another.

But that theory doesn’t really hold up in the real world. Because real investors aren’t robots.

Behavioral finance eventually stepped in to explain why so many people still love getting dividends. And the answer, in part, is psychological. People treat dividends like income—same mental bucket as wages or interest payments. That makes them easier to spend, while selling stock feels like eating into your principal. Even if that logic is flawed, it’s deeply human.

The “dividend puzzle,” as it was called in a classic 1970s paper, acknowledged that investors clearly prefer dividends. It just couldn’t explain why the preference was rational.

But now, we have more data—and it turns out, maybe it is rational after all.

A recent study from Meir Statman (a leading voice in behavioral finance) along with Vanguard researchers looked at thousands of Vanguard customers. They compared investors in dividend-focused funds versus those in plain-vanilla equity funds. And here’s the funny part: most people in both groups just reinvested the dividends. Even the ones buying dividend-income funds weren’t necessarily using the payouts for income.

At first glance, that feels like buying a Corolla for its speed—it technically moves fast enough, but that’s not really what it’s built for. So why do investors still chase dividends?

Because they think dividend-paying stocks perform better and are less volatile. And the kicker is—they’re right.

According to Ned Davis Research, over the last 50 years, S&P 500 companies that pay dividends returned 9.2% annually. Non-dividend payers? Just 4.3%. And with more stability, too. You’d have ended up with 10x more wealth before taxes by holding dividend payers.

So the Corolla analogy holds—maybe it’s not flashy, but it gets you there, and gets you there reliably.

Now, let’s not mix up correlation and causation. Some of the greatest stocks ever—like Berkshire Hathaway—don’t pay a dividend. In fact, Berkshire has only paid one dividend ever, back in 1967. Buffett joked he “must have been in the bathroom” when it happened. And yet, Berkshire’s performance has been incredible.

So what gives?

Here’s the nuance: it’s not the dividend itself that matters, it’s the company paying it. Dividend payers tend to have other traits that drive long-term performance—namely, value and quality. Companies with solid profits, disciplined capital allocation, and a focus on shareholder returns. Those are often the ones that also pay steady dividends.

And while dividends aren’t the only way to return capital—buybacks and debt paydown matter too—dividend-paying companies often show the kind of financial discipline that’s hard to fake.

So yeah, the early academic research wasn’t totally wrong. Dividends, on their own, aren’t magical. But the companies behind them? Those are often the kinds of businesses you want to own.