Are dividends good? Or is a steady total return better?
This Week’s Stock Market Learning with Mikael Hellberg and Vikingen:
Are dividends the stock market’s biggest security blanket?
Is it a good idea to choose stocks with the most generous “dividend bonanza”? We’ve been in a dominant bull market for nearly 16 years. As a result, an entire generation of investors has been lulled into believing that a portfolio full of dividend stocks is a risk-free cash cow.
Let’s see how things actually work in reality. Now that interest rates have started to rise and cash flow is tightening, the “security” offered by high-dividend companies risks being exactly that—an illusion.
The original article by Mikael Hellberg is available in Swedish here.
Stop seeing dividends as free money!
1. The Math: Dividends Do Not Create Value
A little basic business economics: a dividend isn’t a windfall. If a company is trading at 100 SEK and pays out 5 SEK, 5 SEK leaves the company’s coffers, and the stock price is adjusted (all else being equal) down to 95 SEK. As a shareholder in this company, you haven’t become richer. The only thing that actually matters for your portfolio over time is the total return (price appreciation + dividends).
2. Growth always beats dividends
Why do companies pay dividends? Often because they lack profitable projects in which to reinvest their capital!
Warren Buffett has been harping on this for over 50 years: “The ideal company can retain all its profits and invest them to generate a high return over the long term.”
If we look at the market’s true winners—Amazon and Alphabet (Google)—they’ve built total global dominance without paying out a single penny. Berkshire Hathaway has outperformed the index for decades without paying dividends. Every krona that stays in a well-managed company generates compound interest for you, without you having to pay taxes on dividends.
3. The Yield Trap: When a High Dividend Yield Is a Cry for Help
A dividend yield of 8–10% sounds fantastic, but on the stock market, it’s usually a red flag. When the yield is extremely high, it’s rarely because the company is rolling in money—it’s because the stock price has been slashed. The market is already pricing in tougher times and an upcoming dividend cut (a classic yield trap).
The absolute worst: companies that borrow money to pay dividends. We saw it at AT&T, General Electric, and recently in the Swedish real estate sector. Castellum built its entire identity on “ever-increasing dividends.” When interest rates spiked, cash flow dried up, and borrowing became expensive, the company distributed money it didn’t have—only to be forced to suspend dividends entirely and issue new shares the following year. Borrowing to pay dividends is not a sign of strength—it’s a fundamental failure.
4. The Macro Shift – Interest Rates Undermine the Dividend Advantage
Between 2010 and 2021, dividend-paying stocks reigned supreme, but that was mainly because the key interest rate was zero. Investors were desperate for returns: TINA—There Is No Alternative.
The playing field is completely different today. Why take on stock market risk—with the risk of profit warnings, economic downturns, and market crashes—to earn a 4% dividend, when you can get the same or higher returns completely risk-free in a savings account or short-term fixed-income securities? When interest rates normalize, dividend stocks lose their biggest advantage.
5. The Psychology of a Crash
There is a myth that dividend-paying companies act as a safety net in a bear market. History shows the opposite. During the financial crisis, “stable” high-dividend payers were slashed by 50–70%, and dividends were quickly cut as cash flows froze solid. Charlie Munger put it best:
“If you can’t handle seeing your investment drop by 50%, you shouldn’t be in the stock market.”
Take a close look at the yield!
When your portfolio is down 60%, it doesn’t matter that you’re getting a 4% dividend. It’s like being handed a glass of water while your whole house is on fire. The emotional pain takes over, panic sets in, and you hit the sell button at exactly the wrong moment.
Conclusion: Dividend stocks aren’t dangerous in and of themselves, but the false sense of security they provide is extremely dangerous. Don’t get fixated on the dividend yield. Focus on the companies’ underlying earnings, cash flow, and total return. Everything else is just accounting.
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