Guest User

May 19, 2022

Expected Returns, Factor Investing, Historical Data, Investor Behavior, Dividends

Episode 201: The Relevance of Dividend Irrelevance

Guest User

May 19, 2022

Expected Returns, Factor Investing, Historical Data, Investor Behavior, Dividends

Today, on the Rational Reminder Podcast, we are tackling a few interesting topics that tie into recent and forthcoming conversations with our amazing guests. In this episode, we are focusing on thematic ETFs and the truth about dividend investing. After a quick look at The Quick Fix by Jesse Singal, some reflections on the past six months at ARK Invest, and the lessons we can still learn from the dot-com crash, we get into the meat of today's episode by way of Ben's recent experiences on a discussion panel about the utility of thematic investing. From there, we transition into the 'relevance of dividend irrelevance' and share some of the most illuminating and pertinent findings. In the end, our argument is simply that dividends are not the way to go and are an inefficient policy on many fronts. This has not deterred many investors, however, and we get to grips with the kinds of behaviours associated with dividends before espousing what this can mean for you and your objectives. To catch all of this and links to some of the best research available, be sure to listen in with us today.

Key Points From This Episode:

Today's book review of The Quick Fix by Jesse Singal and its critique of popular psychology. [0:12:30]
Inflows at ARK Invest; the startling commitment that we are currently seeing. [0:21:48]
Reflections and information that we dug up on the dot-com crash in the '90s. [0:22:30]
Notes on thematic ETFs garnered from the recent panel Ben was on. [0:25:09]
Disentangling the relevance of dividend irrelevance. [0:35:45]
The performance of a dividend portfolio and a better idea of expected returns. [0:40:28]
Empirical findings about dividend investors and their actions in relation to yields, diversification, and more. [0:42:01]
The tax inefficiency of dividends and what this means for capital gains. [0:49:01]
Underlining the importance of dividend investor's consumption and its sensitivity to dividends. [0:51:31]
How the problem with dividends is compounded outside of the US. [0:57:11]

Read the Transcript:

Ben Felix: This is The Rational Reminder podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We are hosted by me, Benjamin Felix, and Cameron Passmore, portfolio managers at PWL Capital.

Cameron Passmore: Welcome to Episode 201, otherwise known as the week after Professor Eugene Fama, which was incredible, and we're very grateful for Gene joining us. What a way to celebrate 200 episodes.

Ben Felix: Yep. Very cool conversation to have had and to have listened to. I listened to the episode. I don't always do that, but for this one I did.

Cameron Passmore: Yeah, so did I. It's also interesting to hear your intro. I went back and I've been listening to some of the older episodes, and your intro has evolved over time. We've actually both evolved, hopefully for the better, but the intro, it's much different, actually. The pace is different, the intensity is different.

Ben Felix: But the words are the same, right? We never changed the intro?

Cameron Passmore: Other than "from two Canadians," it is the same.

Ben Felix: Yeah.

Cameron Passmore: Also, a big difference in the questions, how we ask questions of our guests, they're much shorter, much sharper. We did a bit more rambling back in the earlier episodes, so slight shifts every week. Incredible weather here in Ottawa lately. We had an unbelievable streak of, I think, eight or nine days without a cloud. Then we were driving back from Montreal yesterday, and we happened to drive by a land spout tornado. We're looking up at the sky on the left and it wasn't more than a kilometer in the fields in the highway, and we just noticed this, it was horizontal and it started coming down to the ground, it's like, is that a tornado? Or is that not? It was pretty severe weather coming through. So, in the news this morning, Lisa saw that it was a land spout tornado.

Ben Felix: Is that a bad thing?

Cameron Passmore: I don't know. I didn't read the article yet, I don't know if it's bad. It wasn't terribly scary. There were some cars pulled over taking videos of it, we got a couple of pictures. It doesn't really look like that big a deal, but maybe it was, I don't know.

Ben Felix: Interesting.

Cameron Passmore: Have you watched Ozark? I forget.

Ben Felix: I watched, well, bits and pieces, some of it.

Cameron Passmore: It was an incredible finale, for those who haven't watched it yet. The back half of season four, the final season is out. It was amazing. Interesting, last week we passed 3 million audio downloads in total for the podcast, so it's cool to have that on the day, it was actually on Thursday, the day that the conversation with Gene came out. And last week was a record week for total downloads, we had over 35,000 audio downloads, which was an all time high. 15,000 of those were of episode 200, so obviously people are coming back and checking out other episodes. So, I went back and looked, our first episode, which I personally find kind of dreadful, has already had almost 150 downloads this month.

Ben Felix: Wow.

Cameron Passmore: So, people are still going back to the first one. I think it's worth highlighting the paper that you dropped last week, Finding and Funding a Good Life, I think it's a fantastic, beautifully written paper. So many good findings all brought together in one place. People should definitely check it out.

Ben Felix: Yeah. In the Rational Reminder community, some of the comments were that it's a good, concise summary of a lot of the stuff that we've talked about on the podcast, which is effectively what it is, because it's true. All the things that are in there are topics we've discussed, are based on guests we've had on. Yeah. It's nice to have it all in one place.

Cameron Passmore: Agree. So, next week Antti Ilmanen is here from AQR, author of the book, Investing Amid Low Expected Returns. And you pointed out that Antti is actually a regular, he pointed out, a regular RR listener.

Ben Felix: Yeah. He told us I didn't point, because I thought it was cool, but he's the one that told us. I thought that was very cool to hear.

Cameron Passmore: Yeah. And then the week after, Katy Milkman's here to talk about reading. She was our guest back in episode 161. And then in three weeks time John List, who is the professor from the University of Chicago, an author of the book, The Voltage Effect: How to Make Good Ideas Great. And great ideas scale will be here. So, I started working on the questions today and listened to a couple of interviews he's been on, really interesting stuff. The book is excellent, and going to be great conversation. And then in five weeks, Carlota Perez, who's the author of Technological Revolutions and Financial Capital will be here, which is terrific.

Ben Felix: Yeah. That one's been a long time coming. Been trying to coordinate to get her on, so very happy to have that booked at least, we still have to record it, but good to have it in there.

Cameron Passmore: Very good, very exciting. Lots of recent reviews, maybe we can fire through some of them quickly. Ben, you want to go ahead?

Ben Felix: Yeah. I don't know if this is just going to be the new reality, but there are so many new reviews that it's almost like we can't read them all, which is the first time that I felt like that. Trent McKean from Canada said, "Great podcast, hosts, guests and content," and he enjoyed the episode with Gerardo Riley. Tyler1557 from the US said, "Behavioral finance at its finest," they listen to the show almost every week and they like the blend of behavioral finance, academic papers and chit chat. Anyone can create Excel sheets and run numbers, but the secret to financial success is not letting our emotions or biases trip up a good financial plan. You want to do one?

Cameron Passmore: Sure. Craig from Australia reached out saying he finds it informative and entertaining, "Despite being based in Canada, Cameron and Ben are providing information relevant to any investor around the globe. Every week is a must listen, even all the way in Australia." Nice to hear from Australia. Morty Waves from Canada says, great content, loves a research based content with a diverse set of guests. This is funny, he says, "It's funny though as soon as Ben bought a house, he became bullish on it, I guess even the best of us are sometimes emotionally motivated."

Ben Felix: I want to push back on that. I am not bullish on home ownership, I do not like owning a house.

Cameron Passmore: I knew you were going to say that.

Ben Felix: If I could go back to renting, I would do it in a second. I was actually out for a walk in the town that I live in, and I stopped and I was chatting to a guy because I really liked his house and he happened to be outside, and I was like, hey, I love how you did this and this, looks great. And he was like, "Oh, well you should tell it to my landlord." And I was like, "Wait, you rent that place. Are you kidding me?" And it made me wish that I had found that place to rent so that I wouldn't have to own the house. And I don't know where the idea that I'm bullish on housing came from. I think I heard that comment after we did an episode saying that Canada wasn't in a housing bubble, and by nature of saying that Canada's not in a housing bubble, I became a housing bull, and I think that's bull.

Cameron Passmore: Yeah.

Ben Felix: That's not what I was trying to say with that episode. The point of that episode was that prices looked where you'd expect them to be based on where interest rates were. And now that interest rates are going up, you'd expect prices to come down, which I think we're already starting to see. And if rates keep going up, prices can keep coming down a lot. But I'm not bullish on housing, either from a financial perspective or from a, I don't know what you call that, emotional, personal, psychological perspective. I detest it. I mean, I don't want to ramble a lot about this.

Cameron Passmore: And you're on record with me many times off air.

Ben Felix: I love where I live, I can walk out of my house and walk into the forest and go hiking. And there's a ski hill that I can hike up or ski down in the winter. I can walk to a river and go kayaking. That's all amazing. It is nice to know that we're not going to have to move, ever if we don't want to, that does feel good, particularly for my wife. But owning a house sucks, anyone that tells you different is... That's all, nevermind.

Cameron Passmore: You're on record again.

Ben Felix: Thanks.

Cameron Passmore: Near Mojo from Canada says, "Best source of financial information," says that we're experienced in nossal financial educators. Jonathan Conway from Australia, another one from Australia, "Easily my favorite podcast of all time. If it wasn't for this podcast, I'd never heard of Eugene Fama, Carlota Perez, Annie Duke, or a myriad of other minds who are fascinating in their own right," so asked to keep up the good work. Speaking of good work, many people reached out and placed orders and dropped Jackie a note to get a free took, so we're going to keep that offer going. Just put a note at check out saying, hey, Jackie send me a took, and she'll include one with your order. As always, we love hearing from people on LinkedIn. I had a cardiologist, get this, reach out, thanking us for our book recommendations and videos. Bob reached out saying he appreciates the podcast. Speaking of LinkedIn, I'm getting so many requests. It's going to get harder over time to keep including, and in fact, keeping track of them, it's difficult.

Ben Felix: Oh yeah. That happened to you. That happened to me once, so I just stopped looking.

Cameron Passmore: Yeah. So, for this one, I apologize.

Ben Felix: I said this, I don't remember which episode, many episodes ago, I had to say the same thing. And now here we are.

Cameron Passmore: Yeah, yeah.

Ben Felix: Full circle.

Cameron Passmore: Mohammed Connect is saying he appreciates the transparency of the content. Jonah, this was good to hear, a computer science grad from Chicago says, "It's always nice to hear a reference to a school."

Ben Felix: Oh.

Cameron Passmore: Hugo from Brazil, DMed on LinkedIn saying that he loves RR and that it's helping him organize his investments and keeping him sane among so many colleagues who are always talking about day trading.

Ben Felix: We've had a few finance professors join the Rational Reminder community, and I thought that was, I just thought it was very cool. A couple of them from Chicago, won't name any names, couple from other universities in Canada, but self-identifying as I'm a finance professor at this school and that's why I want to join the community. That's been neat to see. If the discussion is at a level where finance professors want to participate, that's kind of cool. I mean, I guess they don't know that yet because they had just joined the community, but-

Cameron Passmore: Hopefully they stay.

Ben Felix: Yeah. Hopefully they stick around.

Cameron Passmore: Also wanted to give a shadow to Patrick in London, England who posted his week update on LinkedIn, which included a successful $120 million funding round, meeting partners and clients at a trade show in Europe, watching a soccer game, and he finished off the week going for a walk, listening to our conversation with Gene. He called the podcast the best and most relevant financial podcast and been listening since the early single digits. Which you pointed out is interesting, how many people claim to be early adopters.

Ben Felix: It's always interesting that people point out that they've been listening since the early episodes.

Cameron Passmore: Yeah. In the reading challenge, we have almost 500 readers. I actually completed my 23rd book this morning, so I've got my challenge done for the year, but I'll keep going. Angelica says that the list of top books from the challenge will be found in the community and she will have a link in the show notes. There's about 30 books now that are quite popular in the community. You want to talk about the goal survey?

Ben Felix: Yeah. So, we mentioned in our last episode with just the two of us that we have this financial goals survey that we've posted in the Rational Reminder community. I didn't check, but Angelica told me last week that we had over a hundred responses, so it's got to be higher than that presumably by now. A lot of good feedback from people that have taken the survey, just about the process of taking the survey. So, I actually have a quote from someone in the Rational Reminder community, they said, "After participating in the goals survey, the simple act of going through that process for a relatively short period of time really allowed me to see a trend in the ideas I was putting down and what was missing from my life. I would highly recommend everyone try it out as an exercise, the simple act of just writing as many different goals or thoughts down, and that step by step process was incredible. Thank you for the opportunity to participate in that." So, that's cool, and I'm glad people are finding going through the survey valuable. That's good to hear.

From our perspective, we want to collect as many responses as possible, because the objective with this survey is to build a master list of financial goals. Once we have, assuming this project is successful, once we have a master list of goals, it'll be something that anybody who's sitting down to set financial goals can refer to. And there's evidence that shows that referring to a master list helps people identify goals that are personally relevant to them, that they would not have identified otherwise. So, I think it's a really important project. And I think that the more responses we get... I don't know at what point the marginal benefit decreases, I don't know, do we need a thousand responses? I don't have the slightest clue. Anyway, the more we get, the better. So, in the Rational Reminder community, I think it's pinned, so when you sign in, it should be pretty obvious where it is. And if you have a few minutes to take the survey, we would appreciate it, and you may enjoy the process itself.

Cameron Passmore: Excellent. Anything else?

Ben Felix: No, let's go ahead and do the episode.

Welcome to episode 201 of The Rational Reminder podcast.

Cameron Passmore: And I have another great book for you, Ben, for all your free time. This one's called, The Quick Fix: Why Fad Psychology Can't Cure Our Social Ills, by Jesse Singal. I have no idea how I found out about this book, but it's wonderful. Especially for people who are interested in the study of science and how decision making happens that comes from science. So, this is a book that takes a rather critical look at some of the recent trends in behavioral psychology, and the punchline is that there's basically been a perfect storm of many weak studies along with weak science that end up getting published, the academic then writes a book and then the public carries this message from there. And it grows to a place, my interpretation is, that it grows to a place that's much bigger than anyone ever imagined because of Ted talks or the desire for people to read books that have quick messages that solve big problems.

So, people are looking for a quick fix, hence the title, and academics are looking to become tenured, so you've got this perfect storm going on. So, this is a very critical book that looks at this issue, and it links also to the John List book that I mentioned earlier, that book said science and that decision making comes out of science. So, these books are all kind of all intertwined. So, this book, The Quick Fix, kicks off with a story about how important self-esteem became in raising kids back in the eighties and nineties, and then ended up creating this massive self-esteem industry, even though at the time a book called The Social Importance of Self-Esteem had conclusions that were very underwhelming. However, the excitement over self-esteem created this massive cottage industry. They tried to estimate the size, they set it, the broader self-help industry which self-esteem is part of, was about a $10 billion industry in 2016.

So, you can just imagine the size back in the eighties and nineties. Anyways, hundreds of school districts added self-esteem and motivational materials to their curriculums. Many employers turned to consultants to try to raise employees morale and improve weak performance through self-esteem techniques. And then a New York Times article said that rather than hiring better teachers and spending more money on actual schools and instruction, it, so the self-esteem training, became a surrogate for the stuff that might actually have done some good. And as it turned out, the book I mentioned, Social Importance of Self-Esteem said there's very little validity to the cause of claims that were being made about self-esteem in the eighties and nineties. So, as they point out, many people have been fooled into believing claims about self-esteem and it is genuinely useful for anyone hoping to understand, not only the self-esteem controversy, but this idea of these scientific findings more broadly being used to get people to do things that don't have real scientific justifications.

And even though there's all kinds of warnings from different papers, the enthusiasm just swept this whole phenomenon into action. There's another great example. There's a lot of examples in the book, but another great example has to do with human happiness, and someone that we've talked about a lot, Martin Seligman and how the US military latched onto something he designed to help soldiers who suffer from PTSD. So, there was an article that came out, it was argued that 50% of the variance in human happiness is accounted by genetics, 10% by circumstance and 40% by factors within individuals control, i.e. the choices they make. So, based on that last 40%, this idea of the happiness pie concept went viral, leading to books and speaking engagements, and Seligman became quite popular. However, The Quick Fix book, the author argues that the argument that there is little reason to believe that 40% is a reliable estimate, and he said the number is actually scientifically closer to 5%.

Not withstanding that the military came out with what's called a comprehensive soldier fitness program, a CSF, and this was a preventative program that sought to enhance the psychological resilience among all members, all members of the army community. This was a massive, massive program, so it became a mandatory part of army life that every soldier, more than 1 million in total. So, this became one of the largest mental health interventions geared at a single population in the history of humanity, and possibly the most expensive, but the author argues there was very scant science behind it. So, you wonder, how is this even possible that some program could get picked up and put into place so broadly without the data to back it up? And it comes down to two big problems, one is a complete waste of funds, and it actually neglected the approaches that do work.

Here's a quote, "So, preventing PTSD as the army sought to do was even harder terrain. In fact, at the time CSF was launched, there was little evidence any intervention could prevent PTSD. And even as I write this midway through 2020, researchers are taking only their first steps toward pilot programs that might be able to accomplish that goal. But the attractiveness of having a program that could treat PTSD was so irresistible, it was basically too tempting a solution for the military not to implement." Another quote here, "This is a veritable carnival of unskilled intuition and exaggerated storytelling, a striking example of how science can be adulterated and misunderstood by an organization seeking to apply it. There may be no other single mental health intervention in the history of humanity that has cost this much. And the army has almost nothing to show for it." It's just an incredible story.

So, the author goes through other... For example, takes a pretty good run at Angela Duckworth's famous book, Grit, and questions the science behind that. So anyways, quick takeaways here, some of the causes for this issue, like for the military example, leaders usually end up in their positions because they're an expert in some aspect of their business, however, they're not experts in solving that specific problem in PTSD, so they depend on others. And with all kinds of leaders, biases, and heuristics, they latch onto ideas possibly too quickly. The human brain has an easier time latching onto simple and mono causal accounts, they're more likely to be accepted as true. Classic con men system one thinking, we're all so busy that if we can find something that is perceived to be a quick fix, good enough, take it and move on. Author argues that we're all guilty of this.

And the book talks about how once an idea is out there, the media and social media can often carry the idea so much further than the original academic ever imagined. Stories provides a simplified cause and effect accounts, the desire for fixes is so strong. And we've talked about this many times. In a time starved world, these fixes make the world much easier to understand and stories fuel good intentions. On the other side, the research side, he talks a lot about how making a name for yourself as a new young psychologist is tough, so attaching a simple and elegant and appealing theories are more likely to be paid off and help you get tenure.

Ben Felix: That's not specific to psychology though.

Cameron Passmore: No.

Ben Felix: That's any field, right? Cam Harvey talked to us about this for finance, it's the same. You want to get tenure, so you publish. And that's why we have this problem of so many factors. It's probably similar in psychology.

Cameron Passmore: And this is where the solution he proposes, and this may be in other domains as well, is to, instead of having a study picked up by a journal after the study's been done, is have the study accepted by a journal, not on the basis of its results, but on the basis of its design. So, the journal commits to publish a study before knowing how it will turn out and if widely adopted, this will market a potential revolutionary inflection point. Because the study is accepted in advance, the incentives for authors change from producing the most beautiful story to the most accurate one. So, you preregister the study before you do it, as opposed afterwards.

Ben Felix: Yeah. We talked about that again with, I can't remember if we talked about it with Cam Harvey or amongst ourselves, but there's massive publication bias. I can't remember what the statistic is, but you're much more likely to get an affirmative paper published in finance, and I'm sure it's true everywhere else too.

Cameron Passmore: Yep. Anyways, I really enjoyed the book. It's a very quick, easy read, it's enjoyable. A lot of the names you know, a lot of the books we've talked about. Doesn't mean I don't think that these books are not good, it just means that they can lead to taking on a life of their own and causing decisions that aren't founded in science necessarily. So, there's nothing wrong with having grit, it's just taken to the next level and saying, it's the explanatory factor of so many other things that can become less than great. So, highly recommend The Quick Fix and also The Voltage Effect, which John List is coming up in three weeks.

Ben Felix: Taleb, Nassim Taleb-

Cameron Passmore: Yep.

Ben Felix: Is very critical of academia in general, but I think it's specifically economics and psychology. And I'm not saying that I agree with things that Taleb says, but it's interesting that that seems to be his target as well when he is critical of academia.

Cameron Passmore: Yep. There you go. You want to talk about ARKK quickly?

Ben Felix: Well, you want to talk about ARKK, because I made a joke last time we talked that they probably weren't getting a lot of inflows, and you said that you thought you saw something otherwise.

Cameron Passmore: Yeah. So, Eric Balchunas tweeted on the weekend that ARKK had just posted his biggest week of inflows in over a year with 534 million US. So, it's the top 1% among ETS. Now, fifth straight week of inflows. Crazier though, get this, I'm just quoting the tweet, crazier though, "It's taken in nearly $2 billion since February 11th, during which period it's lost 39%." So, people are sure committed, just pounding the money into it.

Ben Felix: Yeah, that is real commitment.

Cameron Passmore: All right.

Ben Felix: Interesting to see where it goes. Real quick, this isn't in our notes, but I was poking around the data for the dot-com crash last couple of days, and yeah, I don't know. You look at where tech has gone recently and it's not necessarily just going to bounce back because it is a similar type of drop in the dot-com era. And it took 14 years, 13, 14, 15, depending on the index you look at, longer even, years to come back to even. So, obviously not a prediction, who knows what's going to happen, it could bounce back. But the closest thing to precedent for what we're seeing doesn't tell a very compelling story for a tech rebound.

Cameron Passmore: I may have told this story, I'm not sure, about the seg fund that owned the QQQ.

Ben Felix: No.

Cameron Passmore: The seg fund you can lock in, you know this story, but you can lock in value that's guaranteed 10 years later, this is the way these insurance contracts worked at the time. Had one client that had this one holding for other reasons, happened to see this person the day of the peak, I think was March 23rd, 2000, happened to sign the form, just locking in at that value. Anyways, we had to wait a decade to get back that value so, I forget the amount, roughly a quarter of million dollars. It only made it back, I can't remember the amount, but it made it back halfway. But because of the contract, he was guaranteed to get the 261 out a decade later, but it was still well underwater.

Ben Felix: Wow.

Cameron Passmore: He got his money back.

Ben Felix: Unreal.

Cameron Passmore: It's unreal. But you go look at some of the big names from back then, they're still not back to the value they were, and the revenues are many multiples higher. So, as you say, it's the price you pay, not necessarily the quality of the company.

Ben Felix: Yep. I also looked at a couple of actively managed funds. There's the video that I did a while ago, that we covered in Rational Reminder too, the star fund managers and what happened to them in the dot-com era, looked at some of them and how they recovered. And yeah, likewise, brutal. A few of them are still around, like the Jacob Internet Fund is still around and it's actually done quite well in more recent history, and the Berkshire Focus Fund, same thing. Couple funds with massive returns leading up to the dot-com crash, big drops, but no recovery or at least a very, very, very slow recovery.

Cameron Passmore: We need to go back and dig up some of the Canadian names that were popular back then, maybe we can start a thread in the community and get some of the other senior Canadian advisors that might remember the names. I haven't heard of any of them in ages, so I don't know if they've all died or been merged. Don't know.

Ben Felix: Well, over any 10 year period you expect in Canada, I think it's about 50% survivorship, so presumably a bunch of them have closed. Anyway, that would be fun.

Cameron Passmore: Okay. You were on a panel last week.

Ben Felix: Yeah. Kind of related to what you were just talking about, I guess. I was on a panel, you watched it, right?

Cameron Passmore: I did.

Ben Felix: Yeah. So, I was on the panel with a few other people on thematic ETFs and everybody else on the panel. Well, that's not true. There were four people, two of them were very pro thematic investing, one was there just to talk about fund flows and where assets were going, an ETF analyst. And then I was there, apparently The Globe told me after the fact, to balance out the discussion. It was through The Globe and Mail.

Cameron Passmore: Yeah.

Ben Felix: A Canadian paper, newspaper. So, I just wanted to talk about some of the notes from that. I thought it might be interesting. It's a bit of a recap of stuff that people have heard before, because, well, I drew from my old notes.

Cameron Passmore: Yes. It's too bad it was so scripted. There was no chance to debate.

Ben Felix: The overall discussion, you mean?

Cameron Passmore: Yeah. Because you made some very good points and they were made and onto something different, and there wasn't that ability to debate back and forth.

Ben Felix: Yep. Well, I actually thought about, I'm still thinking, about one of the people that was on the panel is the head of thematic investing at BlackRock, the US head.

Cameron Passmore: Yeah.

Ben Felix: The main guy. As much as I don't think thematic ETFs are good investments, the guy actually, he was very well spoken and had intelligent commentary. Could be interesting to have him on Rational Reminder and maybe have more of that back and forth, actual debate and discussion. Anyway, maybe we'll do that, maybe we won't. Okay. So, I was asked in the panel, they said that I've been hesitant and wanted me to take them through my position.

Cameron Passmore: Hesitant? You had the evidence. I just don't understand. You presented clear evidence.

Ben Felix: But people don't always want the best risk adjusted returns, sometimes people want to speculate and that's-

Cameron Passmore: Could you being so understanding.

Ben Felix: They want to express an informational belief, and who am I to say that's wrong?

Cameron Passmore: Okay.

Ben Felix: But they asked me why I've been hesitant and what's the best approach for advisors to gain exposure to broader themes or mega trends? So I said that, "I think thematic ETFs are catering to a fundamental misunderstanding that many investors have about expected stock returns, which is that economic growth and investment returns are positively related." Yeah. That kind of kills it. "The reality, both empirically and theoretically, is that there's somewhere between unrelated and negatively related. Couple reasons for that, one, it's that high growth expectations are already in the price." So, we know that argument, "And of course there is empirical evidence, growth stocks being one of those, but other evidence too, that investors do systematically overpay for growth, or at least demand low expected returns for high growth companies, if you want to take the risk based view. So, I think that's one big piece. And the other one, is that growth doesn't happen in a vacuum. As we've talked about before, you get earnings dilution if there's a new growing sector, lots of new businesses are going to form."

"So, even if the sector does have massive earnings growth, earnings per share growth, gets diluted as companies issue new shares or new businesses enter into compete." And then I made the comment that, "Older, boring and declining industries have lower prices, so investors tend to actually underpay or demand a higher expected return, depending on how you want to view it. And you don't have as much, or maybe you have even negative new equity issuance. So, your earnings are getting spread across, not an increasing number of shares necessarily, or at least not at the same rate as you'd have in a high growth industry or area." And then I updated some of my data for some of the examples I use in one of my videos on this. "So, from 1900 to 2021, railway stocks went from 63% of the US market to less than 1%, so declining industry, at least by market cap. But over that period, they outperformed the US market and they also beat trucking stocks and airline stocks since the inception of those industries in the 1920s and 1930s."

Cameron Passmore: Think about that. That's a remarkable statement.

Ben Felix: Yeah.

Cameron Passmore: But you got to think that through.

Ben Felix: Yeah. And then I also did the high tech and energy stocks just from Ken French's database, the industry sorts high tech. So, 1971 is the approximate start of the age of information, which we'll be talking to Carlota Perez about, I'm sure, "In 1971, high tech was 10% of the US market, energy was 13%. Today, tech is 34% and energy is 3%, so clearly tech has been a mega trend while energy's relatively been on the decline. But the energy industry portfolio, in terms of stock returns, beats the high tech industry portfolio from 1971 to April 2022." It was like a 20 basis point annualized advantage, if I remember correctly, so fairly even, but still not necessarily what you'd expect.

Cameron Passmore: No.

Ben Felix: So, I said that, and then I said, "That's probably not what everybody else wanted to hear." And then part of that question was, how should advisors get access to these mega trends? And I said that, "You probably want to underweight them, eliminate them from portfolio. So, you want negative exposure to the trends," and everyone laughed awkwardly. Then the next question they asked me is, there's an academic paper suggesting that thematic ETFs launch with high priced stocks and go on to deliver poor returns, but proponents of thematic ETFs point to the fact that it may take years or even decades for some of these themes to become entrenched and deliver fully on their promise. And the paper they were referring to was, Competition for Attention in The ETF space, which we covered on the podcast a while ago and I also covered in my YouTube video on thematic investing.

In that paper, they looked at specialized, basically thematic ETFs, they called them specialized ETFs, but same idea, from 1993 to 2019. And they found that portfolio had risk adjusted returns of negative 3.1% per year after fees. And most of that is driven by the post launch performance of specialized ETFs. They lose 6% annually in the first five years after inception, and the authors of the paper say that's driven by the overvaluation of the underlying stocks at the time of the launch. And then I won't cover the whole thing because we know the story, but the authors are basically saying that ETF providers are capitalizing on attention, whenever something has the attention of investors, they launch a product to capitalize on it, absorb a bunch of assets, charge fees while they can. And these funds tend to close much more frequently than normal funds.

Cameron Passmore: But it seemed to be so based on feelings. I have a feeling the next six to 12 months are going to be good for this sector, be it agriculture, water, cannabis. It wasn't evidence driven.

Ben Felix: Yeah. Some people just don't want to make evidence based decisions. What if they're right? That's one of the other things I talked about in this thing, is that these types of stocks that are in these funds have lottery-like characteristics.

Cameron Passmore: Yeah.

Ben Felix: They're typically small growth stocks with weak profitability and aggressive investment. So, that's... If you're going to express informational beliefs, this is maybe the place to do it. Anyway, so my answer to this question was, "If you want higher expected returns, the time to invest in themes or sectors is when they're cheap." Because the question is like, well, this paper said that the returns and these things are bad, but what if you just have to hold them for a really long time? It's like, okay, well just buy them when they're cheap. Why do you have to hold them? If they're going to have bad returns for a long time, why would you hold them over the full period? Just buy them when they're cheap.

Cameron Passmore: So, wait for them to become small value.

Ben Felix: Or just value. But then my follow up to that was, "If you want cheap stocks, why would you pick a theme and wait until it gets cheap? Why wouldn't you just buy cheap stocks, period? You don't need to take the sector bet, and actually, you don't want a sector bet if you're chasing the value premium, you're better being industry neutral." Then they asked if the recent downturn for thematic funds provides more reasonable entry points for advisors and investors looking to invest in some themes. And I said that, "Sure, if lower prices are better than high prices. So, if somebody really wants to make a speculative bet on a theme, maybe now is a better time than before, I guess."

Then I also said, "You might have to worry about fund to closures, which is a real thing. The thematic ETFs do tend to close at a higher rate. So, after poor performance is typically when that would happen, if they see outflows." Although, that's not what's been happening with ARKK as we talked about earlier. And then they asked what due diligence people should be conducting to make sure that these things are in line with clients' risk tolerance? And I said, "You got to look under the hood. You got to understand what characteristics you're buying. You don't want to look at the flashy label or name of the fund or the sector that you're buying. What's the company size? What are the relative prices? Are they profitable? How aggressively the company's investing. You don't want to be looking at what's the potential size of this market."

That's the big market delusion that we talked about in one of our past episodes. "You don't want to be looking at expected economic growth, chasing trends, all that kind of stuff. Let's look at what's under the hood." And some of the other panelists said the same thing, so I wasn't the only one saying that. Everyone agreed, you got to know what you're actually buying, inside the wrapper. And then I said, "If a client wants exposure to those characteristics, if you look under the hood, it's like, okay, you see what the characteristics of this thematic ETF are, and a client says, yeah, I want exposure to those characteristics. Okay, why are we going to get the exposure through a thematic ETF, which is typically going to have higher fees?" Oh, and then... All right, I looked at all of iShare's US equity thematic ETFs, there's not that many of them.

The average expense ratio is 42 basis points, but then my comment to the group was, "I could do that or I can get US total market for three basis points from iShares or higher expected returns small cap value for 18 or 20 basis points, depending on the ETF, from iShares. And if I wanted small growth, I could get that for real cheap too, but you're going to pay more for basically a label. Well, and a thematic bet, because you're expressing a belief." Oh, and then I said, "If a client wants to express an informational belief, that means that they think they have more information than the market. I think it's important to communicate that those bets don't tend to work out, particularly in thematics." And that's when I talked about the small cap growth, low profitability lottery-like characteristics, but then the, what do you call it, the olive branch that I extended was that, "If a client really does want to express an informational belief, knowing the poor odds, I would rather see them do it through a thematic ETF than through individual security selection."

Cameron Passmore: Look at you getting all open-minded and polite.

Ben Felix: It was a fun panel to be on. I don't know. I enjoyed it.

Cameron Passmore: If you want to express an informational belief with Ben Felix. Okay, onto another one of your favorite topics. Always a fan favorite.

Ben Felix: Well, we'll see. It's always divisive, I don't know if it's always a favorite.

Cameron Passmore: Some love it. Some people knew this was coming because I did mention it, I think, in a previous episode we mentioned it.

Cameron Passmore: Yeah.

Ben Felix: And I mentioned it in the Rational Reminder community too, but we're going to talk about the relevance of dividend irrelevance. I think it's important. So, the last time I did a video on this was in, I think, in 2019 where I talked about why dividends are not useful as a predictor of future returns and why returns from capital are the same as returns from dividends. In other words, dividends are irrelevant to the valuation of shares. I was a little hard on dividend investing in that video, but for good reason. I'm not softening up now. Investing and spending based on dividends doesn't make sense. And I think that's an important one, that's an addition to my coverage of dividend investing here, is that spending based on dividends doesn't actually make sense. So, we'll get into that more later. The only thing dividend investors gain, if you can call it that, from the dividend investing strategy is tax inefficiency, only things that are few, tax inefficiency, a lack of diversification, irrational behavior, and that's with respect to both spending and how much they're willing to pay for stocks.

An arbitrary spending rule dictated by corporations with no connection to or knowledge of their utility function or financial plan. So, those are all big things. So based on that, I thought it was time to follow up on my 2019 video and explain in detail why the irrelevance of dividends is relevant to making good financial decisions. So, dividends are irrelevant, that's the starting point. And of course, I don't mean that they're relevant to returns. If you look at the returns of a price only index, they're going to be a lot lower than the returns of a total return index. So, I'm not saying we don't want the dividends, they're an important part of total returns. And we don't want to avoid dividend paying companies either because they're globally, say, it's 50% of the market. So, I'm not saying we don't want dividends, I'm just saying we don't want to focus on dividends. That's what I mean by irrelevant.

Now, this was shown, of course, theoretically by Miller and Modigliani in 1961, and Fama and French showed empirically in their 1993 paper common risk factors in the returns on stocks and bonds that portfolios formed based on their dividend yield to have three factor alphas that are statistically indistinguishable from zero. So, returns of a dividend portfolio are fully explained by market beta, company size, and relative price measured by book to market, in the case of Fama and French. So in other words, dividends don't contain additional information about expected returns when you're controlling for the exposures that I just mentioned. Now, this is easily confirmed, kind of like what Fama said when we talked to him, he made a comment about momentum, he's not sure whether it's there or not. And he said, "Well, you can go check if you want, Ken French has the data, you can just go look and see if momentum's still there."

So, that was kind of funny. So, it's the same thing with dividends, you can go onto Ken French's website, download the series for the high dividend to price index and run five factor regression with, again, data available for free on Ken French's website. So, I did that for International Developed from 1990 through 2021, and for US, both high dividend indexes from July 1963 through December 2021, and using five factor regression I found alphas statistically indistinguishable from zero. So, in other words, market beta, company size, relative price, profitability and investment explained 100% of the returns of a portfolio formed on dividends, which is what you'd expect. I wasn't surprised to find that, but it is particularly interesting because it's exactly what valuation theory in a world where dividends are irrelevant to the valuation of shares would predict. The dividend discount model says that the theoretical value of a share of stock is the discounted value of expected dividends per share. But if you take Miller and Modigliani 1961, they show that given investment policy, dividend policy is irrelevant to the valuation of shares.

And then with dividend policy irrelevance, the value of expected dividends is equal to the expected earnings minus expected investment. And that equation, we'll try and do a visual of that in the YouTube video because I know it's a lot to take in there, but that statement is the theoretical basis for, a light theoretical basis, as Fama emphasized, but it is the theoretical basis for the factors in the Fama-French five factor asset pricing model. And as we just saw a second ago, empirically it explains the returns of portfolios formed on dividends, which again is what you would expect based on the theory. Okay. Now, why is this relevant? And I think this starts to get pretty interesting. The dividend portfolio, you don't expect it to underperform the market. I would even say based on the factor loadings and the regression, it's got the high dividend to price portfolio from Ken French at least, it's got exposure to low price stocks with robust profitability.

So, I actually think that the high dividend portfolio has a pretty good chance of beating the market. And as people know, we are proponents of having exposure to low price stocks with robust profitability. So, what's the problem here? Why don't we just leave the dividend investors alone to enjoy their cash flows and they're naive exposure to factors? But there are a few things that I think are really, really important. From the joint perspectives of portfolio management and financial planning, to jump into that, we need to understand a little bit about dividend investors. At the core of the theory of dividend irrelevance is fungibility, that investors should treat money equally regardless of its source. But empirically, dividend investors do not view dividends and capital gains as fungible. So in that sense, dividends are irrelevant, but not in the way that dividend investors would hope.

It's one of the criticisms that I would often hear when I have done stuff on dividends in the past, oh, that theory doesn't reflect reality, the assumptions are too rigid or whatever. But this is an interesting point here. That's true, the assumptions are too rigid. Investors do have a preference for dividends, but that works against the expected returns of dividend investors. So, I'm going to talk more about that now. In a 2019 paper, The Dividend Disconnect, Hartzmark and Solomon find empirically through multiple empirical tests that investors view dividends as free money and account for them separately from capital gains.

Cameron Passmore: Get paid to wait.

Ben Felix: Yeah, get paid to wait. Exactly.

Cameron Passmore: It's so ridiculous.

Ben Felix: Yeah. Yeah. Hartzmark and Solomon refer to this, to their empirical finding, as the free dividends fallacy. The effect makes a stock, these are my words not theirs, the effect makes a stock that pays a dividends seem more attractive than one that doesn't to some investors, to investors that have a preference for dividends. Now, if dividend investors place a high value on the cash flow stream from dividend paying stocks, they'll be willing to pay a premium for those cash flows above and beyond what a rational investor would. The result, if that is the case, would be higher prices and lower expected returns for dividend paying stocks when yield is in high demand.

So, in support of that statement, Hartzmark and Solomon find that dividend demand is higher when interest rates are low and bond interest payments provide less income, and the effect is more pronounced for stocks whose dividends are more stable or have increased in the recent past. They explain that dividends seeking investors are likely to buy dividend paying stocks at the same time as each other. And this is important. They estimate that investors buying dividend paying stocks during times of high demand have reduced their expected returns by roughly 2-4% per year.

Cameron Passmore: Wow.

Ben Felix: Right. So, it really is important. So in other words, when dividends are in high demand, when interest rates are low, there's a good chance that dividend investors are overpaying for their dividend stocks. And there's another paper that looks at this, so further support for investors overpaying for dividends when yields are low in the 2021 paper, Monetary Policy and Reaching for Income, Daniel, Garlappi and Xiao find that low interest rates lead to significantly higher demand for income generating assets, such as high dividend stocks and high yield bonds. They argue that the phenomenon is driven by investors who follow the living off income rule of thumb, and they show that the preference for income affects both household portfolio choices and the prices of income generating assets. So, that's one point. One point is that dividend investors will systematically overpay for dividend yield, which drives down the expected returns of dividend paying stocks when yield is important.

The next big one is diversification. So, you look at all the stocks in the world, I think it's roughly 50/50, approximately, of stocks that do and don't pay dividends. If you take just the US high dividend portfolio from Ken French's website, there are 400, roughly, firms in that sort. And of course, there are thousands of listed companies in the US available to investors. So, knowing that dividends are not related to expected returns, it's an unnecessary reduction in the investment opportunity set. And then of course, some investors will look for even more stringent criteria, like we don't just want high dividends, we want high dividends that are also growing. So, if you look at the Vanguard Dividend Appreciation ETF, as an example, it's got 288 holdings. But again, I did a five factor aggression and its returns are fully explained by the Fama-French five factor model with a small negative alpha for fees presumably, or other drags, or a reduction in the opportunity set of companies is only one part of the diversification problem.

So, you take the thousands of companies that exist, you chop that opportunity set down a whole bunch, just by excluding stocks that don't pay dividends or even more so stocks that don't have growing dividends. The other problem that you run into is that, consistent dividend paying companies or dividend growth companies tend to be larger, so you're cutting out smaller companies. So, it's not only a reduction in the number of firms in the opportunity set, but it's also disproportionately cutting out smaller companies. Now, if a dividend strategy delivers naive exposure to priced risks, like value and high profitability, which we know it does, foregoing exposure to those factors within small caps is a potentially meaningful missed opportunity. There's a 2020 paper, Settling the Size Matter, where Blitz and Hanauer find that there are interaction effects between size and other factors, like value, and that factor premiums tend to be bigger among small caps than among large caps.

They suggest in their paper that size can add a lot of value by serving as a catalyst that helps to unlock the full potential of other factors. So, to the extent that a dividend focus results in a tilt away from smaller companies, dividend investors may be missing out on expected returns. So, that's another big one. Dividend payers also tend to concentrate on specific industries, like dividend paying companies, so I looked at the ProShares S&P 500® Dividend Aristocrats ETF, NOBL, it's got significant overweights to basic materials, consumer defensive and industrials, and a huge underweight to technology. And then as a comparison, because if that's the only way to get this specific factor exposure, for example, then maybe that's not such a big deal. But I looked at the dimensional US high profitability ETF, which matches NOBLs factor exposures almost perfectly but targets high profitability rather than high dividends and limits sector over and underweights, it does not have the same issue.

So, you can get same factor exposure without seeking high dividends and without the sector overweights that you get by trying to target high dividends. Now, that matters a lot because sector bets are not compensated, you're not getting paid for taking sector bets. If you want to capture risk premiums, you're better off being industry neutral, at least for things like value and profitability. A little bit of an over and underweight dimension does, I think, a max 10% drift, a little bit is inevitable in pursuit of specific characteristics. Because certain industries just have more firms with certain characteristics. But allowing dividends, which are not related to expected returns, to dictate industry tilts introduces what I would call completely unnecessary uncompensated risk. And then of course, there's taxes, and taxes have a few different implications.

Dividend investing in domestic stocks tends to be much more favorable from a tax perspective. This probably is not true in all countries around the world, but in Canada it is for sure. I think it's the same in the US, Australia, lots of countries where domestic dividends are treated favorably. A Canadian investor living in Ontario in 2022 with an income of a hundred thousand dollars will pay about 25% in tax on eligible Canadian dividends, but they'll pay about 43% on foreign dividends earned in a taxable investment account. Now, keep in mind that regular stock, like total market ETFs, will also pay dividends, but the dividend yield will tend to be much lower, a much smaller portion of total returns than it would be for a dividend focused portfolio. So, I looked at the S&P/TSX Canadian Dividend Aristocrats Index ETF, it's got a 12 month trailing yield of 3.2% versus 2.48% for the iShares Core S&P/TSX Capped Composite Index ETF. Even with a favorable tax treatment with domestic stocks, the additional dividend income reduces future capital gains, but it also forces investors to prepay a portion of their taxes, if it's in a taxable account.

Some investors believe they have special skills in selecting dividend paying companies, we're talking about indexes and all this stuff. Well, that's ridiculous, because if you can pick the best dividend paying stocks, then that's irrelevant. For the 10 years ending 2021, 84% of professionally managed dividend funds in Canada trailed the S&P/TSX Canadian Dividend Aristocrats Index, not great. Now, a comment that I've heard many times is that you can't look at professionally managed money because individuals have an advantage, they've got less capital to deploy, they can be more flexible, they don't have the same institutional pressures to make certain decisions. But it's important, of course, to remember that stock returns are heavily skewed, meaning that a small number of stocks are responsible for most of the markets positive returns. It is true though, with that skewness, it is true that if you do have the right skills to pick the winners, you will win big.

But as professor Hendrik Besenbinder, the author of the landmark papers on skewness and stock returns, told me over email, I think a year ago or two years ago, I emailed him seeing if he'd come on the podcast and he said he doesn't do podcasts, but he said I could ask questions by email. So I did. One of the things that he said to me is, "That for those individual investors who believe that they themselves have the right skills, it might be useful to review the evidence regarding overconfidence." Okay. And the last point, which is maybe the most important one, these papers have only recently come out, which is probably why I didn't cover it last time I covered this, but dividend investors' consumption is highly sensitive to dividends. So, there's a 2020 paper, Stock Market Returns and Consumption by Di Maggio, that's Marco Di Maggio, that we had on the podcast. Kermani and Majlesi, they find and added that household consumption is significantly more responsive to dividend payouts across all parts of the wealth distribution, consistent with households treating capital gains and dividends as separate sources of income.

Cameron Passmore: Isn't that interesting?

Ben Felix: Oh yeah. And this next one's even more detailed data. So, 2022 paper, Consuming Dividends by Bräuer, Hackethal and Hanspal, and Hanspal is Tobin Hanspal, who we have recorded a podcast episode with, just hasn't been released yet, but it will be. They find in detailed daily data from a German bank, and Tobin talked about this when we spoke to him, that their data was super, super, super detailed, they had every tiny little bit of activity from both brokerage and bank accounts for German clients of this financial institution. So, their whole financial life, so they could see exactly what these people were doing. So, they find that private consumption is excessively sensitive to dividend income and that investors across wealth, income and age distributions increase spending precisely around the days of dividend of receipt. Their results suggest that consumption responses to receiving dividends reflect planned consumption driven by investors who buy dividend stocks intentionally, anticipate dividend income, and plan consumption accordingly.

Cameron Passmore: Wow.

Ben Felix: Now, this is a problem, and it's a problem because dividends, they're a rather arbitrary approach to determining the magnitude and timing of your consumption. Total returns are harder to think about because they're not cash flows, it's not money in your bank account, which is very appealing for mental accounting. But I think it's relatively easily resolved through financial planning, determining how much can be sustainably spent from a portfolio and then spending that amount, regardless of the source of returns. For our clients at PWL, we do that. We go through financial planning, figure out what can be sustainably spent, and then we create an income stream. John Cochrane talks about this, too, that one of the things that advisors can do is help to create that sustainable income stream from total returns to make a portfolio behave as if it were giving payouts. Just got to figure out what the sustainable payouts are. And then in that case, you don't care what the source of returns is.

Now, dividends are effectively a variable spending strategy, variable spending can also be accomplished in a broadly diversified total return portfolio with a variable spending strategy, as opposed to just spending the same amount adjusted for inflation each month. So, one way to do that, there's all sorts of different variable spending strategies, one way to do that is to spend some percentage of the portfolio each year, so a percentage of the portfolio every year, not a dollar amount. Sometimes you would hear of a percentage in the first year and then adjust that dollar amount for inflation every year, but fix a percent of the portfolio each year. Now, unconstrained, that would be extremely volatile. If the portfolio drops 40%, you're spending the following year would drop 40%, but you can put a ceiling and a floor on the amount that changes.

So for example, if you start with 4% of a million dollar portfolio in year one, you spend $40,000. In year two, if the portfolio is dropped to $800,000, instead of cutting spending to $32,000, 4% of $800,000, you only cut it to the maximum 5% year to year change, which would be $38,000 in this case. Now, setting up this kind of variable spending strategy, the ceiling and the floor can be increased or decreased depending on the preferences of the individual. More consumption variability, allowing for more variable spending, allows retirees to consume more of their wealth while they're alive. That's known as consumption efficiency or spending efficiency. Less variability consumption is less efficient, but for someone with a strong preference for stable consumption, spending efficiency is just a trade off. It's not necessarily a downside. Somebody might say, I want to guarantee, or close to guarantee, the exact amount that I'm going to have each month. And it's like, okay, that means that you're going to expect to end your life with a large cushion, a large amount of leftover.

Cameron Passmore: Right.

Ben Felix: That's an inefficient consumption path. But some people might say, no, I'm good with that because I don't want any variable in my income. And that's fine. The optimal spending strategy for each individual is going to depend on their utility function, which highlights one of the big problems with leaving consumption decisions to corporate dividend policies. And the other problem, and this is some interesting analysis that Braden helped me with, is that dividends are empirically inefficient relative to other variable spending strategies. So, we used that ceiling and floor strategy that is mentioned, so variable spending with the ceiling and a floor, we took the top 30% dividend yield US dogs from 1927 to March 2022, and we modeled 30 year withdrawal periods. We tested a thousand possible total return variable spending strategies with incrementally increasing flexibility in spending.

So, from very inflexible spending all the way up to total spending flexibility. Given a level of total consumption, we found that spending dividends resulted in a lower ending net worth. Given a standard deviation of monthly consumption, we found that spending dividends resulted in a lower ending net worth. And given a standard deviation of monthly consumption, we found that spending dividends resulted in approximately equivalent total consumption. We'll put charts that Braden made to illustrate that in the video, hopefully. But basically given a financial planning objective, so whether the objective is net worth, whether the objective is variability and consumption, total consumption, given an objective, dividends are probably an inefficient spending policy. Not to mention the investment implications that I talked about earlier.

Now, another problem is that we used for that example US data, US dividends have historically grown in real terms by about 1.8% annually on average, I think, over time. Around the world, from 1900 to 2021, the rate of growth of real dividends has been negative in 10 out of 21 countries that we have data for.

Cameron Passmore: Wow.

Ben Felix: In the Dimson, Marsh and Staunton data. Now, that's I think particularly problematic from a dividend perspective, given the tax incentive for dividend investors to have a home country bias. Because of course, you don't know if you live in a country that's going to have negative real dividend growth. So again, from a consumption spending policy perspective, seems suboptimal. So, to sum up, dividend policy is theoretically irrelevant to the valuation of shares. Empirically, dividends do not explain differences in returns between diversified portfolios, as the theory would predict. That's not surprising. And while a theory makes a lot of assumptions, the real world is different. And I accept that investors really do like dividends, which can result in them overpaying for yield, that's the break from the theory right there, driving down the expected return of dividend stocks when yield is in demand.

Focusing on dividends and portfolio construction can result in a reduction in the opportunity set. I mean, it does result in a reduction in the opportunity set of available securities, an underweight to smaller companies and unrewarded bets on sectors. And it also encourages a home country bias for investors in many countries. And finally, in addition to being inefficient for portfolio construction, dividends allow retirement consumption to be executed by corporations rather than tailored to the preferences of each individual. And given a financial planning objective, dividends are typically an inefficient way of getting there. So, there you go, there's my updated case for total return investing instead of focusing on dividends.

Cameron Passmore: That was awesome.

Ben Felix: Glad you thought so.

Cameron Passmore: A lot of great points.

Ben Felix: Is it raining at your house?

Cameron Passmore: It is absolutely pouring. I'm amazed we didn't get cut off here. The storm going on outside here, I don't know if you can hear it but-

Ben Felix: No, I can hear my own storm.

Cameron Passmore: I'm just happy the internet made it, because I thought we'd be going down there a few times.

Ben Felix: I saw you peeking out your window a bunch of times. I figured something was going on.

Cameron Passmore: So, we're good to go.

Ben Felix: Yeah, I think that's it, it was great.

Cameron Passmore: Great. All right. Thanks everybody for listening.