For many investors, stocks that pay dividends represent the height of reliability. Just witness the track records of Coca-Cola (NYSE:KO) and its main competitor PepsiCo (NASDAQ:PEP): Both rank among the 53 “dividend kings” that have increased shareholder payouts for at least 50 consecutive years.

Yet the question remains whether paying dividends is really the most resourceful option.

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"There are some companies that are growing so rapidly that the best use of their cash is not to pay dividends to shareholders or even to buy back their own shares, but to reinvest in their own operations” said The Oxford Club’s Chief Investment Strategist Alex Green in a recent interview with finance YouTuber Ari Gutman.

Market giants like Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) have opted over time for the latter. That sets the stage for more growth, which can in turn lead to higher share prices.

Green recalled a time more than 24 years ago when he worked on Wall Street and advised a client to buy shares in billionaire Warren Buffet's company, Berkshire Hathaway (NYSE:BRK.A). The client, who was retired, took a pass because they wanted some steady income and the company didn't pay out dividends. (It still doesn't.)

"Think how well he would have done if he'd have bought those shares of Berkshire and just sold a little bit off each year if he needed some income," Green said. “That’s what everyone needs is return, not income.”

We did the math and since the year 2000, the stock has soared by more than 1,200%.

How dividends work — and sometimes fall short

A dividend is a shareholder payout companies make, usually on a quarterly basis, based on their profits. Many investors like them because it can act as a steady source of income.

For example, sitting atop the “dividend kings” utilities sector you’ll find two businesses that have upped their dividend growth for 69 consecutive years: American States Water (NYSE:AWR) and Northwest Natural (NYSE:NWN). This is as ranked by Simply Safe Dividends whose tagline says it all: "We're boring and conservative."

Yet as Green’s too-careful client learned the hard way, boring and conservative can be humbling and costly. Consider the aforementioned Amazon, a high-flying company whose stock is doing better now than it has over the last two years. Since last year, the stock is up by more than 100%.

Out of 65 analysts surveyed by the Wall Street Journal, 54 call it a "buy." And it has never offered a dividend. Compare that to American States Water, whose stock has lowered over the same period.

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Piecing the puzzle together

Skepticism over dividend-centered investing is nothing new. But it’s not that dividend stocks are bad bets in and of themselves; rather, they can be part of a balanced portfolio that could include even more conservative investments such as bonds and riskier ones such as cryptocurrency.

Meanwhile, tech-sector companies that famously resisted dividends have gotten into the game. Apple (NASDAQ:AAPL) started paying out dividends in 2012, while Alphabet (NASDAQ:GOOGL) gave out its first-ever dividends in June 2024.

Just a few months prior, Meta (NASDAQ:META) announced its first dividend effective Feb. 22. In each case, the dividend marked a point where the companies had matured past their go-go stages and had plenty of money to sit on. All three today boast market caps measured in trillions of dollars.

Green urged investors to think of stocks not just in terms of dividends, which many treat as income, but total returns. If a stock skyrockets, its share price will far outpace even the biggest dividend; in the S&P 500, that's offered by Walgreens Boots Alliance (WBA).

“I have nothing against dividend investing,” he said. “A lot of smart people are dividend oriented and there are a lot of great dividend-paying stocks out there. But I just would warn people not to invest exclusively in dividend-paying stocks.”

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