Since the dutch-belgian meet-up is upon us tomorrow I thought it a good time to throw a stick in the chicken coop (this is actually a litteral translation of the dutch saying: ‘een knuppel in een hoenderhok gooien’, the English equivalent would be ‘to stir the pot’).

You see, contrary to a lot of other finance bloggers I do not like dividends. I would even go as far as to say I hate dividends and have been trying to avoid them as best as possible for my entire investing time.

There are two reasons for this. The first is taxes.

The taxman cometh

Tax on dividends in Belgium is currently 30% and if you happen to own foreign shares you will most probably be taxed twice: once in the country where the company has it’s headquarter and once more in Belgium! So for me dividends of Royal dutch shell will be taxed 15% in the Netherlands (that is after I fill in some paperwork to lower it! Ugh, paperwork!) and then what is left will be taxed at 30% in Belgium! So a dividend of 100 euro gross will end up being only 59,5 euro by the time it hits my account. That is a 40% total tax level. I prefer my companies to keep this money and invest it themselves thus avoiding all this tax nonsense


The second reason is laziness. Finding good companies at an attractive price is not easy. Shortly after the 2008 – 2009 financial crisis you had your pick of top quality companies at bargain prices. But over the years prices have risen. Once more, you need to look at a lot of coal to find a diamond. That is a lot of work. And my name is not financialfreedomSLOTH because I like working! I find it much more pleasant if the company I invest in would do this in my place. They are usually a lot better placed to do it.

– By doing this they avoid taxes. As said above: if Royal Dutch shell pays a dividend I could only have 59,5 euro after taxes to invest. Which means their rate of return can be lower than mine and still produce the same value for me!

– They also have economy of scale. Finding a good company to invest in takes a lot of work. But once you have found a good investment opportunity investing 2.000 euro, 200.000 euro or 2.000.000 euro does not take a lot of extra effort. (There is sometimes a little bit of effort to avoid influencing price and illiquid stock can put a limit on the amount that you can invest but this is easy to avoid by only looking at companies of a certain size).

– Private equity investments are also possible for them.

– They have the best knowledge of their own sector. If market size is too big to acquire additional companies within their sector they can always look at their suppliers and clients. Here again they have an information knowledge advantage.

It is the reason I like holding companies and within them absolutely love Berkshire Hathaway!

Other stock I like mostly for option plays. Buy it by writing a put, then sell it with some capital gains by writing a call. All of which is tax free in Belgium! Dividends are then something that sometimes happen by accident (like the time I held Coca-Cola shares just when they happened to pay out a dividend, doh!).

Profitable minority

I know I am in a very small minority with this (and I might change my approach once I achieve financial freedom). But it has been a profitable viewpoint up until this point.

A small anecdote on how being too focused on dividends may cost you money. Years and years ago I noticed that the price of Artwork systems (a small, local software company) would fluctuate. It would go higher when the dividend was near and then reach a low point about 6 months later. This was because it was a very small stock, nobody followed it and liquidity dried up. But the swing in stock prices was more (almost 2x more) than the dividend paid. And liquidity near the dividend date was also higher! So I accumulated a position in the down months. Sometimes being the only one in the market, my bid price became the market price. Ooh, fun times! And then when the dividend approached and liquidity returned I sold it all before the dividend was paid (let somebody else pay those taxes!).

Since the general assembly was in the same city I lived in at the time I even went to it and explained why I would prefer them to keep the dividend and use their profits to turn Artwork systems into a holding company! This was against my direct financial interest but my long term wish to be as lazy as possible won over my wish for short term profits. I mean, all that buying and selling (sometimes 5 or 6 trades In a single year, in a single stock!) was very tiring 😉

The president of the board explained to me (in a somewhat belittling tone) they had no interest becoming a holding and the other shareholders almost skinned me alive (how did I dare to threaten their sweet dividends!!). The next year I visited again, kept my mouth shut and just got very drunk on the excellent champagne they provided for their shareholders. Even smuggled one bottle outside under my coat (there can be other advantages to being a shareholders). It was one of a very few times I was truly and completely drunk!

A year later my very profitable strategy came to an end as artwork systems was bought by Esko, which was at the time owned by Axcel A/S a Danish private equity investment company. This private equity firm used the profits of Artwork systems to build out their graphics group and then sold the complete group to Danaher, which is for all intense and purpose a holding company …

Through all of this, the president of the board stayed on …

Danaher is a public company and pays a dividend. Perhaps I should go and try to explain my viewpoint again? Does anybody know what quality of champagne they serve?