Dividends VS Capital Growth - Which Strategy to Choose?

For a beginner in the stock market, dividends are important to consider. But are they more important than capital growth? In this article, we will study Dividends VS Capital Growth – Which strategy to choose in the stock market? 🧐

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⚠️ This article contains past data that are not guarantees for the future. Investing involves a risk of losing money!

Warren Buffet – Dividends or Growth?

Warren Buffett, one of the people in the world who has made the most money from the stock market. As I write this, he earns an average of $5.7 billion per year in dividends alone, according to AI.¹.

Looking at these numbers, I thought that Warren Buffett gave great importance to dividend amounts. In reality, this is not really the case.

Yes, he likes the dividends he receives (who doesn't like earning 5.7 billion per year?) 😊. But in reality, he prefers the growth of stock market capital compared to the payment of dividends².

For example, According to him, it is more profitable for shareholders of his stock (Berkshire Hathaway) that they occasionally sell Berkshire shares rather than Berkshire distributing dividends.

According to Warren Buffet, when a stock like Berkshire has a good long-term stock market profit. For the shareholder, receiving dividends is nonsense compared to selling Berkshire shares when the shareholder needs money.

Pay a dividend to the shareholder	❌
The shareholder sells a share occasionally, following a stock market rise	✅

Indeed, if we analyze Swiss taxation and dividend taxation. This dividend policy is true! But we will come back to it later in this article.

Another example is Warren Buffett's dividend policy. The top 3 stocks in his stock portfolio in 2024, representing more than 50% of stock market assets, distributed low dividends (less than 2.4% per year).

Apple (26%)
American Express (15%)
Bank of America (11%)

Mattthieu Louvet – The order to make money on the stock market

Then I saw Mattthieu Louvet's video³, which develops this subject.

To summarize, he explains that the order to perform on the stock market is:

1- Invest in growth stocks without dividends and without selling them

2- Invest in non-dividend growth stocks and sell a portion occasionally

3- Have high dividend stocks

Taxes – Growth VS Dividends

⚠️ This article deals with taxes for most citizens. However, the tax situation differs from one taxpayer to another. !

👉 From a tax perspective. In most countries, for taxpayers, focusing on the growth of a share is less taxable than receiving dividends. ❗

🔺Please note that stock market taxation will depend on your country of residence. And it is your duty to inform yourself on this subject.

In my canton of residence for example. The taxation concerning stock market returns is:

Approximately 1.5% regarding the total value of the stock or ETF

Between 15% to 35% of the dividend received (% depending on the country of origin of the share)

Example tax

For example, if last year I had a stock that cost $100 and a year later it costs $120. Without receiving dividends. The tax calculation would be:

$120 stock value x 1.5% = $1.8

In this case, I will pay about $1.8 in taxes. For a gain of $20.

On the other hand, if last year I had a stock at $100, which would have given me $20 in dividends. And the value of the stock stabilizes at $100 a year later. The tax calculation will be much less gentle.

100 dollars stock value x 1.5% = 1.5 dollars
20 dollars dividends x 15% = 3 dollars

= $4.5 tax on $20 earned

To summarize, regarding the taxation of a stock market investor. Here is a table:

	Growth Action without dividend	Dividend stock without growth
Stock market gain	20 dollars	0 dollars
Dividend received	0 dollars	20 dollars
Total value taxes	1.5% X 120 dollars = 1.8 dollars	1.5% X 100 dollars = 1.5 dollars
Dividend tax	0 dollars	15% X 20 dollars = 3 dollars
Tax payable	1.8 dollars	4.5 dollars

Therefore, choose between:

Around 1.5% for stock market growth

15% or more in dividends

➡ My tax choice is obviously a growth of action 🫡

Receive dividends or sell shares?

When we are beginners in the stock market, points 2 and 3 may seem to have the same ending.

2- Invest in non-dividend growth stocks and sell a portion occasionally

3- Receive large dividends via dividend stocks

But in reality. The taxation between dividends and sale of shares is not at all the same. 🔍

Note that according to Swiss taxation, for example, stock market returns are divided into 2 categories:

Stock market value or sale = Wealth tax
Dividends = Income tax

For example, let's say that in one year, stock (A) increased its share price by $100 per month and did not pay a dividend.

And another stock (B) paid out $100 in dividends per month but got no growth.

Action	Growth in value	Dividend
Action (A)	+100 dollars per month	0 dollars
Action (B)	0 dollars	+100 dollars per month

We agree that if the shareholder of stock (A) had sold $100 per month. There is no difference in income between the 2.

Action A = $1,200 in sales
Share B = $1,200 in dividends

But in reality, as I wrote in my article “Dividends or Withdrawal from stock market capital”. In Switzerland, we find that dividends are much more taxable than stock sales ❗❕

Here is a summary 😉

Action	Growth in value + dividends	Tax
Action (A)	Sale $1,200 growing + $0 dividend	– total value at the end of the year = +/- 1.5%
Action (B)	$0 sales growing + $1,200 in dividends	– total value at the end of the year = +/- 1.5% + – minimum 15% of dividends received

For example, if the end-of-year value of stock A and stock B is $1,000. And simulating that the sales commission fee for stock (A) is $0.5%.

The taxes and losses would be:

	Action (A) (sale for $1200)	Action (B) (dividends 1200 dollars)
Share value tax ($1,000)	approximately 1.5% = 15 dollars	approximately 1.5% = 15 dollars
Stock sales commissions	about 0.5% = 6 dollars	0 dollars
Dividend Commissions	0 dollars	minimum 15% = 180 dollars
Total	21 dollars (1,75%)	$195 (16,25%)

👉 Therefore, it is more profitable to sell shares than to receive dividends. ❗

Because you pay less tax on selling shares compared to receiving dividends. 🔍

Never put the brakes on compound interest!

If you read my article about the “the multiplier effect of compound interest”. You understood that time is an ally of the profitability of compound interest. 🫡

Here is a proof with 2 ETF's that have a similar strategy but not the same objective. And therefore, they do not have the same performance on the long term !

1 – the VOO ETF, which tracks the performance of the 500 most important stocks in the USA.

2 – the VYM ETF, which tracks the performance of 530 high-dividend stocks, the largest in the USA.

Investors should be aware that both ETFs have a diversified portfolio of stocks similar to over 70 % stocks!

That is, the shareholder of a VOO ETF invests most of the shares of a VYM ETF.

In reality, the big difference between the 2 ETFs. These are the first stocks of the VOO ETF, which are stocks that promote strong growth and distribute low dividends (less than 1.5%).

It is worth noting that these growth companies have the potential for superior long-term returns. In other words, the performance of the top growth stocks in the VOO ETF allows for spectacular stock market growth over time.

4 examples VOO Vs VYM

Therefore, here are 4 examples of performance that I compared on the zonebourse comparison chart⁴. Between the past performance of VOO ETF VS VYM ETF.

▶️ 1) The first example, 6 months, we conclude that the performance is very similar.

This is normal, because the 2 ETFs have a similar investment and too short a time to perform.

▶️ 2) The second example, 12 months, It was concluded that the VOO (growth) ETF outperformed 10%.

Indeed, in 1 year. The VOO ETF is already more profitable than the VYM ETF (with a high dividend).

▶️ 3) The third example, 60 months (5 years), we conclude that the VOO (growth) ETF has outperformed by almost 50%.

In this case, investing in a VOO ETF was almost 1.5 times more profitable than a VYM ETF. However, both ETFs have an identical portfolio of companies at over 70%.

Moreover, it is notable to understand that in 5 years, the value of the VOO ETF has almost doubled!

▶️ 4) The fourth and final example. 96 months (8 years), we concluded that the VOO (growth) ETF performed better than 95%.

That is to say, in 8 years, investing in a VOO ETF has been almost 2 times more profitable than a VYM ETF.

Here is a summary of the performances of the 2 ETFs

Time	% Won by VOO ETF	% gained by VOO ETF compared to VYM ETF
6 months	8%	+ 2%
12 months	25%	+ 10%
60 months (5 years)	84%	+ 50%
96 months (8 years)	162%	+ 95%

➡️ In this case, we see that the compound interest earned from the top growth stocks in the VOO ETF is much more profitable than receiving large dividends from the VYM ETF.

👉 In fact, the longer the period, the better the profitability of a growth ETF performs compared to a high dividend ETF!

Conclusion

Dividends VS Capital Growth – Which Strategy to Choose?

▶️ Favoring a growth-oriented stock portfolio is (historically) much more effective than a portfolio focused on large dividends. Mainly for 3 reasons:

It is more tax efficient to promote stock growth compared to receiving dividends.

It is more tax efficient to sell a stock compared to receiving dividends.

Large uninvested dividends are a hindrance to accumulating compound interest! Note that compound interest is the key to long-term investment wealth.

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