Dividendy
Dividend Myths That Cost You Money
Key takeaways
- A dividend is not "free money" — the share price drops by exactly the dividend amount on the ex-date.
- A high dividend yield can be a warning sign, not a bonus — the "yield trap" is a real risk.
- Dividend income and selling part of a portfolio are economically equivalent — only the tax impact differs.
- Reinvesting dividends alone is not enough — what matters is whether the company is growing and creating value.
Dividends are popular, but they are surrounded by widespread myths that genuinely reduce investors' returns or lead to poor decisions.
Myth 1: "A dividend is free extra income"
It is not. On the ex-dividend date, the share price falls by exactly the amount of the dividend paid. The total value of your position remains the same — you receive cash, but the share is worth that much less. It is like moving money from one pocket to another. Added value arises only if the company generates above-average returns on invested capital — not from the payout itself.
Myth 2: "The higher the yield, the better the stock"
Yield = dividend / price. The price may fall without the dividend changing — and the yield looks temptingly high. This is called a yield trap. A company in trouble, whose shares are losing value, may still be paying a dividend until the cash runs out. Always monitor the payout ratio, cash flow, and payment history.
Myth 3: "Dividend income is better than selling shares"
From the perspective of total value, both approaches are mathematically equivalent — you either receive cash as a dividend or sell part of the portfolio for the same value. The difference is in taxation: in the Czech Republic, dividends are always taxed at 15%, whereas a sale after the time test may be exempt. See tax efficiency of dividends.
Myth 4: "Reinvesting dividends will fix everything"
Reinvestment helps compounding, but the company must continue to create value. If the company stagnates or destroys capital, reinvestment will not sustain you. The historical returns of dividend strategies are strong, but largely due to selecting high-quality companies, not the dividend per se. An overview of quality dividend companies can be found in the section on Dividend Aristocrats or in the ETF navigator on Hřivna.
FAQ
Why does a share price fall on the ex-dividend date?
Because the dividend leaves the company — the company has lost the cash that was part of its value. The market prices this immediately: the share falls by exactly the amount of the dividend paid. The total value of your position remains the same.
What is a yield trap?
A situation where the dividend yield looks attractively high because the share price has fallen significantly. The company may still be paying the dividend, but from savings or debt rather than healthy cash flow. A signal of trouble, not an opportunity.
Is it better to receive dividends or sell shares?
Economically they are equivalent — in terms of value it amounts to the same thing. The difference is tax: in the Czech Republic you always pay 15% on dividends, whereas a sale after 3 years may be exempt. That is why accumulating ETFs are more advantageous in the growth phase.
How do I know if a dividend is sustainable?
Monitor the payout ratio (the share of dividends in net profit — ideally below 70%), the free cash flow payout ratio, the payment history over 10+ years, and the company's debt load. Aristocrats meet these conditions over the long term.