Hello savers,

France is a very conservative and risk averse country when speaking about investments. Only 8.7% of French people invest in the stock market for instance! (source) For comparison, 54% of Americans are invested in the stock market!

And when speaking to these people, a large majority of them prefer investing in companies paying dividends, which feels more “safe”.

 

 

Weaknesses of dividend investing

However, when you really think about it, dividend investing is far from being the best approach in France. It is also more risky than it seems.

Let’s review the weaknesses of dividend investing. Again, that is only my advice and you are free to disagree in the comments!

🌎 You have to invest in a lot of companies to be diversified enough

A simple MSCI World index holds more than 1600 companies stocks, spread in a lot of developed countries. Before achieving that level of diversity in your portfolio, you will probably need a lot of time and a lot of money!

Even if you buy one share of each of the 1600 stocks of the MSCI World index, that would cost you more than 20 000 euros!

So dividend investing can actually sometimes be more risky because you invest in a reduced number of companies.

💸 You pay fees when reinvesting your dividends

If you reinvest your dividends to grow your capital, your broker will most likely take a commission on that. That little fee you pay each time can dramatically impact your portfolio performance on the long run.

Foreign companies cannot be bought in a PEA. So the French states will tax the dividends before that they are reinvested! It is another fee impacting your foreign stocks that will impact your performance.

💀 Companies can cut their dividends

It happens rarely, but companies can cut their dividends where they are in trouble. Many people forget it, thinking a dividend is like an interest rate…

🔎 You need to follow the companies you invested in

When you invested in a company, you have to follow its performance and review it often to see if it still fits your portfolio. An ETF does that passively for you.

Moreover, it is hard to define realistic and non-subjective criterias to choose in which company to invest…



However, you can still buy a replicating MSCI World index (or even S&P 500) in a PEA! So you benefit from a large diversification, automatic reinvestment of dividends and tax benefits linked to the PEA.

I think people are scared of these capitalizing index because they like getting dividends on their accounts. It feels more like passive income. However, I think it is mainly psychological bias!

When you go in depth, you can see that capitalizing ETF usually leads to a better performance than dividend investing, especially on long period of time.

So here is why I focus mainly on passive ETF funds like the MSCI World index. With my PEA I pay no tax and almost no fees on my investments and re-investments (seems crazy right?), I am very diversified and absolutely lazy with my portfolio!

What do you think? Post in the comments!

Categories: Opinions