The case for hating dividend stocks

The Australian way of life.

Beaches. Coffee. Smashed avocado on toast. And dividends from shares.

For generations, Australian investors have been told that dividends are the gold standard of portfolio construction. Franked bank payouts, quarterly ETF income and dependable LIC distributions have become so culturally embedded that many investors treat yield as a proxy for quality itself.

But here’s the uncomfortable question no one wants to ask: Are dividends making Australians worse investors?

Financial commentators celebrate yield as discipline, safety and passive income. Advisers use it to soothe nerves. Retirees rely on it to fund lifestyles. Younger investors chase it because the cheque in the account feels like progress.

But in this article, I put forth reasons why the obsession with dividends may be a sub-par way to maximise wealth, and in many cases, lead us to buy and hold ASX companies that offer mediocre total returns at worst, and in some cases, lose money over the long-term.

Contention #1 - The world’s great investor hates dividends

“In a very minor way, Berkshire shareholders have participated in the American miracle by foregoing dividends, thereby electing to reinvest rather than consume.” - Warren Buffett, Berkshire Hathaway Shareholder Letter, 2024

Buffett, arguably the world’s greatest investor, has spent decades refusing to pay a dividend at Berkshire Hathaway - not because he couldn’t, but because he believed every retained dollar could be put to better use inside the conglomerate now worth over US$1 trillion.

That decision flies in the face of how most Australian investors think about income, but it sits at the heart of one of the greatest compounding stories in market history.

Over 60 years, Berkshire delivered annual returns of 20%; $100 invested in 1965 grew to more than $5.4 million by the end of 2024.

The difference, arguably, wasn’t luck. It was capital allocation. Buffett kept the cash inside the machine and compounded it - and shielded it from market storms - for decades.

It’s the same playbook used by many of the best-performing businesses of the past two decades, particularly the Magnificent 7, and for local success stories like Pro Medicus. The chart below shows the total returns of key zero and low-dividend companies (<1% yields) versus the high-dividend brands we're used to.

Contention #2: The income you thought you could trust

It’s a danger Australian income investors know all too well: the dreaded yield trap - a high dividend built on weak fundamentals. Eventually, something breaks.

The graphic below tells the story. Some of the ASX’s biggest dividend payers - Telstra, Westpac and Woolworths - have actually cut their payouts over time, despite being positioned as bastions of reliable income.

In chasing tax-effective income, investors often end up with highly concentrated portfolios exposed to the same names across two sectors.

But the deeper issue is capital stewardship.

For years, ASX management teams brainwashed investors to believe 80%+ payout ratios were sustainable.

Then reality hit - the GFC, COVID and structural shifts - and many of those same companies are now paying lower dividends today than they were a decade ago. Make no mistake, long-term income investors in so-called ASX blue-chips have, on too many occasions, experienced the duality of falling income and rising inflation.

This obsession with financially engineering the next distribution has arguably come at a cost to total returns. Look across major markets over the past decade and the pattern becomes hard to ignore.

What does this tell us? Markets that prioritise reinvestment over innovation - by virtue of lower yields - appear to deliver relatively strong total returns.

Contention #3 - Are Australian dividends really tax-effective?

Franking credits, oh how we love them. Yes, they can turn ordinary income into something more tax-effective - even refundable - particularly for those in the 0–30% tax brackets.

But that logic assumes a very specific, linear life: you live and work in Australia forever, stay within those tax brackets, and your dividends are consistently franked. The moment any of those change, the “tax-effective” argument starts to unravel.

Consider the following:

• High-income earners on the 45% rate still pay additional tax on fully franked dividends
• You don’t get franking credits if you move overseas and become a non-resident
• Not all dividends are or stay fully franked - stocks including ANZ and Aristocrat Leisure have shifted toward partial or unfranked payouts over the years
• Entire asset classes like A-REITs provide no franking at all

This isn’t an argument against paying taxes on dividends. It’s a reminder that the idea that all Australian dividends are tax-effective is a myth.

Contention #4 - Dividends turn investors into spenders

And lastly, one of the most seductive features of dividends is psychological.

The money lands in your account and instantly makes the portfolio feel productive, safer, and more tangible - like it is doing its job. But investing works best when capital is left alone to compound, not pulled out along the way (or too early).

The problem is that investors don’t treat all returns equally. In their 2007 paper, The Effect of Dividends on Consumption, Harvard’s Malcolm Baker, alongside Stefan Nagel and Jeffrey Wurgler, found that “consumption indeed responds much more strongly to returns in the form of dividends than returns in the form of capital gains.”

In other words, dividends feel like spending money. It’s easy to treat that Commonwealth Bank interim dividend as what just paid for your avocado and toast, but that behaviour comes at a cost.

Dividends make up roughly half of the total return of the ASX 200, and every dollar spent is a dollar no longer compounding. That’s a luxury you don’t get with businesses that keep every dollar invested.

5 zero-dividend compounders to watch

With this argument established, I didn’t want to leave readers hanging. So I screened the global equity universe for companies that don’t pay dividends but have consistently compounded earnings - and are expected to keep doing so.

The screening criteria was as follows: 20%+ historical EPS growth, 20%+ forward EPS growth, and strong, defensible brands. What follows isn’t a buy list - it’s a starting point for deeper research.

#1 - Life360 (ASX: 360)

Life360 is a classic compounder in the making. Best known for its family safety and location-sharing app, the company is reinvesting aggressively to cement its position as the leading platform in its category, expanding into pet tracking, insurance, financial services and advertising.

With forecast EPS growth of 56%, the market is betting that Life360 can convert strong user growth into serious operating leverage. The risk? Execution - and proving it can scale profitably without churn.

Blackwattle’s Michael Skinner believes Life360’s recent sell-off has been overdone, attributing it to broader AI-related concerns and called the stock significantly undervalued below $20.

#2 - Amazon (NYSE: AMZN)

Amazon needs little introduction, but it’s evolving fast. While retail still dominates headlines, the real earnings engine is Amazon Web Services, alongside a rapidly scaling advertising business. After years of reinvestment, Amazon is now showing what happens when a scale machine turns on profitability. It also owns a huge stake in AI pioneer, Anthropic.

With forward EPS growth of 22%, it’s no longer just a growth story - it’s a margin expansion story. No dividend here; every dollar is reinvested. For investors, the question is whether that reinvestment continues to generate outsized returns.

Vihari Ross of Antipodes and Casey McLean from Magellan both rated Amazon a BUY on a recent episode of Buy Hold Sell, calling the tech giant attractively valued AI winner.

#3 - Arista Networks (NYSE: ANET)

Arista Networks is a quieter name, but one of the highest-quality operators in global tech. The company provides high-performance networking solutions to hyperscalers and enterprises - effectively the plumbing behind cloud and AI infrastructure.

With EPS growth expected at 22%, Arista benefits from structural tailwinds as data demand explodes. What stands out is its capital-light model and strong margins. No dividends, just reinvestment into innovation. The key risk is concentration - a handful of large customers drive a big chunk of revenue.

The numbers aside, Fidelity's Maroun Younes nominated Arista's CEO, Jayshree Ullal, as one of the world's best executives.

#4 - Block (ASX: XYZ)

Block, the owner of AfterPay, sits at the intersection of fintech and ecosystem thinking. From Square’s merchant payments to Cash App’s consumer finance platform, the business has built a two-sided network that feeds on itself.

Despite periods of market scepticism, Block continues to show strong earnings growth potential (31% forward EPS), driven by monetisation across both segments and operating discipline.

The bull case is that it is a diversified fintech platform with multiple growth levers. The bear case? Cyclicality in consumer spending, ongoing questions around margin durability and  its AI strategy.

#5 - Shopify (NYSE: SHOP/TSX: SHOP)

Shopify is the backbone of independent e-commerce. Its platform enables millions of merchants to build, scale and operate online stores - and increasingly, to manage logistics, payments and customer relationships.

After a period of heavy investment, the company has refocused on efficiency, with forward EPS growth of 30% signalling improving profitability. Like the others on this list, Shopify reinvests rather than pays dividends, aiming to capture a larger share of global commerce.

Shopify last year overtook Royal Bank of Canada as Canada’s most valuable company - a powerful example of what happens when a business reinvests aggressively into global expansion.

Why there’s a case for no or low dividends

This article isn’t meant to suggest that Australians abandon dividend investing altogether, but rather to not ignore the reality that investing in quality companies that pay little to no dividends can have merit. Companies that do this are keeping their money to:

• Invest heavily in research and development
• Keep significant amounts of cash available for opportunities such as M&A and share buybacks
• Avoid setting unrealistic expectations among shareholders that high payout ratios are manageable, and see sharp drops in the stock prices when they have to cut

And, while tax should never be a primary consideration, no-dividend stocks in particular leave it to you to decide when to crystallise a gain and enjoy the reward with the potential of a 50% CGT discount.

But more importantly, these companies are investing in the future - AI, data centres, the cloud, new technologies, providing a useful diversifier for portfolios and long-term growth potential.

The catch, of course, is that the payouts are non-existent or so negligible that they may barely buy you a cup of coffee!