The Magician’s Trick of Dividend Safety #Why “Income Investing” Feels Safer Than It Really Is
There is a reason why a magician never explains their trick while performing it. Once you understand where to look, the illusion collapses. What felt mysterious becomes mechanical, and what felt impressive becomes obvious.
Dividend investing works much the same way.
The appeal is immediate and intuitive. Cash arrives in your account. The portfolio feels productive. You are being “paid” for owning stocks. Price movements fade into the background while income takes center stage. It feels disciplined, conservative, and safe.
But like all good magic, the trick relies on attention. While investors focus on the dividend, the real action happens elsewhere.
A dividend is not a reward handed down from the market, and it is not a sign that risk has disappeared from your portfolio. It is a transfer. Cash leaves the company and enters your account, and the value of the company adjusts accordingly. Nothing new is created. Wealth is simply rearranged.
A simple example:
A stock is worth $100.
It pays a $5 dividend.
All else equal, the stock should trade around $95 after the dividend, because the company now has $5 less cash (or $5 less value) on its balance sheet.
You did not “make” 5%. You moved $5 from the company’s pocket into your own, and the price reflected that.
This is not a philosophical position. It is the foundation of corporate finance. Miller and Modigliani demonstrated decades ago that a firm’s value is determined by its earning power and investment decisions, not by how cash is distributed.¹ What matters is the business. The wrapper does not.
And yet, dividends continue to feel different.
That difference is emotional, not economic, and the brain is wired to overvalue what feels tangible and immediate. Receiving income feels like progress, while selling shares feels like depletion. One feels responsible, the other reckless. But when viewed through the lens of total wealth, both are simply ways of funding spending from the same pool of capital.
Consider another simple example. An investor with a $1,000,000 portfolio needs $40,000 per year. One portfolio yields 4 percent and delivers that income automatically. Another yields 1 percent, and the investor sells $30,000 of shares to make up the difference. At year-end, both investors have funded identical spending. Both portfolios are smaller by the same amount. The only difference is how the transaction felt, even though the financial outcome was identical.
Those feelings matter, because behavior shapes outcomes. But feelings should not be mistaken for safety.
When Dividends Disappear
The deeper illusion is the belief that dividends themselves are stable, and therefore reliable in exactly the moments they are most needed. They are not contractual. They are discretionary. When conditions deteriorate, boards protect balance sheets before they protect payouts.
History makes this clear. During the Global Financial Crisis, dividends fell sharply across markets. During the early stages of the pandemic, dividend cuts and suspensions reached levels not seen since 2009.² Income that felt dependable disappeared precisely when investors were counting on it most.
The Hidden Cost of Dividend Tilts
There is another consequence of dividend preference that is less obvious, but often more damaging. Dividend strategies tend to reshape portfolios in ways investors rarely intend.
High-dividend portfolios cluster in the same places. Financials. Utilities. Real estate. Consumer staples. Energy. These sectors share characteristics that support payouts, but they also share economic sensitivities, capital intensity, and exposure to interest rates and regulation. What looks like diversification on the surface can quietly become concentration underneath.
A comparison within the same market illustrates this clearly.
The iShares Core S&P 500 ETF (IVV) is designed to simply own the US equity market as it exists. Its sector composition reflects where market capitalization and earnings power have accumulated, with information technology as the largest weight, followed by financials, communication services, consumer discretionary, and health care.³
The SPDR Portfolio S&P 500 High Dividend ETF (SPYD), by contrast, selects the highest-yielding stocks within the same index. The result is a dramatically different portfolio. Real estate, utilities, consumer staples, and financials dominate, while information technology represents barely a rounding error.⁴
This structural difference has not been benign.
Over the ten years ending December 31, 2025, IVV delivered an annualized total return of approximately 14.8 percent, while SPYD returned about 9.0 percent annually over the same period, with dividends reinvested. Over five years, the gap remained meaningful: roughly 14.4 percent per year for IVV, versus 10.5 percent for SPYD.³ ⁵
This is not an argument that technology will always lead, nor that dividend-paying stocks are inherently flawed. It is a reminder that dividends are a characteristic, not a return engine. A dividend tilt is not a neutral income choice. It is a sector bet, and sector bets can be expensive.
This is where the evidence matters most. Academic research shows that long-term equity returns are driven by underlying factors such as profitability, value, and size, not dividend policy itself.⁶ Dividends often correlate with these traits, but they are not the source of return. They are a byproduct of how companies allocate capital.
When investors chase the byproduct and ignore the source, they misunderstand what compounds.
None of this is to say dividends are bad. They can be useful. For some investors, regular income provides structure and emotional comfort. For others, dividends simplify cash flow management. Those benefits are real.
But dividends are a tool, not a principle, and tools work best when they are chosen intentionally rather than by habit.
Designing Income, Not Chasing It
At Westmount Wealth Management, income is designed, not outsourced. We begin with spending needs, time horizons, and tax considerations, and then build portfolios to support those goals. Sometimes dividends play a role. Sometimes systematic withdrawals make more sense. Often it is a blend.
The objective is not to avoid selling assets. It is to avoid selling the wrong assets at the wrong time, for the wrong reasons.
Safety in investing is not a yield. It is alignment. Alignment between assets and liabilities. Between cash flows and commitments. Between portfolio behavior and human behavior.
The magician’s trick works because the audience watches the flourish instead of the mechanics. Dividend investing feels safe because the cash payment is visible, while the price adjustment is easy to ignore.
But wealth is not built on what feels good in the moment. It is built on what compounds over time.
Dividends do not create return. They rearrange it. Once you see that, the illusion fades, and attention shifts to what matters: total return, diversification, discipline, and a plan designed to endure when markets and emotions inevitably misbehave.
References
Miller, M. H., & Modigliani, F. (1961). Dividend Policy, Growth, and the Valuation of Shares. Journal of Business.
https://www.jstor.org/stable/2351143S&P Dow Jones Indices. U.S. Indicated Dividend Payments Decrease Q2 2020.
https://press.spglobal.com/2020-07-08-S-P-Dow-Jones-Indices-Reports-42-5-Billion-Decrease-in-U-S-Indicated-Dividend-Payments-for-Q2-2020-Worst-Quarter-since-Q1-2009BlackRock iShares. iShares Core S&P 500 ETF (IVV) Fact Sheet.
https://www.ishares.com/us/products/239726/ishares-core-sp-500-etfCharles Schwab. SPDR Portfolio S&P 500 High Dividend ETF (SPYD) ETF Report Card.
https://www.schwab.wallst.com/schwab/Prospect/research/etfs/reports/reportRetrieve.asp?reportType=etfrc&symbol=SPYDState Street Global Advisors. SPDR Portfolio S&P 500 High Dividend ETF (SPYD) Fact Sheet.
https://www.ssga.com/library-content/products/factsheets/etfs/us/factsheet-us-en-spyd.pdfFama, E. F., & French, K. R. (2008). Dissecting Anomalies. Journal of Finance.
https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2008.01328.x
This information has been prepared by Damir Alnsour, MBA, CFA, CFP®, FCSI® who is Head of Portfolio Management, Portfolio Manager, Financial Planner for Westmount Wealth Management Inc. Westmount Wealth Management Inc. is registered as a Portfolio Manager in British Columbia, Alberta, and Ontario. Westmount Wealth Planning Inc. is a subsidiary of Westmount Wealth Management Inc.
This material is distributed for informational purposes only and is not intended to provide personalized legal, accounting, tax, or specific investment advice. Please speak to a Westmount Wealth Advisor regarding your unique situation.
