Note: This article discusses Indonesian financial products and markets. The principles apply globally, though specific products, regulations, and tax treatments vary by country.

Dividends Aren’t Safer Than Selling Stocks

“I just want to invest in dividend stocks so I can get passive income without selling shares.” This statement is very popular among Indonesian investors. It sounds logical — money comes in without reducing ownership. But mathematically, dividends and selling stocks are equivalent.

Let’s break down why.

What Happens When a Company Pays Dividends?

When a company pays dividends, its stock price drops by the amount of the dividend. This isn’t theory — it’s a market mechanism that definitely occurs.

Real example:

• BBCA stock price IDR 10,000 per share
• Company pays dividend of IDR 200 per share
• After ex-date, stock price becomes ~IDR 9,800

Your total wealth doesn’t change:

Dividends aren’t “free money.” Dividends are your own money being returned from the company’s value.

Dividends = Inefficient Forced Selling

Receiving dividends is economically the same as selling a small portion of your stocks. The differences:

1. You can’t choose the amount. The company determines how much dividend is paid.
2. You can’t choose the timing. The company determines when dividends are paid.
3. Tax is immediately deducted. Stock dividends in Indonesia are subject to 10% final PPh (Income Tax).

Meanwhile, if you sell stocks yourself:

• You choose how much to sell
• You choose when to sell
• Stock sales tax is only 0.1% of transaction value

Tax comparison¹

Tax difference: 100 times. From a tax perspective, selling stocks is far more efficient in Indonesia. Learn more about dividend tax details.

Note: Since the Cipta Kerja Law (Job Creation Law) 2020, dividends can be tax-free if reinvested within 3 months.² But this actually shows that dividends that are used (not reinvested) are indeed subject to high taxes.

”But I’m Not Reducing My Number of Shares”

This is the most common argument. The answer: the number of shares is irrelevant — what matters is your total portfolio value.

Simple analogy:

Imagine you have a cake worth IDR 100,000. There are two ways to get IDR 10,000:

1. Cut 10% of the cake and sell it → You have 90% of the cake worth IDR 90,000 + IDR 10,000 cash
2. The cake “releases” IDR 10,000 and shrinks by 10% → You have a cake worth IDR 90,000 + IDR 10,000 cash

The result is exactly the same.

Owning 100 shares @ IDR 9,800 + IDR 20,000 cash is financially identical to owning 98 shares @ IDR 10,000 + IDR 20,000 cash. Total wealth is the same IDR 1,000,000.

Why High-Dividend Stocks Aren’t Necessarily Better

Companies that pay high dividends means they’re returning more money to shareholders instead of reinvesting in the business. This isn’t always bad, but it’s also not always good.

Some facts:

• Berkshire Hathaway (Warren Buffett’s company) has never paid dividends — because Buffett believes the company can allocate capital better than individual investors
• Fast-growing tech companies usually don’t pay dividends — they reinvest profits for growth
• Companies forced to pay high dividends sometimes sacrifice long-term growth

What You Should Pay Attention To: Total Return

Total return = capital gains + dividends. This is what truly determines your wealth.

All three stocks provide the same return. None is “safer” than the others.

With index funds, you get total return from the entire market. Dividends are automatically reinvested by the investment manager, so you get optimal compound growth — and without dividend tax.

When Do Dividends Make Sense?

Dividends aren’t entirely without benefits. There are some situations where focusing on dividends can be considered:

1. You’re already retired and need regular cash flow — although selling part of your portfolio is equally effective
2. You’re not disciplined about saving — dividends “force” the company to give you cash
3. Psychological reasons — some people feel more comfortable receiving “income” without selling

But psychological reasons aren’t financial reasons. Feeling safe isn’t the same as actually being safe.

The Behavioral Economics of Dividend Preference

Why do so many investors prefer dividends despite the mathematical equivalence? Behavioral finance research offers several explanations:

Mental accounting bias: Investors tend to treat different sources of money differently. Dividends are mentally categorized as “income” (safe to spend), while capital gains are seen as “principal” (should be preserved). This arbitrary distinction leads to suboptimal decisions — your wealth is your wealth, regardless of its source.

Myopic loss aversion: Selling stocks feels like “locking in” a decision and making your position smaller. Dividends provide cash without this psychological discomfort. But economically, both actions reduce your equity position by the same amount.

Self-control mechanism: Some investors use dividend stocks as a forced savings mechanism. Rather than relying on discipline to not sell, they depend on companies to “decide” how much cash to distribute. While this addresses a real behavioral challenge, index fund automatic investing achieves the same goal more tax-efficiently.

Dividend safety illusion: During market downturns, dividends may continue even as stock prices fall, creating an illusion of stability. However, companies can cut dividends at any time — and often do during severe downturns. Your dividend “income” is only as stable as the company’s ability to pay.

Understanding these biases doesn’t make them disappear, but it helps you make more rational allocation decisions.

Historical Performance: Dividends vs Total Return

Looking at long-term data provides valuable perspective:

S&P 500 (1926-2023): Approximately 70% of total returns came from reinvested dividends and their compound growth. However, this doesn’t mean “dividend stocks beat growth stocks” — it means reinvestment matters more than the source of returns.

Tax drag over time: In Indonesia, the 10% dividend tax compounds negatively over decades. An investor receiving 4% dividends annually loses 0.4% to tax every year. Over 30 years, this can reduce total wealth by approximately 10-12% compared to a tax-deferred growth strategy.

Sector concentration risk: High-dividend strategies often overweight banks, utilities, and mature industrials while underweighting technology and growth sectors. This sector bet has alternated between outperformance and underperformance over different decades — not a reliable edge.

The evidence supports broad market index investing with automatic reinvestment, not dividend stock selection.

Index Funds: A Better Solution

If you invest through index funds:

• Dividends from stocks in the index are automatically reinvested
• No PPh dividend needs to be paid (because mutual funds are tax-exempt)
• You get total return from the entire market, not just “high dividend” stocks
• When you need money, you can sell as many fund units as you need

This is more flexible, more tax-efficient, and mathematically not inferior to the “living off dividends” strategy.

Summary

Focus on total return, not dividends. Use index funds to get both optimally.

Disclaimer: This article is for educational purposes only, not investment advice.

Related Articles

• Dividends Aren’t Everything: Why Chasing Yield Can Hurt Returns
• Indonesian Stock Mutual Funds: Complete Guide for Long-Term Investors
• Index Funds: The Simplest Way to Own the Entire Market
• Dividend Tax in Indonesia: Complete Guide for Stock Investors
• Asset Allocation: The Most Important Investment Decision