There are a lot of people who recommend stocks that pay dividends. Kevin O’Leary, for instance, says dividend stocks are “paying you while you wait.”

The theory is that if there are two comparable stocks of the same value and one pays a dividend and the other doesn’t, the dividend stock is worth more because you’re getting paid in two ways: through the dividend and the value of the stock as it grows.

But I’ve never understood this logic or how a dividend advantage, if you want to call it that, could possibly be sustained on an open market. Why would the market attach the same value to two companies if one of them paid a dividend and the other didn’t? It strikes me that on an open market, the dividend has been taken into account in the value of the company. It’s not just a free bonus to the shareholder that isn’t connected to stock price.

Besides, if a company issues dividends to its shareholders, it has less cash in the bank, so the value of the company has gone down. It can’t have the same value as a company with similar results that kept its money in the bank and could spend it in another way.

There’s plenty of science to back this up. Here are a couple of blog postings by respected writers that speak to exactly that:

7 Myths About Dividend-Paying Stocks
Debunking Dividend Myths: Part 1
We’re going to talk about the dividend myth on the next edition of Experts on Call with the folks from PWL Capital. It will be on Saturday, November 28 at 3:00 on CFRA in Ottawa.

To me, the dividend myth is a bit like thinking you’re saving money if you skip a mortgage payment, because no money came out of your account. But you still owe the money – and in fact, the bank is collecting more interest from you.

To put it another way, if it seems too be good to be true, it probably is.