[willbes]

Dividend paying stocks will be pulling from the value of the stock. The 4% you get will immediately drop the value of the stock by 4%ish.

Dividend paying stocks may not be a great option for most US people (and maybe others) unless they are in tax-advantaged accounts. You will be taxed on that as income and not capital gains, which would have occurred if you had a stock that held value and then sold it when you needed to.

[KMag]

In other words, ignoring taxes, in a long-term holding strategy, one would expect reinvesting dividends from a stock to perform as well as if that stock just didn't pay dividends (all else being equal, which it never is).

Though, taking into account taxes, the tax on dividends is effectively compounding annually while capital gains taxes are a simple rate. As long as the dividend tax rate for stocks held long-term is equal to the long-term capital gains tax rate, it's more tax-efficient for investors if a company buys back its own stock instead of paying dividends.

This is also the logic behind end-of-year loss harvesting: compounding interest on tax savings in capital gains losses.

I'm not an accountant or tax attorney.