When Dividend Stocks Aren’t Right For You
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Alright, you may wonder why a guy writing about dividend investing and buying companies that consistently increase their dividend payout has a post outlining the detriments of dividend-based strategy. I have to admit it was not easy. I scoured the web for reasons not to use a dividend-based strategy. At the end of the day, I could not find much. However, there were a couple of reasons and situations when a dividend based strategy is not a good idea – here they are:
1. If you want income, then bonds are a safer bet as your principle is guaranteed – if you are an older investor, then this guarantee is important.
2. Firms that reinvest funds into the company that otherwise would go to dividends will see the value of their firm increase, and with it the stock price.
3. In some countries, dividends are taxed twice by the governments – once by the corporation and then once again by individual investor
And that is it – I really could not find any good reasons not to use a dividend-based strategy in a portfolio because I think that anyone can see that these can be picked apart quite easily. That being said, I would love to hear if you can let me know of things that I may have missed here – please use the comments to let me know
5 Comments on this post
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Tyler said:
I wouldn’t necessarily say that bonds offer a guarantee of principal. There is always the risk of default with corporate bonds. A little default risk does mathematically exist with provincial and government issued bonds…although highly unlikely.
June 5th, 2007 at 7:27 pm -
alex said:
What about the fact that dividends are taxed at the marginal tax rate, whereas if the company invested that money into growth and their stock went up, that would be taxed at the long-term capital gains rate?
June 5th, 2007 at 7:52 pm -
Yielder said:
2. Firms that reinvest funds into the company that otherwise would go to dividends will see the value of their firm increase, and with it the stock price.
Dividend growers and initiators have the best average annual return – 10.6% – from 1972 through 2004 while non-dividend paying stocks have the worst return over the same period – 4.3%.
June 6th, 2007 at 5:43 am -
Yielder said:
Source for the above.
and David Dreman
June 6th, 2007 at 5:51 am
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