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Why are some people against stocks that pay out dividends?
03-11-2021, 01:42 PM
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#1
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Recycles dryer sheets
Join Date: Mar 2012
Posts: 202
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Why are some people against stocks that pay out dividends?
I was reading about dividend stocks today and saw many comments from people that were against investing in dividend stocks. It seemed to be related to taxes.
I don't quite understand. Why are some people against stocks that pay out quarterly dividends?
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03-11-2021, 01:50 PM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Mar 2013
Location: Limerick
Posts: 5,633
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Quote:
Originally Posted by YoungSaver
I was reading about dividend stocks today and saw many comments from people that were against investing in dividend stocks. It seemed to be related to taxes.
I don't quite understand. Why are some people against stocks that pay out quarterly dividends?
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I don’t think they’re against dividend stocks, I think they mean you shouldn’t pick stocks just for dividends and look for the total return approach. Most of my stocks pay dividends, but not all. Most have good growth prospects too. I prefer dividend stocks that grow their dividend each year.
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03-11-2021, 01:58 PM
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#3
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Moderator
Join Date: Nov 2015
Posts: 13,846
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Dividend stocks don't always turn out to be the best growth stocks, and dividends + growth is often less than pure growth stocks.
A lot of investors are attracted to dividends without looking at the whole picture.
Similarly, dividend payouts then become more challenging: Perhaps you don't always want them reinvested the day they are awarded. Perhaps you don't want that extra income that quarter, etc. That's where taxes becomes a thing. Especially if you're trying to manage to a tax bracket or ACA subsidies, you don't want a whole mess of dividend income as a stream that you can't control, vs. selling taxable investments on your own schedule.
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03-11-2021, 02:22 PM
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#4
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Recycles dryer sheets
Join Date: Mar 2012
Posts: 202
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I understand the ACA subsidies, but why would people try to limit themselves to a certain tax bracket?
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03-11-2021, 02:49 PM
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#5
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Thinks s/he gets paid by the post
Join Date: Feb 2009
Location: Cville
Posts: 1,597
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There is a thinking that if your stock pays a dividend of say $1 then the price will go down by a buck. Makes sense as your company is worth $1 less now that they don’t have it.
There is also thinking that follows above, that if stock cost $50 yesterday and they pay a $1 dividend and it now costs $49, you will get taxed on a $1 but you haven’t made any extra money.
Another reason is a dollar reinvested in growth is better. A company that pays a dividend must not have any good ideas on how to take that buck and build more business.
I would consider each of these as there is a grain of truth in each, but not rules for me to live by.
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FIRE 31 Aug, 2018 - Always leave every place better than you found it, always give more than expected or Due
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03-11-2021, 03:08 PM
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#6
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Moderator
Join Date: Nov 2015
Posts: 13,846
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Quote:
Originally Posted by YoungSaver
I understand the ACA subsidies, but why would people try to limit themselves to a certain tax bracket?
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Because I'd rather pay 12% than 18%? and if a few hundred extra bucks in dividends push you over a bracket, that's a case of penny wise pound foolish.
It's all down to control. Dividends aren't bad, but you have to be more hands-on to avoid the potential for issues, especially when they are in taxable accounts.
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03-11-2021, 03:33 PM
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#7
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Thinks s/he gets paid by the post
Join Date: Feb 2021
Posts: 2,324
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Quote:
Originally Posted by Aerides
Because I'd rather pay 12% than 18%? and if a few hundred extra bucks in dividends push you over a bracket, that's a case of penny wise pound foolish.
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But you don't pay the higher rate on all of your income. You only pay it on the amount that exceeds the cut off. You'd still pay 12% on the same amount and only pay 18% on the income that falls into that higher bracket.
If taxes weren't tiered, it might make sense to avoid crossing into the next bracket, but that's not how it works.
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03-11-2021, 03:37 PM
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#8
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Thinks s/he gets paid by the post
Join Date: Feb 2021
Posts: 2,324
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Some people want to create a steady predictable income stream in retirement. Dividend stocks are good for that. You'll get that quarterly check ever 3 months. The amount may even increase over time (though it could also decrease as many discovered this past year).
Others would rather benefit from growth and, when they need money, sell a few shares.
Neither way is right or wrong, and many do a combination of both. We invest in a high dividend yield ETF that's paying a bit over 3% currently. It's not where most of our stock allocation is, but it is a piece of it.
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03-11-2021, 03:38 PM
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#9
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Thinks s/he gets paid by the post
Join Date: Mar 2009
Posts: 2,975
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Over. the years I have migrated my growth/blend stock ETF's and MF's into Roth accounts. My tIRA's include slower growing dividend ETF's, CD's, Bonds etc. This minimizes any potential tax consequences. At that point the dividend debate is pretty much a wash. My philosophy with my growth portfolio is that no one ever went broke taking a profit. Likewise no one ever went broke by taking only the dividend. I do both depending on the current situation. As long as the total portfolio stays above my predetermined minimum I'm good.
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Took SS at 62 and hope I live long enough to regret the decision.
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03-11-2021, 03:40 PM
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#10
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Recycles dryer sheets
Join Date: Mar 2012
Posts: 202
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Quote:
Originally Posted by Aerides
Because I'd rather pay 12% than 18%? and if a few hundred extra bucks in dividends push you over a bracket, that's a case of penny wise pound foolish.
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That's like a $20 difference
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From 2013, $170k -> $227k -> $244k -> $226k -> $312k -> $426k -> $462k -> $515k -> $791k -> $875k -> $808k
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03-11-2021, 03:42 PM
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#11
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Recycles dryer sheets
Join Date: Mar 2012
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Quote:
Originally Posted by RetireBy90
if stock cost $50 yesterday and they pay a $1 dividend and it now costs $49, you will get taxed on a $1 but you haven’t made any extra money.
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This makes the most sense to me.
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03-11-2021, 04:28 PM
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#12
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Recycles dryer sheets
Join Date: Jan 2012
Posts: 124
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My DH inherited a substantial amount of a dividend paying utility stock when his mother passed away. At the time my immediate response was to sell it and invest in a stock fund, but he wouldn't hear of it. In our retirement we receive quarterly dividends that account for about 35 to 40% of our needs from this stock. The rest is taken care of by SS and pensions.
The dividends have actually slightly increased since we have owned it and they are taxed at the (very low) qualified dividend rate. We have yet had to dip into our other savings or retirement funds because of what we receive in dividends. While dividend stocks are not loved by many, I am grateful that we have them.
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03-11-2021, 04:52 PM
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#13
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Thinks s/he gets paid by the post
Join Date: Feb 2014
Location: Syracuse
Posts: 3,501
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Personally, I would like to get rid of the buy back provisions and have companies pay dividends instead. However I don't chase dividend stocks or shun companies with buy back histories. I own a total market fund instead.
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03-11-2021, 05:06 PM
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#14
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Thinks s/he gets paid by the post
Join Date: Feb 2021
Posts: 2,324
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Quote:
Originally Posted by bluelight
My DH inherited a substantial amount of a dividend paying utility stock when his mother passed away. At the time my immediate response was to sell it and invest in a stock fund
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I'm actually going to be facing that very same decision in the near future. I will be receiving an inheritance probably later this year and part of it is shares in two different dividend-paying stocks, a utility and a bank. The yields are decent (2.7-3.7%).
The common consensus is that if it isn't stock you would go out and buy today, sell it and feed the proceeds into your existing portfolio and asset allocation. And that's likely what I'll do. I've been actively working to simplify our portfolio as we approach retirement so adding a couple more stocks to keep track of isn't really on my to-do list. I'd rather dump that money into our existing high dividend yield ETF - same end result.
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03-11-2021, 05:19 PM
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#15
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Apr 2013
Posts: 11,078
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Back in 2012 I bought some APPL, I just looked, 25% of my shares have a zero cost basis. Darn dividends.
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03-11-2021, 05:28 PM
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#16
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Thinks s/he gets paid by the post
Join Date: Feb 2017
Posts: 1,844
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One good thing, I thought, about the former DRAD, was that it paid a dividend. Then Digirad had some trouble and there was fear they'd stop dividends and the price tanked. Some time later it did stop the dividends and it tanked more. Now I consider dividends another variable to worry about.
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03-11-2021, 05:30 PM
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#17
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Recycles dryer sheets
Join Date: Jan 2012
Posts: 124
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Quote:
Originally Posted by disneysteve
I'm actually going to be facing that very same decision in the near future. I will be receiving an inheritance probably later this year and part of it is shares in two different dividend-paying stocks, a utility and a bank. The yields are decent (2.7-3.7%).
The common consensus is that if it isn't stock you would go out and buy today, sell it and feed the proceeds into your existing portfolio and asset allocation. And that's likely what I'll do. I've been actively working to simplify our portfolio as we approach retirement so adding a couple more stocks to keep track of isn't really on my to-do list. I'd rather dump that money into our existing high dividend yield ETF - same end result.
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That is the consensus and I was told the same thing at the time. At this point the utility stock has almost doubled in value from our original cost basis so the tax bite to sell it would be pretty huge. I have compensated on the rest of our portfolio to keep our asset allocation balanced. The net overall result may be that we have lost a bit during these historic stock market highs.
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03-11-2021, 06:02 PM
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#18
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Thinks s/he gets paid by the post
Join Date: Feb 2014
Location: NW Pennsylvania
Posts: 1,803
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Quote:
Originally Posted by MRG
Back in 2012 I bought some APPL, I just looked, 25% of my shares have a zero cost basis. Darn dividends.
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I’m not sure I follow. Are you saying 25% of your shares are the reinvested AAPL dividends? If so, each share should have a basis of the price that share was purchased at when the dividend was reinvested. None of them should be zero.
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03-11-2021, 06:07 PM
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#19
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2013
Location: Les Bois
Posts: 5,761
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Quote:
Originally Posted by YoungSaver
I understand the ACA subsidies, but why would people try to limit themselves to a certain tax bracket?
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because it's possible to pay zero income taxes in retirement with qualified dividends, capital gains, tax-exempt interest and enough deductions (medical expenses, prop taxes, mortgage interest etc.) under current tax law anyway...that's why a rule of thumb is to draw off of your after-tax savings first
https://www.investopedia.com/ask/ans...apital%20gains.
so if you keep your income low enough, cap gains and qual dividends aren't taxed
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03-11-2021, 06:25 PM
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#20
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Apr 2013
Posts: 11,078
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Quote:
Originally Posted by PaunchyPirate
I’m not sure I follow. Are you saying 25% of your shares are the reinvested AAPL dividends? If so, each share should have a basis of the price that share was purchased at when the dividend was reinvested. None of them should be zero.
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Tell Fidelity, yes 25% of the shares are from reinvested dividends. That is how they show my tax lots $0. Not that I care, it's an IRA.
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