Why are some people against stocks that pay out dividends?

[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?

 

[Dash man]

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?

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.

 

[Aerides]

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.

 

[YoungSaver]

I understand the ACA subsidies, but why would people try to limit themselves to a certain tax bracket?

 

[RetireBy90]

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.

 

[Aerides]

I understand the ACA subsidies, but why would people try to limit themselves to a certain tax bracket?

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.

 

[disneysteve]

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.

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.

 

[disneysteve]

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.

 

[foxfirev5]

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.

 

[YoungSaver]

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.

That's like a $20 difference

 

[YoungSaver]

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.

This makes the most sense to me.

 

[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, 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.

 

[GravitySucks]

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.

 

[disneysteve]

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

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.

 

[MRG]

Back in 2012 I bought some APPL, I just looked, 25% of my shares have a zero cost basis. Darn dividends.

 

[Boho]

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.

 

[bluelight]

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.

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.

 

[PaunchyPirate]

Back in 2012 I bought some APPL, I just looked, 25% of my shares have a zero cost basis. Darn dividends.

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.

 

[Big_Hitter]

I understand the ACA subsidies, but why would people try to limit themselves to a certain tax bracket?

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/an...ified,or 35%—pay 15% at most in capital gains.

so if you keep your income low enough, cap gains and qual dividends aren't taxed

 

[MRG]

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.

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.

 

[PaunchyPirate]

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.

That makes sense then if in an IRA.

 

[Out-to-Lunch]

That's like a $20 difference

I am going to PM you my address. Please send me a check for $20. That is only a $20 difference in your savings, so no biggie!

 

[garyt]

I think many of us are using dividend stocks as a cash/bond alternative. I have T for example. I certainly wouldn't recommend it to someone younger or someone who's considering it as an actual equity position because of course you can do way better with a growth stock. But compared to a CD/MM/Bond fund it does quite well and barring catastrophe won't go much lower. But really I'm not worried about the price so long as the dividend is safe, which it appears to be going forward. CSCO, JnJ, PG are some other stocks I use for the same thing. I even get some growth in an up market. I don't plan on ever selling these stocks so long as the dividend is safe.
And yes I know this is still much riskier than just holding your typical Cd etc. I still carry 3 years in cash for buying opportunities.

 

[Markola]

Everything is a trade off. If you pursue dividend yield, you’re giving up price growth. Personally, I buy the whole market in index funds and don’t worry about yield.

 

[free2020]

This is an interesting topic. At the risk of going against the crowd, I'll lay out why Dividends may not be the best for shareholders.
1. Dividends are paid out when the company decides to, not when the shareholder asks for it (mentioned already by others); In some cases, a shareholder may not need it for several quarters at a time, years even.
2. If the above is the case, shareholders pay taxes and frictional costs unnecessarily
3. Company may have better capital allocation opportunities but it is insidiously difficult to tell shareholders that dividend will be suspended, even for only a quarter or year.
4. If the above is true and the company's hand is forced in paying a dividend, shareholders are truly affected in the longer term (opportunity cost).
5. There's nothing sacred about the number 100 or 1000 shares one originally purchased. This is sort of a mental anchoring. If a stock goes from $1 to $10 in ten years, the shareholder's capital went from $100 to $1000. There is nothing wrong with the holder selling 2 shares and now owning 98*10=$980. It is still a nice gain of $880.
6. Finally, from the company's perspective, longer the company's history of paying "increasing dividends every year", the more painful the end game. It is insidiously difficult for a company to stop a dividend. The fundamental responsibility of the company to deploy capital wisely is severely hamstrung by a history of dividend payments.

The relationship between the shareholder and the company should be one of trust. After all, money is "entrusted" over to the company in the form of the share purchase. In many cases, the shareholders mistrust the company (perhaps deserved in most companies) with excess earnings. This is a fundamental trust issue. It is not a healthy relationship at all, especially if you first got into the stock because of the promise of a dividend. A shareholder should not be a shareholder with this mistrust. I realize that most companies don't deserve the trust but that doesn't still change the gold standard.


Thoughts?