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Why are some people against stocks that pay out dividends?
Old 03-11-2021, 02:42 PM   #1
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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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Old 03-11-2021, 02:50 PM   #2
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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.
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Old 03-11-2021, 02:58 PM   #3
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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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Old 03-11-2021, 03:22 PM   #4
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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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Old 03-11-2021, 03:49 PM   #5
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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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Old 03-11-2021, 04:08 PM   #6
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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.
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Old 03-11-2021, 04:33 PM   #7
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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.
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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Old 03-11-2021, 04:37 PM   #8
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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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Old 03-11-2021, 04:38 PM   #9
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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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Old 03-11-2021, 04:40 PM   #10
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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.
That's like a $20 difference
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Old 03-11-2021, 04:42 PM   #11
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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.
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Old 03-11-2021, 05:28 PM   #12
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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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Old 03-11-2021, 05:52 PM   #13
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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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Old 03-11-2021, 06:06 PM   #14
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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
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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Old 03-11-2021, 06:19 PM   #15
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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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Old 03-11-2021, 06:28 PM   #16
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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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Old 03-11-2021, 06:30 PM   #17
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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.

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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Old 03-11-2021, 07:02 PM   #18
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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.
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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Old 03-11-2021, 07:07 PM   #19
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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/ans...apital%20gains.

so if you keep your income low enough, cap gains and qual dividends aren't taxed
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Old 03-11-2021, 07:25 PM   #20
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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.
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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