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Dividends don’t matter. Total return matters. Dividends are just a return of some of your funds and, in a taxable account, cause you to pay taxes earlier than you may want. That could lead to a drag on your returns.
Looking at your list
Lower volatility- maybe, maybe not
Compounding through reinvestment- how is that important. No benefit compared to a no dividend paying stock.
Inflation hedge- no idea how you get to this conclusion
Tax advantages- do you mean tax disadvantages?
Long term performance- no idea where you get this conclusion
Make more research to learn more
They were top notch companies, until they weren’t. Sears used to be what Walmart is now, the largest retailer in the country. Just like GM was until it wasn’t. Not sure why it is so hard to understand that paying a dividend doesn’t make you a better company.
Dividends are meaningless in a tax advantaged account and a disadvantage in a taxable account.
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Thanks bot
To add AI trading is something to consider too
Why would I want advice from someone that doesn’t understand how dividends work? In the long run, very few can beat the market. I don’t see why AI would be any different.
Wrong wrong and wrong!
Dividend stocks are more risky than a broad ETF matching the S&P500 because it is less diversified. There isnt a guarantee that the stock will be high paying dividend in the future, as companies can lower the pay out at anytime. Dividends are less tax efficient because you have to pay taxes each time a dividend is issued out. Because these taxes have to be paid, you will lose out on compounding growth even if you decide to reinvest the dividend back into the stock.
Lastly, there isnt a free lunch, when dividends are paid out the stock price falls to match the amount paid out to all shareholders.
I love my dividend portfolio. Stocks up almost 30% yoy. Plus paid about a 4.5% dividend. Feels like a hack.
They could be at cap gains rate if qualified. But yes, that is the reason not to want dividends in a taxable account
Yea Emma, this ain’t it.
You’ve picked companies with several other common fundamentals, picked one common character (div paying) and concluding those characters are b/c they’re div paying. I think the argument is backwards.
Investing 101. Divs don’t matter same way as Cap gains by themselves don’t matter. It’s your total after tax return (and to complicate it), adjusted for risk, that matters. Hope this helps.
I know that fact, only that you know investments is personal journey for everyone with different experiences. Thanks for the correction it would help
Emma - I’m not bashing what you’re attempting to get across… but it’s a tad misleading and misguided…
Great for Conservative Investors - a “conservative investor” is more interested in capital preservation and obtaining a yield on their money. So conservative investors are really geared more towards Treasuries, Money Markets, CD’s, HYSavings, Annuities, etc. What you are suggesting, protecting capital and generating income, describes a conservative investor, however equities may or may not be an appropriate recommendation. For a Moderately Conservative investor, yes, that would be more geared towards MegaCap Div Paying Equities.
Lower Volatility - Maybe, Larger MktCap, like you listed, typically have a beta <1.0, and therefore as compared to avg. market returns ex dividends, can provide lower volatility, sure. Less downside, but also less upside. If you are unfamiliar with Beta, it’s how this equity is expected to return in relation to the market. So if I have stock A with a beta of 0.5 and stock B with a beta of 2.5, given the market return is 10%, stock A would return 5% and stock B would return 25%.
Compounding through Reinvestment - if the reason that you are buying the stock is for the dividend and you are using it as an income vehicle, compounding through reinvestment would not be a factor, because your not reinvesting.
Inflation Hedge - sure, maybe, but that just comes with the territory of investing in equities vs other vehicles (cash, bonds, REITS). Historically yes, you’d be correct as equities tend to generate returns that are greater than inflation. So in real return terms, I can see how you’d draw this conclusion.
Tax Advantages - this one is going to be a hard no. Anyway you split it, receiving dividends are a taxable event, whether you reinvest them or not, and are taxed as ordinary income. So take the dividend and pay the taxes from proceeds, or reinvest the dividend and pay the taxes out of your pocket.
Long Term Performance - maybe. Typically a company will not amend its shareholder policy to include paying out dividends unless they have a history of profit and sustainable growth, and have reached a scalable business that no longer needs to grow based on acquisition, launching new products with high R&D costs, etc. Therefore, the best use of their cash is to return it to shareholders and buy back stock to increase share prices.
Typically the cost of a matured company paying dividends is higher than if they were not paying dividends, being that their overall return is based on capital growth and dividends paid. This is why, when a company announces that they are stopping their dividend, they experience a price decline. Furthermore, if they are utilizing cash to buy back stock, they are decreasing the number of shares outstanding, effectively increasing their EPS (Same Earnings, Less Shares).
Just some information for you to know…
You do not pay all your dividends as tax, your dividends can actually be reinvested.
And you pay tax on those dividends if they are not in a tax advantaged account. Reinvesting does not prevent tax