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With dividends you are taxed every year and they are taxed at the full rate as any other income. With appreciation you only pay the capitol gains taxes when you sell.
2008 saw dividend payers slammed just as hard in many cases ...just look at the volatility in AT &T ...it has moved the equal of hundreds of points in the Dow in one day at times.
Evidently the lingo is completely unrelated to whether a company pays a dividend, or how much. Rather, in this particular context, "dividend stock" denotes a conservative company with a solid brand and good stewardship of that brand. Berkshire Hathaway is the quintessential "dividend stock", even though it famously pays zero dividend. AT&T wouldn't qualify as a "dividend stock" after its breakup in 1982. Microsoft is emerging as a "dividend stock", because unlike the other FAANG-type of stocks, it has a venerable established history, and a brand that's not tied to the latest fashion or fandom.
"Dividend stock" is not congruent to "value stock". The latter simply means low P/E, low debt, and (one hopes) decent prospects for earnings growth. Dividend stocks are large, well-established, and have some particular and enduring advantage. Exxon-Mobile isn't a dividend stock, because Chevron and Conoco are too close as competitors. Neither is Boeing (because of Lockheed and Airbus).
What's the down side? There won't be the level of growth of an Apple or a Netflix.
The down side is taxes and loss of control of income flow as it pertains to all the things that are hinged on controlling your income in retirement.
The down side is taxes can be higher along the way
Today all stocks are pretty volatile...I would not classify any stock as safe or safer ...I mean AT&T used to be a stock for widows and orphans ..today is has already had 2 and 3 point swings in a session ..look at the dump ibm took .
Ge and Gm were the bluest of blue chips , so was kodak , Polaroid, zerox , citibank , Jc penny ,sears ...the list goes on and on .
The only issue I have with the whole dividend thing is as simple as it is the mechanics are just not understood at all ...you see it here all the time .....
People do not have a clue what they are , how they work nor the fact they are not like interest .
They will get burned unknowingly if they fail to understand these are first and foremost stocks and are not proxies for fixed income at all .
With dividends you are taxed every year and they are taxed at the full rate as any other income. With appreciation you only pay the capitol gains taxes when you sell.
Qualified dividends are taxed at 0%, 15% or 20%, depending on your tax rate. You can also avoid taxation by including them in your tax advantaged accounts. And non-dividend stocks and funds in your regular investment account.
Qualified dividends are taxed at 0%, 15% or 20%, depending on your tax rate. You can also avoid taxation by including them in your tax advantaged accounts. And non-dividend stocks and funds in your regular investment account.
They are taxed though on the entire amount ...a 4% dividend is taxed on 100% of that dividend ...a 4% draw from a portfolio of non div payers with the same total return is only taxed on the gain portion ...that can be a big difference in taxes ...in fact if you don’t sell you never recoup those taxes you paid up front .
In a retirement plan is okay but then you lose any special tax rate on them totally.
Putting heavy appreciation stocks in your taxable account is not a good move either . ..some of these funds not only have yearly capital gain distributions that can be sizable but the mere fact they are not growing money on money that is tax deferred takes a big bite out of compounding growth in retirement plans .
Michael kitces found that over the long term as little as a 2% dividend can wipe out any tax savings in a taxable account ...capital gain distributions and turnover add to that effect.
I have some funds in our taxable account which I had no choice but to put there ,that have accumulated so much in gains I can’t really sell them without causing all kinds of damage in retirement because so much is linked to retirement income....it would take me years to sell these off so I let them sit .
Index funds and etf’s can become awful tax torpedoes down the road ...they can have decades of pent up taxes due .....making changes for retirement can create all kinds of tax surprises especially with Medicare premiums which go back to years prior to set rates
Thankfully I had mutual funds where taxes were paid along the way ...I made changes in 2007 getting ready for retirement mode ...if I had to stretch them out because they had decades of gains pent up , I would have ran in to 2008 .
Dealing with what assets to put where really is unique to each situation and the taxes effected by it
Last edited by mathjak107; 01-12-2020 at 02:24 PM..
Evidently the lingo is completely unrelated to whether a company pays a dividend, or how much. Rather, in this particular context, "dividend stock" denotes a conservative company with a solid brand and good stewardship of that brand. Berkshire Hathaway is the quintessential "dividend stock", even though it famously pays zero dividend. AT&T wouldn't qualify as a "dividend stock" after its breakup in 1982. Microsoft is emerging as a "dividend stock", because unlike the other FAANG-type of stocks, it has a venerable established history, and a brand that's not tied to the latest fashion or fandom.
"Dividend stock" is not congruent to "value stock". The latter simply means low P/E, low debt, and (one hopes) decent prospects for earnings growth. Dividend stocks are large, well-established, and have some particular and enduring advantage. Exxon-Mobile isn't a dividend stock, because Chevron and Conoco are too close as competitors. Neither is Boeing (because of Lockheed and Airbus).
What's the down side? There won't be the level of growth of an Apple or a Netflix.
You're right. At&t is an example of NOT a 'dividend stock' since its break up. It pays dividends of course, but its earnings are sensitive to the economy, not to mention its own company specific problems.
And you are also right that 'dividend stocks' are not growth stocks. People who want growth should buy growth stocks, people who want stability can look at 'dividend stocks', among their options.
Unlike growth stocks, dividend stocks typically don’t offer dramatic price appreciation, but they do provide investors with a steady stream of income.
That's why O'Leary said he does dividend paying stocks. So he makes money whether there is share appreciation or not.
And, if there is, he's made money through the dividend -- and the appreciation.
Now, this is me -- a layperson -- explaining what he said.
And making money two ways sounded pretty good to me.
So I thought I'd ask about it here....
Quote:
With dividends you are taxed every year and they are taxed at the full rate as any other income.
I was asking about scenarios with 401ks, IRAs, etc., not necessarily taxable accounts.
But I do get what you mean about stocks/funds NOT in tax deferred accounts.
That's why O'Leary said he does dividend paying stocks. So he makes money whether there is share appreciation or not.
And, if there is, he's made money through the dividend -- and the appreciation.
Now, this is me -- a layperson -- explaining what he said.
And making money two ways sounded pretty good to me.
So I thought I'd ask about it here....
I was asking about scenarios with 401ks, IRAs, etc., not necessarily taxable accounts.
But I do get what you mean about stocks/funds NOT in tax deferred accounts.
You can never make money with dividends without share Appreciation.......
Every dime paid out has a mandatory set back in share price by the same price ....
If a 4% dividend is paid out markets have to provide at least a 4% price increase in share price just see that as a 4% return ..
In fact if there is a 4% dividend and the share price is flat after the mandatory reduction your return is zero despite the payout .
It works like this always .....it is not like interest which goes on top of principal ...it is really a return of a piece of whatever your share price was ......
All appreciation and market action going forward is on less dollars if you spend the dividend then you had the night it went ex div. otherwise if you reinvest it then it will be on the same dollars you had working for you .
..it is no different than a mutual fund .
You have x-amount invested , it goes ex div or has a distribution , you reinvest and when you wake up next morning an you have the same amount you went to sleep with , just more shares at a lower price .
You only make money one way in equities, share appreciation. Period
Last edited by mathjak107; 01-12-2020 at 05:15 PM..
In your mutual funds.....do you tend to go for growth..... or dividends?
In an old (2011) interview I heard Shark Tank shark Kevin O'Leary said he only -- ONLY -- invests in dividend paying stocks. So he can make money right away, and always get his principal off the table that way.
I've always been a growth mutual funds person. So his comment just got me thinking ....that's all.
I'm asking a personal finance, general strategy sort of question for 401ks and IRAs. NOT from a DEEP investment point of view.
I know it's an awfully broad question....but in general how does -- and when should -- a person prioritize dividends over growth....or growth over dividends?
I know some older people tend to go for dividends.
So should a person generally go for growth until retirement, and then switch to dividends?
Thanks!
Honestly, I really think it comes down to personality/temperament.
Growth stocks tend to be more volatile. Dividend payers tend to actually produce better returns over time. However, growth stocks have outperformed over the last 10+ years, but that may not always be the case.. There are good growth funds out there that do well.
I tend to be more of a dividend/value investor, but if I find a growth oriented fund that isn't too volatile, I'll go for it. I own Parnassus Core Equity as one of my largest holdings. It's technically a blend between growth and value, but it leans toward growth, yet it holds up well in market downturns. It also must invest 80% of its assets in dividend paying companies. I like the dividend discipline, yet at the same time it has some flexibility with that. The expense ratio for the fund is kind of annoying at .87%, but I get the cheap institutional shares at work which charge a pretty reasonable .63%.
The down side is taxes and loss of control of income flow as it pertains to all the things that are hinged on controlling your income in retirement.
The down side is taxes can be higher along the way
Today all stocks are pretty volatile...I would not classify any stock as safe or safer ...I mean AT&T used to be a stock for widows and orphans ..today is has already had 2 and 3 point swings in a session ..look at the dump ibm took .
Ge and Gm were the bluest of blue chips , so was kodak , Polaroid, zerox , citibank , Jc penny ,sears ...the list goes on and on .
Great post MJ
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