Dividend Vs Non-Dividend Stocks
The securities market and investing in stocks in general is great way to build long term wealth or make some extra cash. While there are varying degrees of risk in all investments, this article will focus on some of the dangers of investing in dividend stocks or dividend funds as they pertain to the stock market.
Firing squad or electric chair, it is still a death sentence.
Whether you invest in a company that pays a dividend or not, the risk that a stock will lose value before you sell is always present. The only real way investing in a dividend stock can be more dangerous than a non dividend stock is if the dividend is the reason you invested in the first place. With that said, companies that pay a dividend on a stock are under no obligation, legally anyway, to do so. Companies that afford their shareholders this perk do so as a reward to entice new investors to come and old investors to stay. Many investors enjoy popular dividend reinvestment programs that automatically purchase more company stock with dividends accrued. A company that has historically paid continuous dividends however can just as easily decide to not pay them or be unable to pay them for one or more periods or cut them out completely. In contrast, a company that has not paid a dividend in the past can also just as easily begin to shell one out annually or bi-annually to its shareholders.
Uncle Sam loves going to the double dip dividend shop.
When a company pays a dividend to its shareholders, the amount is immediately taxed before your broker even calls to inform you that is has been paid. No matter how long you hold onto a stock, you or your heirs will eventually sell it and then that same dividend that was probably reinvested to buy more stock will be taxed again. Many investors wonder what the point of a dividend is in the first place if half of it is gone before you even get to hold it in your hand. Dividend income is looked at as such by virtually all taxing authorities and the central government. Some state governments may tax a dividend at different rates than others but the game is still the same.
There is also some debate as to whether this is really double taxation. The dividend is taxed the first time as corporate profits which can be seen as a tax on the company or to owners of small portions of the company shareholders, as a tax on them indirectly. Of course the next time it is taxed is when the stock is sold which is a direct tax on the shareholder. Either way money is being skimmed yet from who remains a hot debate.
There are various other perceived risks with investing in dividend stocks. There is always the fear that a company will falter in some way and pull back its dividend, that dividends in general are an outdated or ineffective use of company profits, or that investing in numerous dividend stocks will not yield long term growth of an account as expected. In general, investing in dividend yielding stocks is no more dangerous than investments that do not pay dividends, unless of course the only reason you invested was because the company was paying out money.
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