My Personal Finance Journey

Personal finance observation, musing and decisions in a journey toward financial independence by 2020 with at least $3 million.

By Topics

0. About (10)
1. My Progress (139)
2. Car & Home (107)
3. Credit (138)
4. Banking (33)
5. Saving (49)
6. Investing (308)
7. Taxes (89)
8. Spending (74)
9. Misc (97)
A. Archive (49)


Feb 2014 (3)
Jan 2014 (6)
Jan 2012 (1)
Apr 2011 (1)
Mar 2011 (1)
Feb 2011 (1)
Jan 2011 (1)
Dec 2010 (1)
Oct 2010 (1)
Sep 2010 (1)
Aug 2010 (1)
Jul 2010 (1)
Jun 2010 (1)
May 2010 (1)
Apr 2010 (1)
Mar 2010 (6)
Feb 2010 (2)
Jan 2010 (7)
Dec 2009 (3)
Feb 2009 (4)
Jan 2009 (8)
Dec 2008 (1)
Jun 2008 (2)
May 2008 (2)
Apr 2008 (5)
Feb 2008 (3)
Jan 2008 (15)
Dec 2007 (32)
Nov 2007 (6)
Oct 2007 (8)
Sep 2007 (9)
Aug 2007 (24)
Jul 2007 (2)
Jun 2007 (1)
May 2007 (3)
Apr 2007 (4)
Mar 2007 (4)
Feb 2007 (13)
Jan 2007 (6)
Dec 2006 (3)
Nov 2006 (7)
Oct 2006 (7)
Sep 2006 (6)
Aug 2006 (4)
Jul 2006 (10)
Jun 2006 (1)
May 2006 (3)
Apr 2006 (2)
Mar 2006 (6)
Feb 2006 (6)
Jan 2006 (3)
Dec 2005 (1)
Nov 2005 (9)
Oct 2005 (8)
Sep 2005 (13)
Aug 2005 (25)
Jul 2005 (16)
Jun 2005 (17)
May 2005 (19)
Apr 2005 (20)
Mar 2005 (24)
Feb 2005 (23)
Jan 2005 (36)
Dec 2004 (40)
Nov 2004 (34)
Oct 2004 (17)
Sep 2004 (21)
Aug 2004 (59)
Jul 2004 (37)
Jun 2004 (31)
May 2004 (29)
Apr 2004 (52)
Mar 2004 (49)
Feb 2004 (49)
Jan 2004 (31)
Dec 2003 (48)
Nov 2003 (52)
Oct 2003 (29)
Sep 2003 (8)
Aug 2003 (5)
Jul 2003 (2)
Jun 2003 (2)
May 2003 (5)
Apr 2003 (2)
Mar 2003 (2)
Feb 2003 (3)
Jan 2003 (29)


Why I'm Not A Dividend Investor

Contributed by mm | December 6, 2007 6:37 AM PST

dividend2.jpgMy individual stock portfolio is full of dividend-paying stocks, leading by Citigroup (6.5% yield), Bank of America (5.5% yield) and Pfizer (4.9% yield). As a matter of fact, all but two of my 13 individual stock positions at the end of November is paying regular dividends.

I do believe a long dividend paying history and consistency on dividend increase are good indicators of a company's long-term performance. However, I don't really think myself as a dividend investor. Why?

First, company can create shareholder value in many ways other than returning cash to investors as regular dividends. For one, great companies can always find opportunities to invest for future growth. But even when cash generated by operation exceeds tangible investment opportunities, dividend is not necessarily the best way to return cash to shareholder. Depending on the stock price, shareholders can be better off when company buys back stocks at cheap, and pays dividend when stock price at high. Therefore, companies with no dividend or low dividend payout ratio have more flexibility in maximizing shareholder returns.

Second, regular dividend payment means regular IRS assessment on investors' gains and it is detrimental to long-term investment gains. The reason that 401(k) is a good tax-saving vehicle is not because it can defer the tax you otherwise will pay on your contributions -- mathematically, it makes no difference on the end results whether you get taxed at the front-end or back-end -- but is because you don't get taxed annually on your investment gains, and therefore more of your investment gains can make money for you in the upcoming years. Investment in dividend-paying companies, if not in tax-advantaged accounts, will actually grow slower.

So all in all, I do pay attention to a company's dividend status and history, but I discount such information and focus more on business opportunities and valuation. Call me a value investor if you will!

This Post Has Received 22 Comments. Share Your Opinions Too.

The Dividend Guy Commented on December 6, 2007

This one is just begging for me to respond! I appreciate the viewpoint here.

I don't particularly agree with your viewpoint of not focusing on dividends just because you don't need to file with the IRS every year. Keep in mind that I am Canadian and don't know your tax system, but I would not use that excuse to make any investment decision.

I think your overall premise is not to limit your investment horizon, which I am ok with. I just think that this reason you give does not make sense to me.

Google thought provoking piece!

The Dividend Guy Commented on December 6, 2007

I meant 'good' thought provoking piece!

MM Commented on December 6, 2007

The Dividend Guy,

It is really a quick math:

1) Assuming you invest $10,000 on an investment that always yields 10% annually, and you continue to reinvest dividend after being taxed 20% on the dividend, after 10 years, you will have:

$10,000 * (1 + 10% - 2%) ^ 10 = $21,589

2) For a similar investment that appreciates 10% every year but don't pay out dividends, after 10 years your investment will be worth:

$10,000 * (1 + 10%) ^ 10 = $25,937

And if you sell it and get taxed on your capital gain at a rate of 20%, you can keep:

$25,937 - ($25,937 - $10,000) * 20% = $22,750.

That's a difference of $1,161!

2million's dividends Commented on December 6, 2007

MM, I totally agree with you on paper. Mathematically speaking it is more efficient for the company to retain the earning and reinvested them as double taxation is avoided.

But what is good on paper is not always best for your wallet. I like to think of it this way - If a company never pays a dividend how are you going to get any return on your investment? The only way you can get a return is to SELL your investment. Being a value investor yourself you know that puts you in a potentially untimely situation if you need to develop cash flow off your investment. Your 10% annual return might only be worth 5% to mr. market at that time.

VMD Commented on December 6, 2007

How about if you automatically reinvest the dividends, do you still have to pay tax on the dividends then?

MM Commented on December 6, 2007

VMD, yes, you still need to pay tax on dividends even if you automatially reinvest.

J.C. Commented on December 6, 2007

2million, your point is valid only if you are trying to live off of your investments.

Most people though are trying to grow their investments, and dividends are a not the best way to grow your investments, since they are taxed and not necessarily in the shareholders' best interest, just as MM wrote about.

VMD Commented on December 10, 2007

MM thank you for you article suggestions, I am actually an undergraduate student, and I always try to find information of this type put in a very straight forward manner.

Jim Commented on December 20, 2007

MM, your basic assumption appears to be that the companies that invest the money in themselves will do so in such a way that they continue to operate as efficiently as do the companies paying dividends. I disagree with your basic assumption. Companies paying dividends are less likely to take foolish risks knowing that they still need to meet their dividend obligations to shareholders.

As I recall, during the tech bubble, a lot of the tech companies frowned upon dividend payouts and instead invested accumulated cash back via stock re-purchases. Ironically, the overall number of shares outstanding rarely decreased because the incredible amount of stock options that had been granted substantially increased the number of shares outstanding. Those companies had to repurchase all of those shares just to maintain the same number of overall shares. In my opinion, that was a waste of shareholder value. If those companies had been paying decent dividends at that time, they would have faced a shareholder revolt over the shareholder dilution caused by the stock option grants.

asEnoqt6e8 Commented on December 13, 2016

[url=]buy baclofen[/url] [url=]viagra[/url] [url=]buy acomplia online[/url] [url=]can you buy zovirax over the counter[/url] [url=]lasix online[/url] [url=]buy amitriptyline[/url] [url=]cialis 5mg online[/url] [url=]hydrochlorothiazide[/url] [url=]diclofenac sod[/url] [url=]where can i buy arimidex[/url]

AaronSit Commented on January 9, 2017

[url=]cialis[/url] [url=]augmentin 500mg[/url] [url=]shuddha guggulu[/url] [url=]benicar online[/url] [url=]viagra pills[/url] [url=]cleocin gel[/url] [url=]diclofenac[/url] [url=]erythromycin 500 mg[/url]

Bennyanymn Commented on January 25, 2017

wh0cd577196 [url=]Cheap Viagra[/url] [url=]Cialis Online[/url] [url=]atenolol chlorthalidone[/url] [url=]Rimonabant Online[/url]

AaronSit Commented on February 6, 2017

wh0cd508604 [url=]lisinopril oral[/url] [url=]flagyl[/url] [url=]ciprofloxacin 500 mg[/url] [url=]viagra[/url] [url=]buy eurax[/url] [url=]augmentin 875[/url] [url=]amitriptyline hydrochloride[/url] [url=]buy bupropion online[/url]

AlfredCaf Commented on February 6, 2017

wh0cd913564 [url=]generic cialis[/url] [url=]fluoxetine[/url] [url=]cardura[/url] [url=]generic for benicar[/url] [url=]valtrex sale[/url] [url=]order nolvadex[/url] [url=]buy furosemide[/url] [url=]azithromycin 250 mg[/url] [url=]AVANA[/url] [url=]sinequan online[/url]

KennethCed Commented on February 8, 2017

wh0cd564796 [url=]cialis[/url] [url=]glucotrol[/url] [url=]toradol[/url] [url=]amitriptyline[/url] [url=]generic avodart[/url] [url=]citalopram for anxiety[/url] [url=]metformin[/url]

Bennyanymn Commented on February 10, 2017

wh0cd268924 [url=]PRECOSE[/url] [url=]sinequan[/url] [url=]buy yasmin[/url] [url=]citalopram cost[/url] [url=]triamterene over the counter[/url]

MichaelNub Commented on February 14, 2017

wh0cd605292 [url=]buy clonidine[/url] [url=]amoxil[/url]

Bennyanymn Commented on February 23, 2017

wh0cd325116 [url=]cheap lisinopril[/url] [url=]purchase cytotec[/url]

Bennyanymn Commented on February 23, 2017

wh0cd446604 [url=]viagra cost[/url] [url=]finasteride 5 mg[/url] [url=]antabuse[/url] [url=]female viagra[/url] [url=]Sumycin[/url]

TracyNuami Commented on March 2, 2017

wh0cd499500 [url=]generic abana[/url] [url=]serophene[/url]

CharlesLiede Commented on March 7, 2017

wh0cd325200 [url=]avana online[/url] [url=]strattera[/url] [url=]vermox online[/url]

AlfredCaf Commented on April 6, 2017

wh0cd102799 [url=]buy tetracycline[/url] [url=]stromectol[/url] [url=]viagra[/url] [url=]arimidex[/url]

Add Your Comments

Remember personal information?

(It will take a few moments for your comment to be published. Please do not close the window until then.)

Read More ... 312 Posts In The Same Category

This page was last rebuilt at April 06, 2017 08:28 PM PST. (314 Words)



Consumerism Commentary
Get Rich Slowly
My Money Blog
All Financial Matters
The Simple Dollar


Copyright 2003-2014, All Rights Reserved. (Privacy Policy)