Is dividend Investing worth it?

Why would someone choose to use Dividend Investing?

1)More Predictable and Stable

The market goes up and down; we have no way of knowing where it’ll be in the future. However, if you own shares in a company that has an annual dividend, then you can know what to expect with a good degree of certainty.
The only way this certainty is disrupted is if a dividend cut occurs, more on that below. We’ll later cover how you can reduce the risk of dividend cuts.

2)Control of Allocation and Capital Flow

Some people prefer to reinvest dividends in the company they came from. However, this isn’t always advantageous. For example, I bought General Mills stock near the 52 week low, it’s currently at the 52 week high. I see GIS as overvalued; therefore, I’m not reinvesting it’s dividends back into the company. I take those dividends and use them to buy shares of the most undervalued or best-performing companies. I see this as a huge plus as you are efficiently moving the capital into the best place.

3)Less Time and Maintenance required–

You’ll need to check on a dividend investment strategy less than a growth stock you are holding out for capital gains. There’s no need to sit and watch the market daily, anyone that’s done that knows it’s a good way to go crazy. At the same time, in the beginning, you’ll need to do your research.

4)Fees–

Fees are less with dividend stocks than a Mutual Fund over time. Mutual Funds carry Expense ratios. These expense ratios don’t seem like much but over time they can add up, even fees as small as 1%. With a dividend stock, you only pay fees when you buy and sell. Since a dividend strategy tends to almost never sell, you don’t have to worry so much about fees.

5)Taxes–

Yes, you’ll have to pay taxes on the dividends. At the same time, it beats being stuck in an unpredictable scenario and having to sell for a short-term capital gain, which is taxed more. Also keep in mind if you are in the lower tax brackets (Under $38,600 for single filers and $77,200 for joint filers in 2021),

Qualified Dividends are not taxed.

6)Easier to measure your progress–

If you receive $50 in June but three months later get $80, then it’s easy to see your progress. If you invest in stocks the typical way, you see $50 shares one week and $40 shares the next week. You are automatically discouraged and may even contemplate selling when you shouldn’t. Measuring your progress by the day to day or even month to month swings of the market can be nerve-wracking. I’ve had stocks fall 15% on a terrific earnings report only to go back in the green two weeks later! What if you had sold at the bottom? This is what happens to many investors. You can check my little spreadsheet here where I’m tracking my dividend progress for an example:

You can check my little spreadsheet here where I’m tracking my progress for an example:

7)You can choose the sectors and companies–

Unlike an index fund or ETF, you can choose where to put your dollars. Perhaps you know technology really well and would prefer to invest in tech companies, you can do that. Ideally, you can choose sectors you know the most about. Lastly, with an index fund, it’s not only buying the good but it’s buying the bad as well.

Why you shouldn’t do Dividend Investing?

1)The dividend may be CUT-This is the prime fear of any dividend investor and is 100% correct. Kraft-Heinz is a perfect example of this happening recently. Even Warren Buffett, one of the greatest investors of our time didn’t see it coming. Always understand, ANY investment carries risk. It’s up to you to put those risks on the scale and weigh them out for yourself. I’ll say that the risks are greatly reduced when you investigate and evaluate a company. You must learn to concepts like Debt, Price/Book, Dividend Growth, Cash Flow & Reserves to evaluate. The better the metrics look, the less likely this occurs. Keep in mind, some stocks have over 20 years of never cutting the dividend, look up DIVIDEND ARISTOCRATS. I personally believe the risk of a dividend cut by a company with good books and a great history of paying dividends is much less than hoping a growth stock moves up by a specific amount in the future.

2)Taxes-No one likes taxes and dividends held in a brokerage account trigger taxable income. If held in an IRA they are tax-deferred. REIT’s in particular, are a tax nightmare if held in a brokerage account; this is why I always put REIT’s in my retirement account.

At the same time, most dividend investors buy and hold, we don’t encounter short-term capital gain taxes. The impact of taxes is, of course, dependent on your income level. Those of lower income levels are in the most advantageous situation with dividend taxes, in particular once the dividends are QUALIFIED.

Finally, most investments trigger taxes, so unless it’s in a retirement account there’s no way to get around eventually paying taxes. The only difference with dividend investing is you don’t get to determine when you have to pay the taxes, dividends begat taxes today in a brokerage. If you hold a growth stock, you choose when to sell and incur that tax. If you hold it for 20 years, you only pay a tax after you sell. Please keep in mind there is no way of knowing whether taxes will be lower or higher at some point in the future.

3)Possible narrow focus on yield to the exclusion of everything else-Many dividend investors make no consideration to the financial shape of the company or the total return of their account. They get yield hungry. This is a good way to lose your money! If the share price drops from $45 to $5, what good is a 5% dividend? It takes decades to recover such a mistake. This is the risk inherent in all stocks, even dividend-paying stocks. By chasing yield, you greatly increase your risk.

4)Diversification-If you only hold five dividend paying stocks you aren’t properly diversified. You’ll have to buy over 20 different dividend paying stocks to properly diversify and even then, maybe it’s not enough. This is precisely why I recommend buying INDEX FUNDS in addition to dividend stocks.

Keep in mind Bond funds, ETF’s and Municipal Bond Closed Funds are diversification as well. A grave mistake many dividend investors make is believing they are diversified with a handful of stocks. I do believe Dividend investing can coexist with your basic Index investing. Dividend investors and Index investors like to wage wars on each other, I see no point in such thinking. I cannot recommend an investment strategy that only uses dividend stocks. I strongly believe there is a place for all investment vehicles listed above.

5)The necessary amount of money-Purchasing $100 of twenty different stocks is a bit silly with all of the fees associated with it. Hence why I believe a beginner is better off going with Index Funds until a certain capital and cash reserve is built up. One will need many stocks; otherwise, you’ll have 4 stocks paying dividends one month, 2 stocks the next and 9 the next month. Your dividend income will be highly inconsistent.

6)Not all companies pay a dividend-One could miss out on some great companies because they don’t pay a dividend. Amazon pays no dividend. I currently own shares in Sterling Construction Company; it pays no dividend. Don’t eliminate a stock from consideration because they don’t pay a dividend.

7)Lack of growth-Many dividend-paying stocks aren’t growing or are slow growers. If you’re younger, consider weighing your investments so you capture more growth, in addition to dividend investing. This depends on your goals. A good Index fund is a great way to capture growth in the equities market without risking picking a bad individual stock.