Dividends Aren't That Great
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Do you want to grow your portfolio? Then forget about dividends.
If you think these small cash payments will make you rich, you’re wrong. And there are a number of reasons for that:
A: They’re taxed twice
B: They’re an excuse for no growth opportunities
C: There is no guarantee
Let’s dive deep into each of these. By the end, you might see that they don't truly offer the assured passive income that some suggest.
You do know you have to pay taxes on dividends every year, right? Dividends get taxed twice because companies are first taxed on the company profits, then when they distribute dividends, individuals are taxed again on that dividend income.
It's like a "double dip" because both the company and the recipient face taxation.
However, a part of those taxes can be avoided with tax-advantaged accounts. Nevertheless, this contrasts with capital gains where taxes are incurred only when an asset is sold.
No growth? Let’s pay a dividend.
Once a company gets too mature, and can’t expand, only one options remains. They corner a particular market, focus on cash flow, and distribute it through dividends.
That’s fine for investors who want safety. And I have nothing against dividends. But receiving a small dividend annually is not my priority. I want a company that is still growing. Take a look at this image. Notice anything?
The first 8 companies are still growing. Yes, they’re paying a dividend but it’s not their core purpose.
The latter two, however, are too mature to scale. Therefore, the stock price barely moves.
A while ago, I heard a great quote. “If you don’t grow, you rot.” And if you’re still young, your money is rotting if you’re happy with a 3% dividend and no capital gains.
There Is No Guarantee
Nothing is certain, neither in life nor investing. As a small shareholder, you have no voting power. And if the big players decide it is time to cut the dividend, you’re left barefoot.
Recent example. Intel. A mature company decided it needs more cash for product development so they cut the dividend in half.
And the stock tanked 50% in the coming months.
If a stock drops 50% and it now pays a 1.5% dividend. How long do you need to breakeven?
I rest my case.
Smart companies know that dividends are the last resort. It’s far better to allocate money towards expansion.
It’ll scale the company on one end. And be more tax efficient for you on the other. That’s why Berkshire Hathaway (Buffett’s company) doesn’t pay a dividend. They’re smart. And so are you.
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