3 Reasons to Avoid Dividend-Paying Stocks |  Smart Change: Personal Finances

3 Reasons to Avoid Dividend-Paying Stocks | Smart Change: Personal Finances

(James Brumley)

Even if you don’t own one yourself, it’s easy to see the appeal of dividend stocks – any investment that puts money in your pocket right now has its clear upside, even if those dividend payments are not huge. As the old cliché goes, a bird in the hand is worth two in the bush.

But there are certainly good reasons why an investor might want to avoid dividend-paying stocks, even if only for now. Here’s a look at three of the main reasons why they might not be in your best interest right now.

1. You need growth more than income right now

This is by far the most obvious reason, but it still needs to be stated: there is an opportunity cost to owning dividend-paying stocks that you don’t actually need right now. This cost is the returns you will lose by not owning growth stocks that you could otherwise invest in with that capital.

That’s not to say there isn’t potential for capital appreciation with a dividend-paying name. Take the power of consumer goods Procter & Gamble (NYSE:PG) for example. P&G shares are nearly double their value just five years ago. That’s on top of the $15.25 in dividends paid out during that time, pushing the stock’s total return up about another tenth of its average price over that time. Not bad.

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Except easy-to-own growth stocks Alphabet nearly tripled in value over that same five-year period.

2. You don’t want to complicate (or increase) your taxes

Investor efforts to defer and minimize taxes are understandable. But they have undoubtedly become exaggerated. You have to pay taxes at some point and you don’t want to reduce your overall returns just to avoid a tax burden in the current tax year.

Image source: Getty Images.

On the other hand, if receiving dividends now – even if you reinvest them in multiple stocks of the same stock – is more of a tax problem than it’s worth, it might be easier to avoid the tax altogether. headache.

These scenarios are certainly few and far between. Examples might include a young person or couple who currently owns no dividend-paying stocks outside of a tax-sheltered account, or a high earner who already earns a lot of dividend income. The former would be required to collect and add information to a Form 1040 about only a small amount of additional taxable income, while the latter might find that the additional dividend income is taxed at a much higher rate than their income from current dividend. It’s just enough to make you think twice.

3. You are prone to a false sense of security.

Finally, while more of a philosophical trap to indulge in than a sudden and rude awakening, dividend stocks run the risk of tricking owners into believing they are safer and more stable. than they actually are.

To take P&E (NYSE: PCG) for example. While the California-based utility company is in the sector that seems best suited to support reliable dividend payments – selling electricity to consumers – the business itself is much more complicated than it appears. appears at first glance. The company was found responsible for a series of wildfires that devastated California between 2018 and 2020, not only upsetting the stock by 80%, but forcing the company to indefinitely suspend the otherwise reliable dividend that its action had paid off and improved. since 2006.

No one saw it coming until it was too late.

Make it personal

None of this means that all dividend stocks should be avoided at all costs. There are good reasons to own them, and there are plenty of solid, dividend-paying names to choose from.

Rather, the dividend-paying portion of your portfolio should be as diversified as the growth portion. And it should get the same kind of regular checks just to make sure those seemingly stable companies are still as stable as they were when you first bought them.

In other words, you should only get into dividend-paying stocks if and when they work with a well-thought-out portfolio plan that can be adapted as situations change…theirs and yours.

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Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. James Brumley has positions in Alphabet (A shares). The Motley Fool has positions in and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.

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