Let’s look at some of what are reported to be downsides of dividend investing. We touched on this topic in the past here.
1. Performance of dividend payers lags growth companies.
When we look at stock prices, it is true that dividend-paying value-type companies grow slower than growth companies. Many of the latter do not pay dividends.
If we solely focus on stock prices, then dividend-payers are in a slower category. Of course, more volatile companies have higher risk: today’s high fliers are tomorrow’s decliners. So one of the benefits of dividend-paying companies is that we trade volatility for stability.
2. Cost
This refers to the concept that any mutual fund or ETF that focuses on dividend paying companies will have higher fees than a simple index fund. This may or not be true. Since there are so many funds and fund companies, it takes some research to determine if this is true.
Personally, most of my dividend investing is with individual companies, not through funds. I wish to avoid even the smallest of fees. In investing in individual companies, I run other risks, but these I am willing to live with.
3. Diversification
By buying only dividend paying companies, there is loss of diversification. This logically could be true, but if one buys stock in a wide variety of dividend-paying companies in different sectors and industries, we reduce this issue to almost nil.
4. Yield chasing
Trying to buy the latest high-yielding company can lead investors in a “dividend trap.” Chasing yield is to be avoided, Sometimes a company has a high yield for a reason. Many of these reasons are poor.
Seeing a high dividend yield on a stock does not cause me to salivate.
5. Taxes
It is true that dividends from stock retail accounts pay taxes on dividends annually. Dividends in such accounts are included in one’s income. It should be said that qualified dividends pay a lower rate than earned income, that can be as low or lower than long-term capital gains, depending on one’s tax bracket.
And dividend investing in a tax-deferred account can have a tax-advantaged result.
6. Valuations
This is a mixed area. High valuations occur when the price of a stock far outpaces the company’s earnings by higher than average multiples. We sometimes see this in dividend stocks, but more often, in my view, in non-dividend paying growth companies. So while I feel it is important to look at valuations when investing in any company, out-of-norm valuations are not specific to dividend paying companies. As examples, as of this writing, Tesla (TSLA) has a PE of 78, and Amazon (AMAZN) has a PE of 115. Neither pays a dividend, and in my book going by valuations alone, they are not attractive. (There may be other reasons to buy, if one is so inclined.)
What objections to dividend investing have you encountered? Let me know here.
The first piano built and sold in America was built by Johan Beret (also spelled Berent) in 1775. Ths piano is on display at the Sigal Music Museum in Greenville, SC.
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