Do Dividends Pay Dividends?
Posted by admin in Investing
This USA Today article from last week got me thinking about stock dividends.
When I first started investing, it was the NASDAQ tech boom, dot-com high-flying circus. If a company was paying dividends, that meant it was an old economy company that wasn't using its profit to reinvest in the business for growth and eventual world domination. I bought into this theory.
(In my defense, I had a chance to buy some Garden.com stock at the IPO and even I was smart enough to see there was no real business model there. They wouldn't be paying dividends because there wasn't going to be any profit.)
Anyway, with the stock market stuck in the mud, I'm reading more and more about dividends and spending more time looking for companies thay pay them. I used to think that dividend-paying companies' stock didn't appreciate, so that's why they had to give dividends; otherwise no one would buy the stock.
Not true. Many dividend-paying companies appreciate right along with the rest of the market and those little dividends are just a bonus on your return.
I know this doesn't seem like earth-shattering news. In reality, it sounds like common sense. But the markets aren't always about reality, and sometimes it makes sense to beat the fundamentals back into your head so you will make better decisions in the future.
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You need to take a look at Jeremy Siegel’s latest book, “The Future for Investors”.
In short, last 20 years, S&P500 return is app. 12% per year.
Divide the S&P500 into 2 groups: dividend paying and non-dividend paying.
Dividend paying: ~14%
Non-dividend paying: ~7%
It used to be that the tax treatment of dividends vs. cap gains made them a worse deal, after tax. But dividend tax rate has been reduced.
Hope this helps.
Kilroy
Dividends are a very important component of overall performance for an investor (as comment above shows). But many big investors of the past teach us not to be overly focused on dividend payments. The first issue about investing in stocks remains capital gains on stock prices.
Out of the common discussion (which is rather loud in Germany since many months) I will suggest, there is less “fantasy” – this terrible word of the dot com boom time – in the market now.
So it’s may be time to think less rationally and go for stocks with more growth potential (and not cash-cow business). May be!…May be soon…