Why Investors Shouldn’t Care About Dividend Stocks | Smart change: personal finance


The tax bite

When a dividend is paid, you will be taxed on the full amount of the dividend. If you receive a dividend of $ 100, you will be taxed on every $ 100, although you may be taxed at a lower rate if you have held the underlying stock position for more than a year.

In the reverse scenario, imagine again that you own a stock that does not pay a dividend. To create a “dividend effect”, you can sell $ 100 of shares. In this case, however, you will not be taxed on the entire $ 100, but only on the proportional part which represents the capital gain. Here, capital gains prove to be more tax efficient than dividends when held in a taxable account.

Dividends, in one sense, are a form of passive income. On the flip side, in a taxable account, they’ll increase your tax bill every time they’re paid, usually more than a capital gain of the same magnitude.

What should you do instead?

All this to say that dividends are an important part of your total return, but you shouldn’t base your stock choices solely on dividend yields. This excludes a large number of companies that do not pay dividends but derive enormous value from price appreciation. A strategy based on dividend yields would leave out many of the big tech companies that have generated returns over the past decade.

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