REFUTING THE TALES ABOUT DIVIDENDS
What are the misconceptions surrounding dividends? Below are some of the common fallacies about dividend-focused investments.
Tale 1 – Dividend-oriented firms are firmer and better.
Many argue companies which increase their dividends over a long time have established impressive market positions and strong cash flow. They also believe firms can better manage their finances and avoid unnecessary spending as shareholders can punish the stock in case it fails to deliver their desired profits. It is because dividends tend to hold entities to a certain standard of financial discipline.
Forget this notion. Incidentally, dividends are not considered a good indicator of a company’s management and financial position.
Tale 2 – Dividend stocks offer greater potential and protection
Based on a 2009 SPDR University brochure, dividends provide a steady source of income that can help offset market price decline normally seen in erratic markets. Look at the S&P 500. Since 1926, capital appreciation has rendered around two-thirds of the index’s total return; the other one-third from dividends.
Referring to the fact above, it does not make sense to concentrate on dividends since it give less returns than capital appreciation and doing so is that perilous.
Tale 3 – Dividend is a good option when money market yields are not that high.
Cashing in on dividend stocks is not aligned with being a conservative investor. Aside from that, money market yields, regardless of its performance, do not signal the right timing for investing in mutual funds focusing on dividends.
Tale 4 – Dividend is more appealing because of preferential tax rules
Yes, dividend stocks are taxed at a preferential rate. And yes, the lower rate is better than the standard rates.Two cents: it is not sensible to avoid tax-deferred dividends and tax rates should not be the sole consideration for decision-making.
Tale 5 – Dividend from sturdy firms provide consistent payment
That is not the case, though. The portfolio’s aggregate return, not current yield, matters. Even the best – or "strong" companies – abruptly slash their dividend payments due to unwanted circumstances. Mind you it is not possible to determine the strong and weak companies as there is no stability in future dividends.
Tale 6 – Dividend is for retirees and conservative investors only
Financial advisors often tell retirees to invest in dividend-oriented stocks. But everyone can venture in this type of stock. For conservative traders, they can come up with a portfolio of bond funds and allocate a little portion of their capital in stock fund. And diversify, of course. The goal here is to create an investment portfolio, not investment collection.
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