7 Dividend Myths That Are Just Plain Wrong

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Matt Frankel, TMF Investment Planning 7 Dividend Myths That Are Just Plain Wrong 1

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1. Higher dividends are always better While it’s certainly nice to get paid more on your investments, higher-yielding stocks aren’t automatically better than lower-yielding ones Some stocks pay higher dividend yields for negative reasons. For example: The stock price may have dropped recently The company may focus solely on income (and not growth) 2 August 19, 2015

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For example, although AT&T pays a significantly higher dividend yield (5.5%) than every other stock mentioned in this slideshow, it tends to focus less on growth – meaning lower long-term potential Consider the performance of AT&T over the past 20 years relative to other popular dividend stocks and the overall market August 19, 2015 3

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4 August 19, 2015

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2. You’ll do better with growth stocks It is a common myth that the best way to make money in stocks is to focus on up-and-coming growth companies In reality, many high-quality dividend stocks outperform the market over time For example, check out the average annual total return of these popular dividend stocks 5 August 19, 2015

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As you can see, this can make a big difference in your returns over the long run. August 19, 2015 6

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3. Dividend stocks don’t keep up with inflation Many investors don’t believe dividend increases will keep pace with inflation However, many of the most popular dividend stocks have a history of consistently beating inflation 7 August 19, 2015

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4. All dividends are taxed favorably Unless your dividends meet the IRS’s definition of “qualified” dividends, they will be taxed as ordinary income. Qualified dividends are taxed at more favorable rates, just like long-term capital gains In order to be a “qualified dividend”, the following criteria must be met: Must be a U.S.-based company OR a foreign company readily tradeable on a U.S. exchange Also, you must have held the stock for more than 60 days of the 121-day period around the ex-dividend date (60 days before through 60 days after) 8 August 19, 2015

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5. Dividend stocks are only for older investors Many investors believe dividend stocks are “boring” and are only appropriate for older, income-seeking investors. However, dividend stocks can be a great way for young people to start building wealth. 9 August 19, 2015 Source: 401kcalculator.org via flickr

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As we’ve seen, many dividend stocks consistently produce total returns of 10% or more per year. Consider the value of a hypothetical $10,000 investment in these dividend stocks 30 years ago. August 19, 2015 10

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6. Buying right before the ex-dividend date is a smart strategy Many investors believe that they can purchase a dividend stock shortly before its ex-dividend date, then immediately sell the stock for the same price and then collect the dividend. However, on the ex-dividend date, the dividend amount is subtracted from the share price. You’ll also pay a round-trip commission. This is rarely a profitable strategy. 11 August 19, 2015

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7. All dividend stocks are safe investments There are a lot of safe, profitable dividend stocks to choose from However, not all dividend stocks are safe 12 August 19, 2015 Source: Flickr user Eugene Zemlyanskiy

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For example, many dividend stocks in the energy sector have recently been beaten down and forced to cut or even eliminate their dividend payments If a dividend looks too good to be true, it probably is. It’s important to do thorough research on all dividend stocks before buying. August 19, 2015 13

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