Recently, I posted on the reasons why you might not want to own dividend paying stocks. Now I want to look at some reasons why dividends might just be a good idea right now.
- If you are in need of income from your stocks (for example, a retiree), the dividend yield on stocks right now is much higher than that on bonds. GE was at over 11% about a week ago, and with the recent drop in the stock, is now at over 13%. US Treasuries are below 3%, and other corporate bonds are around 4%.
- Assuming the stock is at or near the bottom, the high yields make for a great return even if the share price stays flat for the next few years, and help support the value of your portfolio. Now this assumes that the company won't cut their dividend, a possibility due to this economy, but in general, there is too much shareholder pressure to keep the dividend, if the company has any sort of strength to it.
- In value investing, the dual taxation of reinvesting dividends hurt your long term return, but if your goal is income, dividends are taxed at a much lower rate, currently 10% or 15%, usually lower than a person's ordinary tax rate.
Agree/disagree? What other reasons do you see for dividend paying stocks? Share your comments below.
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1 comment:
One benefit of giving out dividends is paradoxically that you can cut them--in case of financial emergency it seems better to me to cut the dividend than to make an unfavorable borrowing agreement.
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