Divi-doo and Scrappy too!!!

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.

Divi-don't????

With GE's dividend yield sitting above 11% right now, there was talk of GE cutting the dividend this week. Even in the midst of bankruptcy, a few months ago GM was looking to keep its dividend at $.01 so that its stock would show up on the radar of mutual fund managers that screen for dividend paying stocks. Retirees whose portfolios have been devastated by the market crash are hoping their quarterly dividend check will still be there to pay the bills. Dividends are on the mind of everyone right now as a means to get some sort of return in a time of uncertain and stagnant returns.

What are some reasons for a company to pay dividends? In my mind, the first is a purely aesthetic marketing ploy. Paying a dividend appeases shareholders who are used to it or who will only buy shares in dividend paying companies. Further dividend paying companies appear more stable.

The second is that the company does not have a good way to spend some of its profits to produce a return and rather than sit on the cash, decides to return it to the shareholder. Buffett does not pay a dividend on Berkshire Hathaway because he believes he can produce a greater return for his shareholders with that cash. Further releasing a dividend is not tax-efficient as it subjects the shareholder to a double tax, first on the corporate level via a tax on profits and second on the actual dividend being paid out. If the company is truly run well, the most efficient way to a return is by the company not paying out dividends.

This is not to say dividends don't have a place, depending upon the situation. Stay tuned for more discussion and analysis in this arena.

Agree/disagree/ferociously disagree...share your thoughts below.