Seven Hidden Downsides of Dividend Investing, From a Financial Adviser

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Seven Hidden Downsides of Dividend Investing, From a Financial Adviser​

Seven Hidden Downsides of Dividend Investing, From a Financial Adviser

Dividend investing could be draining your wealth with unexpected costs and limited growth potential. Here are some downsides, along with smarter strategies to take control of your retirement income.

www.kiplinger.com

Richard

 

[Ralph Sir Edward]

If you are in a Roth, you don't pay taxes on dividends, anyways.

Wealth is assets. Strategies that increase your asset base increases your wealth, strategies that shrink your asset base reduces your wealth. Assets that return value (grow) are worth more than those that don't (on average). Getting dividends allow you to maintain your asset base and provide cashflow to either live on, or reinvest in other assets. If you want to invest in highly speculative assets, you can do so with your dividends, with no loss of your asset base. If the risk pays off, you get a big new asset to add to your wealth. If it doesn't, then you still have you existing asset base.

 

[Brett]

If you are in a Roth, you don't pay taxes on dividends, anyways.

Wealth is assets. Strategies that increase your asset base increases your wealth, strategies that shrink your asset base reduces your wealth. Assets that return value (grow) are worth more than those that don't (on average). Getting dividends allow you to maintain your asset base and provide cashflow to either live on, or reinvest in other assets. If you want to invest in highly speculative assets, you can do so with your dividends, with no loss of your asset base. If the risk pays off, you get a big new asset to add to your wealth. If it doesn't, then you still have you existing asset base.

but the article was not about Roth IRA's or taxes

My "non- highly speculative" dividend assets include Vanguard's ETF Utility Index fund

 

[am1]

If you are in a Roth, you don't pay taxes on dividends, anyways.

Wealth is assets. Strategies that increase your asset base increases your wealth, strategies that shrink your asset base reduces your wealth. Assets that return value (grow) are worth more than those that don't (on average). Getting dividends allow you to maintain your asset base and provide cashflow to either live on, or reinvest in other assets. If you want to invest in highly speculative assets, you can do so with your dividends, with no loss of your asset base. If the risk pays off, you get a big new asset to add to your wealth. If it doesn't, then you still have you existing asset base.

Your last parts make no sense. Risking earned money (possibly after paying taxes) is risking your real money. Inflation will eat away at your asset base.

Now if we are using dividends as "beer" money/vacation fund I understand it.

 

[Ralph Sir Edward]

Your last parts make no sense. Risking earned money (possibly after paying taxes) is risking your real money. Inflation will eat away at your asset base.

Now if we are using dividends as "beer" money/vacation fund I understand it.

Perhaps I can make my point clearer by using real estate as an example.

I decide to buy some real estate. I can buy raw land, undeveloped with no cash flow (equivalent to dividends), or I can buy developed real estate that returns rent (dividends). Which is better?

If you buy developed, you get money from it, that you can either spend or use to buy other assets - more real estate or things like stock, bonds, commodities, ect. Your asset base grows.

If you buy raw land, you get no money from it. Your asset base does not grow.

In both cases you cannot realize the capital profit in the asset without selling the asset, at which point you have money, but no longer have the asset.

We are all taught that you should acquire assets for the purpose of selling them later. All profits should be at the selling time, to get lower taxes. I am counterpointing that to be rich is a matter of having assets, the more the assets you own, the richer you are. It's a different perspective.

We all need cash flow to live - food, utilities, transportation, healthcare, ect. My opinion is that selling assets for cash flow is inferior to having assets that return cash flow without having to sell them. YMMV.

 

[Brett]

Perhaps I can make my point clearer by using real estate as an example.

I decide to buy some real estate. I can buy raw land, undeveloped with no cash flow (equivalent to dividends), or I can buy developed real estate that returns rent (dividends). Which is better?

If you buy developed, you get money from it, that you can either spend or use to buy other assets - more real estate or things like stock, bonds, commodities, ect. Your asset base grows.

If you buy raw land, you get no money from it. Your asset base does not grow.

In both cases you cannot realize the capital profit in the asset without selling the asset, at which point you have money, but no longer have the asset.

We are all taught that you should acquire assets for the purpose of selling them later. All profits should be at the selling time, to get lower taxes. I am counterpointing that to be rich is a matter of having assets, the more the assets you own, the richer you are. It's a different perspective.

We all need cash flow to live - food, utilities, transportation, healthcare, ect. My opinion is that selling assets for cash flow is inferior to having assets that return cash flow without having to sell them. YMMV.

Sure, selling little bits of land every month for cash flow purposes would be a major problem.
That's why a typical 60 - 40 investment mix has mutual funds that can be sold easily and the 40% portion will have maturing bonds and CD's (and bond index funds)

 

[am1]

Perhaps I can make my point clearer by using real estate as an example.

I decide to buy some real estate. I can buy raw land, undeveloped with no cash flow (equivalent to dividends), or I can buy developed real estate that returns rent (dividends). Which is better?

If you buy developed, you get money from it, that you can either spend or use to buy other assets - more real estate or things like stock, bonds, commodities, ect. Your asset base grows.

If you buy raw land, you get no money from it. Your asset base does not grow.

In both cases you cannot realize the capital profit in the asset without selling the asset, at which point you have money, but no longer have the asset.

We are all taught that you should acquire assets for the purpose of selling them later. All profits should be at the selling time, to get lower taxes. I am counterpointing that to be rich is a matter of having assets, the more the assets you own, the richer you are. It's a different perspective.

We all need cash flow to live - food, utilities, transportation, healthcare, ect. My opinion is that selling assets for cash flow is inferior to having assets that return cash flow without having to sell them. YMMV.

I get that with raw land but I'm renting it for farmland if possible. Stocks just sell off a few shares as needed. Trading fees are low.

My goal is to have assets I never sell. The road of good intentions.

I gave up paying taxes years ago unless on dividends with holdings. I was selling the stock the day before and buying it back the day of to avoid the dividend and associated tax. But I think one should want assets to compound tax free for as long possible.

I can somewhat understand gamblers taking their buy in money off the table when up to feel good about themselves to loss their winnings back.

 

[jorcus]

I get that with raw land but I'm renting it for farmland if possible. Stocks just sell off a few shares as needed. Trading fees are low.

My goal is to have assets I never sell. The road of good intentions.

I gave up paying taxes years ago unless on dividends with holdings. I was selling the stock the day before and buying it back the day of to avoid the dividend and associated tax. But I think one should want assets to compound tax free for as long possible.

I can somewhat understand gamblers taking their buy in money off the table when up to feel good about themselves to loss their winnings back.

Not sure how that would work. You would have to pay short term capital gain tax by selling stock every 3 months if the price went up. You would never be able to take a loss if you bought it back the following day as that would be a wash sale. In the meantime under certain thresholds most dividends are not taxed and very few would pay more than the 15% rate in the middle threshold.

 

[am1]

Not sure how that would work. You would have to pay short term capital gain tax by selling stock every 3 months if the price went up. You would never be able to take a loss if you bought it back the following day as that would be a wash sale. In the meantime under certain thresholds most dividends are not taxed and very few would pay more than the 15% rate in the middle threshold.

I pay 0 capital gains tax and 25% tax on US/Canada dividends.

In my tfsa I did the opposite sometimes. Buy before the dividend and sell after. I am not an expert by any means about the shirt term risks.