The disadvantages of dividend stocks - Fairmont Equities (2024)

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The disadvantages of dividend stocks - Fairmont Equities? ›

Other drawbacks of dividend investing are potential extra tax burdens, especially for investors who live off the income. 3 Once a company starts paying a dividend, investors become accustomed to it and expect it to grow. If that doesn't happen or it is cut, the share price will likely fall.

Other drawbacks of dividend investing are potential extra tax burdens, especially for investors who live off the income. 3 Once a company starts paying a dividend, investors become accustomed to it and expect it to grow. If that doesn't happen or it is cut, the share price will likely fall.

Dividend stocks are vulnerable to rising interest rates. As rates rise, dividends become less attractive compared to the risk-free rate of return offered by government securities.

Dividend-paying stocks, on average, tend to be less volatile than non-dividend-paying stocks. A dividend stream, especially when reinvested to take advantage of the power of compounding, can help build wealth over time.

Invest for growing dividend income

This ETF features 103 high-quality dividend stocks, including Lockheed Martin, AbbVie, Home Depot, and Coca-Cola. The fund pays a distribution yield (ETF speak for dividend yield) of 3.4%. These companies not only pay a generous dividend, but they also regularly raise their payouts.

Drawbacks of Dividend Stocks

Opportunity Cost: High-dividend stocks typically offer less capital appreciation, so you'll miss out on more substantial growth opportunities through non-dividend-paying stocks.

An observed negative and significant effect of dividend yield on firm value in the full study sample suggests that, on average, an increase in dividend yield ratio is associated with a decrease in firm value.

You could see some high returns, and if you stash dividend stocks in a taxable account, you can minimize the taxes you pay on them.

If your strategy is income-focused, holding the stock to collect dividends might make sense. However, if you're reallocating assets or taking profits, selling before the dividend can help avoid the potential price drop when dividends are paid out. There are tax implications to consider as well.

After a stock goes ex-dividend, the share price typically drops by the amount of the dividend paid to reflect the fact that new shareholders are not entitled to that payment. Dividends paid out as stock instead of cash can dilute earnings, which can also have a negative impact on share prices in the short term.

What are the top 5 dividend stocks to buy? ›

Three of the safer ones you can put in your portfolio today are Abbott Laboratories (NYSE: ABT), Procter & Gamble (NYSE: PG), and Enbridge (NYSE: ENB). Here's why these can be ideal investment options for investors who just want a stable dividend to collect and not worry about.

They're paid out of the earnings and profits of the corporation. Dividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates.

Why Is The Procter & Gamble Company (PG) the Best Dividend Stock of All Time? We recently compiled a list of the 10 Best Dividend Stocks of All Time. In this article, we are going to take a look at where The Procter & Gamble Company (NYSE:PG) stands against the other dividend stocks.

Potential Tax Implications: Although stock dividends don't provide immediate cash to investors, they might still have tax implications. In some jurisdictions, when shareholders receive additional shares, they could be subject to taxes based on the fair market value of those shares.

The payout ratio, which measures the proportion of earnings distributed as dividends, is a critical metric. Ratios exceeding 75% can signal unsustainability, potentially leading to dividend cuts and subsequent stock price declines.

Investing in Stocks without Dividends

Companies that don't pay dividends on stocks are typically reinvesting the money that might otherwise go to dividend payments into the expansion and overall growth of the company. This means that, over time, their share prices are likely to appreciate in value.