Those who decide to roll the dice in one of the nation's major stock markets tend to gravitate toward investments that pay out an annual return, otherwise known as a dividend. Companies as diverse as drug manufacturer GlaxoSmithKline PLC, technology retail giant Best Buy and mega-courier United Postal Service (UPS) all award yearly payments to their investors. Seems like a great financial move, right? But before you rush to the nearest brokerage and start buying up stocks in these types of companies, you should consider the downsides of this investment strategy because of today’s market conditions being manipulated by high frequency trading (HFT). Check out our articles posted on October 3 and 5 to learn more about this controversial topic.
The disadvantages of buying dividend-paying stocks include:
Double taxation – Under current U.S. tax law, the payout of dividends triggers an unusual situation wherein both the company and the stockholder are required to pay levies. First, the company is taxed on its pre-dividend income. Once the distribution is complete, the investor who receives the dividend must pay the U.S. government when Tax Day arrives. While this rate now stands at 15 percent, several government plans, if realized, may push this rate to as high as 30 percent, which would amount to a doubling of fees that investors currently pay on their hard-earned income.
Potential for pullbacks – In extreme cases, companies that pay out dividends may fail. In the event that this happens, depending on the legal structure and liability claims the business must work through, investors that receive dividends may be forced to give back the money they earned.
Risk of losing investment – A simple way of looking at a cash dividend is to define it as a payment that could otherwise go toward R&D, talent acquisition or general business expansion. Unlike other companies that reinvest most of their profits, dividend-distributing organizations intentionally weaken their financial positions. Times of economic strife can hurt a company's financial position, and those that pay investors are more vulnerable during these periods.
Investors that want to learn more about why stock market options can be harmful to their portfolios in unexpected ways should contact GreatWealthStrategies.com right away. We are committed to helping investors preserve their wealth through cash flow real estate assets.