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I love building passive income by investing in dividend stocks and today, I want to tell you the other side of passive income and why dividends may not be so great. First, let’s start with the 4 major reasons dividends are the best ways to start investing – especially for beginners.
Reason #1 – Superior Returns
The Hartford Study showed that dividends have historically played a pretty significant portion of the stock market’s return in the last century. The last 50 years of data shows that dividends people received and then reinvested back into the stock market have been responsible for 78% of the total stock market return. If we want to go back even farther than 50 years to 1930, giving us a lot more data to look at, in that time period, dividends were responsible for almost half of the returns at 42%.
Reason #2 – Longevity
Money that’s been invested in the stock market has returned anywhere between 8% to 9%. Just because the stock market has though, doesn’t mean real people have, and the reason for that is because people get scared, they panic, they try to time the market, and they sell their stocks at a loss. According to the BlackRock Investment firm, the average investor made only 2.1% in the last 20 or so years which is barely above inflation. Being a dividend investor, gives you the staying power to actually make those 9% returns.
Reason #3 – Safety
I don’t have to time the market to enjoy a good retirement like what happened to people in 2008 when they lost their IRAs and 401ks. I can focus more on cash flow and not worry about my stock values are day to day.
Reason #4 – Peace of Mind
As the stock price falls, the dividend yield increases, and vice versa. So I will be paid based on my initial investment. So if I bought $100 of Coca Cola and it was giving me 4% per year, which is $4 a year, it will continue paying that even if the stock fell to $50, it will still give me $4 a year. It’s a good feeling to know that I’m still making money that at any time, I can use to pay my bills. It’s cold hard cash, and it’s all the proof that I need that the company is making money.
Here are some bad reasons to being a dividend investor for passive income.
Reason #1 – Dividends are not guaranteed. In 2020, there we dozens of companies that cut their dividends. It’s not a contract between us and a company that we will be paid dividends. At any moment, companies can hugely decrease their dividend payout or even worse, completely get rid of of the dividend and there is nothing we can do about it.
Dividends limit total returns because, when a company is paying out a dividend, it’s another way of saying they have run out of ideas to grow. It might be also signal a declining company. Because it’s no longer growing, the stock price tends to increase less than that of growth stocks. Reason
Dividends are not free and you will pay more in taxes. When a company pays out money, the stock price drops by the same amount. You’re just taking money from one place, and putting it somewhere else. Like a transfer from your savings account, to your checking account. Dividends you receive are taxed, so you’re forced to pay capital gains taxes on dividends where in contrast, growth stocks don’t pay out so there’s no forced withdrawal, so you don’t get hit with taxes.
It decreases diversification. If you’re investing in dividend stocks, that means you’re only investing in large established companies, otherwise known as “large cap” stocks. But you’re missing out on the new up and coming companies that have the potential to be the next Tesla – the small cap companies.
Dividends are only advantageous emotionally, and nothing else. They don’t provide any real benefit over growth investing other than making you sleep well at night.
*None of this is meant to be construed as investment advice, it’s for entertainment purposes only. Links above include affiliate commission or referrals. I’m part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.