- In this video, I'll go through some reasons
that I do not invest for dividend income.
To balance out my dislike for dividend income investing,
I'll go through when it might make sense
for you to pursue this investment income strategy.
There's this trend that I've seen
on YouTube and other places lately
on the topic of investing for dividend income.
Now this is not a new concept,
but it seems like more and more people
are making videos on this topic.
With platforms out there like Robinhood, M1 Finance,
and Webull making investing easily available,
it gets everyone's nipples hard
because investing for dividend income is touted
as one of the ultimate ways to earn passive income.
It sounds easy, right?
Just buy this stock and that stock and this stock
and you'll receive a quarterly or even monthly dividend.
Some of these companies have been
paying out a dividend for like ever,
so it's a guaranteed consistent source of income.
But let's stop for a minute
to really think about this way of investing.
The point of this video is to give you more information
so you can understand if partaking in this strategy
makes sense for you or not.
Hey, money nerds, I'm Jarrad with an A,
and on this channel we talk about
all things personal finance and investing.
Just a disclaimer, nothing I say in this video
should be taken as investment advice.
This video is for informational purposes only
so please do your own research.
When I talk about investing for dividends I'm not talking
about investing, for example, in an index fund like VTI
with the goal of overall growth
and receiving a dividend in the process.
I'm talking about purchasing specific stocks
with the goal of creating a monthly income stream
through dividends that they offer,
AKA, dividend income investing.
Before we get too deep into it, I need to point this out
so my words do not get twisted.
I am not saying that receiving dividends aren't important
to growing your overall portfolio
because they definitely are.
My argument is against investing specifically
for dividend income and why it doesn't make sense for me
and also might not make sense for the vast majority
of people that see these types of videos.
One more disclaimer because dividend investors
take opposing views very personally,
and I've seen their feelings get hurt pretty easily.
If you invest for dividend income
and you love it so much, then that's great.
Do I think it's a good strategy?
Negative.
But it is a strategy and it's better
than not investing at all.
If it keeps you excited about growing your money
then I cannot fault you for that.
A partially flawed strategy that you stick to is better
than the perfect strategy that you do not stick to.
It's important to always be willing
to change your mind though because if you're not,
then you close off all of those other opposing views
and end up hurting yourself because you stay in this
safe space that you have created for yourself.
If you have a different opinion than I do
then feel free to leave them in the comments down below.
I am all about constructive conversation
even if they challenge what I think.
Dividends are paid out by companies to shareholders
when they have money left just sitting around
that they don't plan on reinvesting back into the business.
When a company has a large pile of cash like this,
there's usually two ways that they'll return
some of this capital to the shareholders.
The first is through paying monthly, quarterly,
or even sometimes yearly dividends.
The second way is through buying back shares
of their own stock.
In 2019, Microsoft bought back $40 billion worth of shares.
Apple repurchased 75 billion,
and many other companies did the exact same thing.
The fewer available shares to be traded,
the more valuable the stock is,
which means, the price will usually increase.
It is the basic principles of supply and demand.
When a company pays out a dividend,
the share price goes down by a least the same amount.
If the share price is $200 and they pay out a $2 dividend
then the price will drop to $198 per share at some point
either after the dividend is announced
or when it's actually paid out.
The price drop might not be as obvious
because the price per share will still fluctuate
like it always does on a day-to-day basis.
This is just common sense if you think about it.
The company is worth less
since money is leaving their bank account
with zero chance of increasing its value.
Think of it like the company is spending money
that will not increase the value of the business.
It's basically a sunk cost.
If instead it decided to reinvest that money
it could be put towards something that has the potential
to increase the overall value of that company.
Dividends should not be looked at as free money
like some may want you to believe.
It is just a way for a company to give its shareholders
a little sliver of its profits in a certain way.
I know this is difficult for some people to wrap
their heads around but receiving a dividend
is the exact same thing as selling off shares of a company
worth the exact same amount.
If you haven't done it already,
please hulk smash (ding) that thumbs up button.
When you get down to it, investing for dividend income
is just a glorified way of stock picking
that's wrapped up in the allure of earning passive income.
That statement right there
is going to trigger a lot of dividend investors.
When you purchase shares of individual companies,
you're putting quite a few of your eggs in one basket.
Now, I know that naysayers will call out
that they are investing in many different companies to help
diversify themselves to protect them from the downside,
but I'd argue that that doesn't matter.
When someone is investing for dividend income,
they're still trying to pick individual stocks
that they think will perform well.
Not sure if you knew this but a very, very small percentage
of people are good at picking stocks
that will outperform a basic S&P 500 Index.
There's more than enough financial studies
out there that prove this.
Am I saying you can't pick really good stocks
and come out ahead?
Not at all because there are people out there who do that.
But what I am saying is what makes you think that you are
so special and gifted to where you'll
be able to pick successful stocks
better than some of the largest investment firms that have
hundreds or even thousands of people working for them
and also have access to more data and information
than you would even know what to do with?
Think about it, if they have access to all
of those resources at their fingertips and still
can't outperform a standard index then why do you think
you're gonna be able to do any better?
Yes, they might be able to beat the market in the short term
but definitely not in the long term.
The odds go down even more as we add additional years
to the investing horizon.
This makes investing for dividend income even less desirable
because you probably plan to buy and hold these investments
for long periods of time to collect your dividends.
Now I can honestly drop the mic with just this point
as to why I don't invest for dividend income
because it's more than enough of a reason
for me not to do it, but that wouldn't be any fun
so let's keep going.
There are no guarantees that a company will
pay out a dividend even it if has been in the past.
I know you'll hear that you can limit your risk
of this happening by investing in those large, stable
blue chip companies who have consistently paid out money
every single quarter, but hold on for a minute.
Let's assume that you do invest in a company
that has been paying out a dividend every quarter
over the past 30 plus years like GE has been.
Within the past 20 years, their dividend yield has
been all over the place.
Back in 2000, it was hovering around 1% then slowly
increased to 2%, 4%, 5%, 7% and even 11%
over the next 8 years until it dropped down to as low
as 2.5% back in 2009, then it stayed around a 3% to 4%
dividend yield until 2019 when it hit as low as 0.35%.
If you were someone who was relying on a portion of your
dividend income to come from GE to live of off,
then you'd be in for a pretty big surprise.
General Electric is just one example of a company
that has cut its dividends over time.
There are many others who do the same every single year.
And going back to the previous example,
what makes you think that you'll be able to choose
the stock of a company that won't cut their dividends?
Sure, you might say well if their dividends start to
go down too much then I'll just
sell my shares and buy something else.
Okay, I hear ya.
So then how do you know when the right
time to do that is?
Which stock will you buy next?
Because now we're back to trying to pick stocks in time
to market and humans are already really bad
at both of those things.
If you are interested in the possibility
of successfully investing for dividend income
then you need to be willing to put a lot of time into it.
Properly evaluating companies before
purchasing their stock dividends is important.
Yes, you could just go buy some of the more well-known
equities and leave it at that, but I'm honestly not sure
how good of an idea that is.
The people who I've read up on,
that are all in with dividend investing,
admit that they enjoy the process of putting
in hours of work to pick and maintain a portfolio
just like this.
Now keep in mind that there is zero correlation
between the hours that you spend picking dividend stocks
and an increase in your investment returns.
Zero, I don't care how hard you work.
There is zero correlation.
(high-pitched voice) Oh, I'm just gonna work smart
and not hard.
Okay, let's see how that works out for ya. (chuckles)
For passive investors actively managing our investments,
it is a nightmare.
I would personally rather spend my time
doin' other things or investing my time and money
into things that I have way more control over.
I already have enough of my net worth
invested in the stock market.
If I'm gonna spend any more time and money
to grow my income streams then I'd prefer to do it
through things that aren't associated
with the stock market like building businesses
and investing in physical real estate.
The next reason that I don't do any dividend income
investing is because my taxable income
exceeds $39,375 per year, which means that I'll
pay 15% to 20% capital gains tax
on my qualified dividend distribution.
Yes, even when you reinvest those dividends
you'll pay taxes because you are technically still
receiving a type of cash payout.
I know that a lot of these dividend investors
who show you their portfolio on Robinhood
are for sure investing within a taxable account
because Robinhood doesn't even
offer a traditional or Roth IRA.
Dividend income investing could be tax efficient
if you did it within a tax-deferred investment account
like an IRA, but that would defeat the whole purpose
and the whole point of investing
for dividend income right now since you shouldn't be
using your IRA money until you retire.
Especially if you were someone who is young
and doesn't need to pull money from the account
for many years down the road.
For people younger than 55, retirement accounts
usually aren't needed for many years
so it doesn't make sense to be investing
for a current income stream within that account,
especially if you haven't reached the age
to start using that money.
I'll talk more about investing for dividend income
within a retirement account in just a few minutes.
When you are a young investor,
you're in the wealth accumulation phase of the process,
not the wealth preservation or spending phase
so why would I be trying to earn a monthly income
from my investments right now?
It doesn't make sense to try to earn dividend income
when you're young within a taxable account
only to pay taxes on those earnings.
Those tax dollars you are paying could be
earning you more money if they were being invested
as opposed to being paid to the Government.
You're creating a tax drag on your overall wealth
and net worth, which will leave you with less money
in the long run.
Another reason I don't invest strictly for dividend income
is that you're forced to take the payout no matter what.
This leaves you with a tax burden
when you might not actually want it.
You're better off investing for growth
and selling shares when you want to receive some cash
from your investments.
Doing this is the exact same thing
as getting paid out a dividend except for the fact
that you actually get to choose how much you want
as opposed to being forced to take out whatever the dividend
is offering at that point in time.
I'd rather invest in a mixture of companies
that do and do not payout a dividend
to help diversify my overall portfolio.
Once a company starts to payout dividends,
it's really difficult for them to stop doing it
in the future because investors get really greedy
and they expect it all the time.
Just like my grandpa told me one time
when I was younger, you can't un-poop your pants
so be very careful before you leave the house.
Because of this mindset, a dividend might be paid out
to the detriment of the company
and the employees who work there.
Just to continue paying a dividend,
some corporations might have to lay off employees
or even take on debt just to continue
the streak of paying out a dividend.
Businesses change, industries change,
laws change, new competitors enter the market,
and many different factors might go into
why a CEO would choose to stop paying a dividend,
but instead of cutting out a dividend
so that they can readjust the business
to make sure that they can still stay in business
they continue to payout that dividend
because some investors have come to expect it regularly.
I'd rather invest my money in a company
that's focused on overall long-term growth
as opposed to making short-term decisions
that could put them out of business just to make sure
that they pay me out my poor little dividend.
Let's finish this video with some final thoughts.
Once again, none of this is financial advice.
This video is for informational
and entertainment purposes only.
Please do your own research.
If someone is super-interested in investing
for dividend income then it would probably make more sense
to do it within a retirement account like a Roth IRA.
That way you are not paying taxes on that distribution.
Although I still don't think that it makes sense,
it makes more sense than using this investment strategy
within a taxable account.
Once again, I wouldn't be interested
in banking my future retirement money
on picking single stocks.
If you've really got a hard-on on for investing
for dividend income then at least think about
waiting until you are in the wealth preservation
or spending stage of life and definitely
talk to a professional before doing this.
Just a quick warning, everyone thinks
that they're a hotshot investor right now
because the stock market has had an insane run
over the past 10 or 11 years.
It seems like a lot of people are getting a little too cocky
with their investing because of this.
I am at the perfect age to where I
remember the US economy crashing back in 2008 and 2009.
Now I didn't lose a bunch of money because I was young
and didn't have that much to lose
but I still saw what it did to people.
Be aware that there will be another market correction
at some point in the future.
Now I don't know when it will be
or how bad it will be either but just be ready for dividends
to potentially be cut if and when that happens.
If you're still enamored with the thought
of investing for dividend income now
then at least make sure you're properly diversified
and don't do it with a large portion
of your total amount invested.
I'll throw a link to a really good video in the description
on why dividends do not matter
coming from a real life wealth manager.
Watch more of my investing videos right here to your left.
I'm editing the video you're watching right now.
And one of these videos right to your left
is from my buddy Dennis who actually is a dividend investor.
He will tell you why he invests
for dividend income so go check it out.
Make sure to check out the description
for different playlists and resources to help you out
with all of your personal financeand investing needs.