3 Reasons To Avoid Dividend-Paying Stocks | Personal Finance | wacotrib.com – Waco Tribune-Herald

Dividend stocks have some appeal for a lot of investors. Companies paying a dividend are usually mature and produce strong enough earnings to cover their payout. A long history of paying a dividend can give investors confidence that a company is going to keep paying that dividend for a long time.

But dividend-paying stocks aren’t a perfect investment option for everyone and they may not be the right fit for your portfolio. Here are three reasons you may want to avoid them.

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1. Dividend stocks offer less control over taxes

The tax code is very generous for dividend-paying stocks. Qualified dividends are taxed at the long-term capital gains tax rate, which is typically 15% for most investors.

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However, you don’t have any control over whether to take a dividend or not like you would if you were merely taking a long-term capital gain in a stock. You get paid the dividend on a regular schedule determined by management, and you don’t get to decide how much the dividend is.

The good news is that you typically know how much the dividend will be ahead of time, so you can do some tax planning around that. But if you want complete control over your taxes every year, dividend stocks aren’t for you.

2. Dividend stocks generally offer less growth potential

Dividend stocks are usually mature companies with consistent earnings. There’s limited room for growth at such companies. In fact, when a company commits to returning excess cash to shareholders through a dividend, it’s sending the signal that it can’t invest all of its earnings to grow the company efficiently.

Conversely, growth stocks pump all of the cash generated back into growing the business. In many cases, growth stocks are unprofitable and use debt and equity to fund the business while growing the potential for future profits.

Unlike dividend payers, there’s no pressure on growth stocks to produce steady profits or cash flow. That gives management more leeway to invest in opportunities that may cost a lot upfront but could generate significant profits over the long term.

While reinvesting dividends back into the stock or in another stock can help improve the returns of dividend-paying stocks, growth stocks can produce even better returns for smart investors over the long term. That said, the sword cuts both ways; growth stocks are also more likely to see their price drop much more than dividend payers when they don’t meet expectations or the entire …….

Source: https://wacotrib.com/business/investment/personal-finance/3-reasons-to-avoid-dividend-paying-stocks/article_dbf12c0a-6bd4-5642-8b37-3f8b148e932c.html

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