Even if you don’t own any yourself, it’s easy to see the appeal of dividend stocks — any investment that puts cash in your pocket right now has its obvious upside, even if those dividend payments aren’t enormous. As the old cliche explains, a bird in the hand is worth two in the bush.
But there are certainly some sound reasons an investor might want to make a point of steering clear of dividend-paying stocks, even if only for the time being. Here’s a rundown of three of the top reasons they may not be in your best interest right now.
1. You need growth more than income right now
It’s easily the most obvious reason, but needs to be stated all the same: There’s an opportunity cost in owning dividend stocks that you don’t actually need dividend payments from right now. That cost is the returns you’ll be missing out on by not owning growth stocks you could have otherwise invested in with that capital.
That’s not to suggest there’s no capital appreciation potential with a dividend-paying name. Take consumer goods powerhouse Procter & Gamble (NYSE: PG) as an example. Shares of P&G are nearly twice their value from just five years ago. That’s in addition to the $15.25 worth of dividends dished out during that time, driving the stock’s total return up by about another tenth of its average price during this stretch. Not bad.
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Except, easy-to-own growth stock Alphabet nearly tripled in value during that same five-year stretch.
2. You don’t want to complicate (or raise) your taxes
Investors’ efforts to postpone and minimize taxes are understandable. But they’ve arguably become overblown. You have to pay taxes sometime, and you don’t want to crimp your overall returns just to avoid a tax burden in the current tax year.
On the other hand, if collecting dividends now — even if you’re reinvesting them in more shares of the same stock — is more of a tax hassle than it’s worth, it might be easier just to avoid the headache altogether.
These scenarios are admittedly few and far between. Examples might include a young individual or couple that doesn’t currently own any dividend-paying stocks outside of a tax-sheltered account, or a high earner already earning a great deal of dividend income. The former would be forced to collect and add information to a form 1040 on only a small amount of …….