4 Reasons to Avoid Dividend-Paying Stocks | Smart Change: Personal Finance | tucson.com – Arizona Daily Star

Dividend stocks pay you to own them. But is there a catch? Sort of. Stocks that pay dividends have their downsides, or traits that may run contrary to your financial goals. Read on to learn about four of these traits and how to evaluate whether dividend payers fit within your investment strategy.

1. Taxable income

Dividend stocks produce taxable income unless you’re holding them within a tax-advantaged account like an IRA or a 401(k). If you don’t have an account that defers taxes on earnings, you will pay taxes annually on the dividends you receive. This is true even if you reinvest those dividends.

Most dividends paid by U.S. companies are taxed as long-term capital gains. In 2022, that tax rate is either 0%, 15%, or 20%, depending on your income. Higher income households may also owe a 3.8% surtax on net investment income.

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Stocks that don’t pay dividends can be far more tax-efficient, depending on your trading habits. This is because you don’t pay taxes until you realize a gain — which happens when you sell.

You could be sitting on Amazon (NASDAQ: AMZN) shares you bought for $40 apiece in 2005, for example. Although those shares are trading above $2,000 now (ahead of a big stock split next month), you don’t owe taxes on that position until you sell.

2. Lower share price appreciation

Dividend stocks generally don’t appreciate as quickly as stocks that don’t pay dividends. There are two factors here. One, share prices are driven by the investment community’s evaluation of the stock’s total return potential. Total return includes dividends and share price appreciation. A stock that doesn’t pay dividends will deliver its return entirely via appreciation. Dividend stocks split their returns between shareholder payouts and appreciation.

And two, companies that can fund dividends reliably are established and predictable. These stocks don’t exhibit the explosive earnings growth that can drive extreme share price appreciation. They tend to follow the slow-and-steady path instead — growing less in strong markets and falling less in weak markets.

If you prefer high-growth potential over stability, dividend stocks aren’t for you.

3. Better with a longer time line

Dividend-paying stocks are well-suited for a long investing time line. As noted, they can be more or less impressive in the short term, depending on market climate. But they tend to prove their value over decades with reliable growth — assuming you reinvest those dividends.

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Source: https://tucson.com/business/investment/personal-finance/4-reasons-to-avoid-dividend-paying-stocks/article_b875b613-970b-50a4-b6a2-fee7917ce2e0.html

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