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3 Reasons to Hate Dividend Stocks

By Selena Maranjian - May 7, 2016 at 8:03PM

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There are lots of misconceptions about dividend stocks. See if any of these reasons to hate them will keep you away from them.

Why would anyone hate stocks that kick out dollars to shareholders every month or quarter (or so)? Well, you might not like the fact that dividends are typically subjected to double taxation -- that is, a company pays taxes on its profits, and pays dividends from what's left to shareholders, who then face taxes on that money. But that's more a reason to hate dividend taxation rather than dividend stocks. In fact, I don't think there are many good reasons to hate dividend stocks, and so the only ones I came up with are the tongue-in-cheek reasons to hate dividend stocks you'll find below.

Reason No. 1: They take the mystery out of investing
Investing can be kind of suspenseful and thrilling as you find out how right or wrong you were to invest in any given stock and see how much it appreciates (or falls) for you over a certain period. Many highflyers people invest in can triple or quadruple in value -- or flame out before becoming profitable.

That's not so with a typical dividend-paying company. For it to have been able to commit to paying a dividend, it must have a relatively stable and predictable business, and ample profits. If a company has a $1.00-per-quarter dividend, unless it's in trouble, you can be pretty sure you'll collect $4.00 from it each year. See? Not very suspenseful.

Reason No. 2: They can build your wealth too quickly
The amount of each dividend payment is typically small, but they can really add up. If your stock portfolio is valued at $200,000 and you're averaging a 3% dividend yield on it, that means you can, barring trouble, count on income of $6,000 per year.

If even $6,000 doesn't sound like a lot of money, consider this: If you receive $6,000 per year for 20 years, reinvesting it in stocks that return, on average, 10% per year, you'll end up with more than $375,000! That alone, without even considering the growing value of the underlying dividend-paying shares themselves, can provide a lot of retirement comfort.

Better still, the amount you collect in dividends will grow over time, too, as long as they're tied to healthy companies. If they grow by just 4%, on average, they will more than double over the 20 years, so that you'll end the period collecting more than $13,000 per year in dividends alone.

Like it or not, dividend-paying stocks are simply strong performers. According to Ned Davis Research, from 1972 through 2014, dividend-paying stocks averaged an annual gain of 9.3% vs. just 2.6% for non-dividend payers. The folks at Fidelity concur, with their data showing that from 1993 through 2014, dividends accounted for about 40% of the 10.3% average annual return of the S&P 500.

Dividend payers are not as boring as you might think. Image: Josh Sniffen, Flickr

Reason No. 3: They can be boring companies
Finally, let's consider the companies themselves. We're often attracted to exciting, highflying stocks, not only because of their growth potential but also because they can be involved in activities such as exploring for gold or oil and researching cures for cancer. In contrast, you'll find many dividend payers collecting garbage, like Waste Management, or selling fertilizer, like Potash Corporation of Saskatchewan. Zzz...

But hold on there. Those companies can be kind of exciting, too. Waste Management, for example, doesn't just collect garbage -- it's also helping the environment via its extensive recycling operations, and it's even investing in technology that can turn hard-to-recycle plastics into crude oil.

It's also not just seemingly boring companies that are paying dividends these days. Apple, with its mega-selling iPhones and innovations such as Apple Pay, the iTunes store, and the Apple Watch, is paying a dividend that recently yielded 2.4% -- as is Harley-Davidson. Pharmaceutical giant Novartis, a leader in the promising biosimilars arena -- and one with many promising drugs, such as Entresto, which tackles heart failure -- recently yielded 3.6%.

As you can see, it was kind of hard to come up with reasons to hate dividend-paying stocks. It's actually rather smart to include them in your portfolio -- they can help build your wealth.

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