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  (ARCHIVES)Back to Current
The Alchemist (11/19/2008)
By Al Thomas
FALLACY OF DIVIDENDS

The most recent craze for brokers, fund managers and financial planners is to buy stocks that have been paying dividends for many years.

Then the investor is told to reinvest the dividends. That sounds good, but does that mean the stock will not go down? Does that mean the investor will not lose money. But you’re getting something extra aren’t you? Or are you?

When a bear market that collapses 20, 30, 40% or more ALL STOCKS go down and in that bear market many “good” companies reduce their dividends. Some companies even borrow money to pay a dividend. How dumb is that?

` Before we get into specifics ask yourself this question. If my stock drops 40% over the next 2 years will the dividends pay enough to make up the loss? You know the answer to that.

Suppose you sold the stock today and put it in a government bond that paid just 2%. Wouldn’t that make up for most of the lost dividend?

Also most government bonds pay tax free dividends whereas stock dividends are taxed.

Is a stock dividend really a dividend/ Compare it to the interest paid on a bond. You must own a bond for a specified period of time. You have it for a year and you have $10,000 in the government bond paying that tiny 2%. At the end of the year you earned $200. If you owned the bond for 6 months you would only receive $100.

If the investor had bought Microsoft stock a couple of years back at $30 per share he would have received a 10% “dividend”. WOW! Even if the shares were bought the day before the “dividend” was declared the purchaser would have gotten the full 10%, $3.00 per share. How can that be? Maybe investors should wait until companies announce a dividend payment and then buy the stock. Great idea, huh!?

Well, here’s the catch. The day after the divdend is declared the stock price is reduced by that amount. Take the Microsoft payout. The stock was reduced from $30 to $27 the next day. Mr. Investor got his $3.00 “dividend”. And here is another catch. The shareholder has to pay tax on the “dividend”.

The company has merely paid out to the share owner some of his own money. It is a capital distribution, not a “dividend”. Joe Sixpack is being fooled by semantics. Ask a broker. Many don’t realize this.

In a long term bear market, as this one, the investor is better off in a good bank CD, money market account or U.S. government bond.

As Will Rogers used to say, “I not interested in the return ON my money; I‘m interested in the return OF my money”.

You may receive Al Thomas’ investment letter at no charge for 3 months on the web site www.mutualfundmagic.com Never lose money in the stock market again. His book “IF IT DOESN’T GO UP, DON’T BUY IT!” has become a classic.

 

 

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