Problems With Dividend Stocks

Stocks which pay dividends could be a good way to get a little extra income off of your investments. But they also have a lot of problems with them. Dividend stocks are not the best investments for everybody.

1. They Don’t Always Come From Strong Companies

Not all stocks that pay a dividend are worth investing into. Some bad companies will even inflate their dividends to get new investors to buy their stock because nobody would invest into them otherwise. You can always avoid this by doing research on the company and making sure that it is fundamentally strong and likely to head up. One of the greatest stock market tips is to have some other reasons for investing into a stock other then the dividends that it pays out. Just buying a stock based off of it’s dividend is kind of a bad idea.

2. It Hurts Stock Growth

A dividend can also hurt the long term growth of a specific stock. This is because the dividend comes directly from the price of the stock. For example if the stock is trading at $90 and they offer a $1 dividend the stock price will drop to $89 to compensate for the $1 paid to shareholders.

Ok, it isn’t that big of a drop, but if it is happening several times a year then over the long term it can really affect its growth. You do get the money from the dividend, but where would you rather have your money, in your pocket or compounding to make you even more money? If you want it to compound and grow then dividend stocks are not for you.

3. Additional Taxes

You do have to pay taxes on dividends. The real problem here is that the money is taken out of the price of the stock. This means if you invest $5,000 in a stock and they pay out a $50 dividend directly after you buy it, you will have the same amount of money that you started with, but you will have to pay taxes on that $50.

You don’t have to make money to be taxes with dividends. Over the long term as the stock continues to appreciate it isn’t that bad because it is, in most cases, paid with the profits from the appreciation. But over the short term it can be a bad thing.