Top 5 Myths About Dividend Investing

Cheers to picking better investments!

1) Stock Prices Adjust Downward When Dividends Are Paid

There is a strategy called the “Dividend Capture” Strategy which suggests buying a stock before the ex-dividend date, to capture the dividend for that quarter, and then exiting the position shortly after.

There is a limiting factor to this strategy, and it’s the fact that the stock price will adjust downwards on the day of the ex-dividend date by the amount of dividend, NOT the pay date.

It’s common for investors to assume this occurs on the day the dividend is actually paid out, but that’s not the case.

If you’re implementing a dividend capture strategy, you should be aware of when the price adjusts.

2) The Record Date Determines Shareholder Eligibility

Many investors confuse the record date with the ex-dividend date.

They are two completely different things.

The record date is the date the company compiles a list of shareholders eligible for the dividend.

The ex-dividend date is the day you need to be holding the stock in order to get paid.

The ex-dividend date usually occurs 1 business day prior to the record date. But keep in mind that if you’re not holding the stock on or before the ex-dividend date, you will not be eligible for the dividend.

3) Dividends Are Always Taxed The Same

There is a common misconception that all dividends are taxed equally, but this couldn’t be further from the truth.

Taxes on dividends can vary depending on the type of account the investor has and their income tax bracket.

Here are the tax rates for qualified dividends.

As your taxable income rises more, your tax rate goes up.

Non-qualified dividends are taxed at your marginal rate.

4) Companies That Pay Dividends Limit Growth

You might think that companies that pay dividends have given up on growth.

This couldn’t be further from the truth.

There are some companies that have such high payout ratios that they retain next to none of their earnings, but as dividend growth investors, we don’t touch these anyway.

If you buy a company that has a healthy payout ratio, then growth shouldn’t be an issue.

Sure, that company may have less money to spend on internal growth, but typically companies who have been paying (and growing) dividends for a long period of time are in mature industries anyway and they don’t need billions of dollars to fuel internal growth.

With that being said, there are tons of “growth” stocks that are sitting on piles and piles of cash, that they don’t know what to do with.

Yes it gives them flexibility to pivot or jump on new opportunities, but cash that’s just sitting there doing nothing is no good either.

5) Dividend Stocks Are For Old People

I saved the best one for last, because this one makes me laugh.

“Dividends are for old people”

“You shouldn’t be investing in dividend stocks when you’re young”

“You should focus on growth stocks instead”

“Passive income is for retirement"

I’ve heard it all.

What’s funny is that people assume I ONLY invest in dividend stocks.

I’ve made it known that investing using only one strategy is foolish.

I make it a point to invest in many different kinds of assets so I stay diversified and have exposure to all types of industries.

The bulk of my portfolio is invested in dividend-paying stocks, and I use the dividend income to invest in other assets that may have a higher upside potential.

The passive income gives me flexibility that I otherwise wouldn’t have had.

The other option is putting in my own money, but sometimes I don’t always have extra cash lying around to do so.

Which is why dividend stocks are great.

Because they allow you to have a consistent stream of income rolling in that you can use to invest anywhere you’d like.

See you in the next one!