Recently Alphabet, the parent company of Google, announced that it would be paying out dividends for the first time in the company’s history.[1] As such, you may wonder if you should adjust some of your portfolio and consider how dividends play a role in your portfolio. You may also wonder what the best dividend strategies are for your unique situation. To help you answer these questions, let’s take a look at what dividends can and can’t do for your retirement portfolio.
Pros of Dividends
- Tax Advantages: Dividends are taxable, but one of the significant advantages of dividends is that sometimes they can be treated as capital gains. In many jurisdictions, dividends are taxed at a lower rate than other forms of investment income. This can make dividend-paying stocks an attractive option for income-seeking investors from a tax-efficiency perspective.[2]
- Portfolio Stability: Dividend-paying stocks may contribute to a stable portfolio.[2] Companies that consistently pay dividends tend to be more established and financially stable, which may provide a level of downside protection during market volatility.[2] Additionally, the regular income from dividends may help offset losses in stock prices, providing a more consistent return on investment.[2]
Cons of Dividends
- Less Capital Appreciation: One downside of dividend-focused stocks is that they may offer less potential for capital appreciation compared to growth stocks.[2] This is because companies that pay dividends tend to be more mature and established, with slower growth prospects compared to newer, high-growth companies.[2] In addition, some posit that the equity value of a stock is reduced by exactly the amount of the dividend. Essentially, this is to say that whatever you receive in dividends you might be paying for in equity value depreciation.
- Dividend Income Isn’t Guaranteed: Unlike the interest payments on bonds, dividend income from stocks is not guaranteed. Companies can reduce or even eliminate their dividends, which can impact the income stream for investors relying on these payments.[2] Economic downturns or company-specific challenges can lead to cuts in dividend payouts, affecting the overall return on investment.[2]
It’s important for you to weigh these pros and cons against your individual investment goals, risk tolerance, and overall investment strategy before incorporating dividend-paying stocks into your portfolio. If you’re curious about how to work dividends into your retirement strategy, Click HERE to reach out to one of our professionals at Haven Financial Group today for a complimentary review of your finances.
[1] https://www.fastcompany.com/91119070/meta-alphabets-dividends-reward-shareholdersespecially-the-founders
[2] https://www.newretirement.com/retirement/pros-and-cons-of-dividend-investments-for-retirement-income/
