Regular Cappy Cap readers will already be familiar with the chart below, but as a refresher, the chart below shows you what's called the "dividend yield." This is the rate of return you can expect from dividends as a percent of the stock price. The reason this is important is because the ONLY real return you get from a stock is dividends. The ONLY thing a stock pays a shareholder is dividends. The ONLY reason you should invest in a stock (long term) is dividends.
And thanks to trillions of dollars flooding the market, you now get a WHOPPING 2% rate of return through dividends!
Bullets and Rumpleminze would make for a better (and more fun) investment.
What is the real inflation rate? *not just the mythical CPI that has een altered...
ReplyDeleteYou are going backwards at 2% dividend... assuming there is another investment that could at least pace inflation.
There is a big factor left out of the dividend chart. In recent times individuals receiving US company dividends , are subject to double taxation. Dividends are paid out on after tax company profits. Then the dividends are taxed again, as income to the shareholder. This has greatly reduced the attraction of dividends to many investors. This taxation policy has also changed the actions of many public companies. A lot of public companies prefer stock buybacks, instead of increasing their dividend. Other companies sit on massive cash reserves such as Microsoft, instead paying out large dividends.
ReplyDeleteI agree that the dividend yield is an important investment component of any stock. However, taxation policy is something, that tends to change the rules of the game.
Pat Sullivan beat me to a key point, this isn't just an inflated market issue. The gov't has worked very hard to make dividends rarer from two directions:
ReplyDelete1. By double taxing dividends but allowing bond interest to be deductible they've made it on the face smarter to finance a business by debt over equity.
2. By tax privileging capital gains they've made investors more interested in stock price over dividends. Of course, the only way to pay dividends is to have cash on hand. Stock prices can be raised by a variety of accounting tricks. It is much easier for an Enron to occur in an age that values short term stock price changes over dividends for that very reason. You can cook the books to get that 10% increase and sell. Dividend checks have to clear the bank.
The question in my mind anymore is this by accident or design.
We are better off in the Great White North. Dividends from Canadian companies are taxed in the receiver's hands BUT a tax credit is given such that the net tax rate paid by both the dividend issuing corporation and the receiving shareholder is no more (and sometimes less) than the taxes the receiver would have paid if the dividend was paid as a deductable, ordinary income for the taxpayer. For many retirees with low incomes the dividend tax credit results in a tax refund. E.g. the issuing corporation pays 30% corporate tax and the net Itax less tax credit) tax paid by the shareholder is 16%. Total tax paid is 46%. If paid as a ordinary income "Bonus" Corporate tax 0% and shareholder tax 46%. Net difference =$0.
ReplyDeleteA bit more complex but worthwhile as it does not distort the marketplace.
If you use your TSFA account.....zero tax!
ReplyDeleteCome on USA! Take notes!