Investment dividends from your favorite utility stock are a welcome source of income during retirement. And investment dividends can be reinvested in dividend reinvestment plans while you are letting your investments grow. And, not all of your investment will pay dividends as some companies simply plow their profits back into research and development or into stock buy-backs in order to grow the company and raise the value of their stock. The question we ask today is if investment dividends are something you want from a stock. After all, the money you get from dividend stocks is taxed as you go during your peak earning years.
Dividends or Not
Many companies never day dividends. They believe that their profits are better spent building the company and the value of the stock. A problem with paying dividends is that they are taxed twice. The corporation that pays dividends needs to pay taxes on the money before they pay it out as dividends and then the shareholder must pay taxes as well. The same money could be efficiently plowed back into R&D or into purchasing other assets such as small growing companies that will add to the value of the parent concern. To the extent that this can be routinely done investment dividends can be foregone and investors will be happy with the appreciation of stock price. However, there are times when stock prices level off and investors want to see something for their investment and they want to see it now. That is when investment dividends become a welcome thing. Such was the case with Microsoft when its growth leveled off. People who saw their initial investment in Microsoft increase a thousand fold or more were perfectly happy with the continual increase in the price of the stock. But, when the stock and peaked and leveled off, as all large caps tend to do, shareholders became restless. People who had owned the stock for fifteen years saw their first investment dividends in 2003. The first check that they received was only for eight cents a share. But, considering that the stock had split nine times this was forty dollars a share on original stock purchases. This is, in fact, the point of investment dividends when one gets into a growth stock early and stays the course.
What to Do with Dividends
Standard investment advice is to reinvest dividends over the years and not start taking cash in dividend checks until retirement. Another smart way to approach the dilemma of paying taxes on dividends is to buy dividend stocks for your 401k. As we noted in our article about how to invest your 401k, when you take your money out of your 401k it is taxed as ordinary income so your retirement years when you have no salary are the best times to withdraw your money. If you have no other appreciable income your investment dividends could conceivably not even be taxed when you take them in retirement! As always the best results in investing come from thinking things through before you invest and carefully analyzing the fundamentals.