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.

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The utilities we mentioned in our 2014 stock picks article were:

• Southern Company SO
• Duke Energy Corp DUK
• Dominion Resource D
• American Electric AEP
• Cleco Corporation CNL
• Entergy Corporation ETR
• NextEra Energy, Inc. NEE
• NRG Energy Inc NRG
• SCANA Corporation SCG
• TECO Energy, Inc. TE
• Xcel Energy Inc XEL

There are lots of dividend stocks and lots of dividend reinvestment plans. As part of your stock portfolio consider holding conservative stocks that will continue to pay dividends in good and bad economies. Consider dividend reinvestment plans in order to profit from exponential growth of your investments.

Screening for Dividend Stocks

A quick and handy tool for stock screen is the Yahoo Finance Stock Screener. You can use this tool to screen stocks by sector, price, dividends and more. As a conservative example we choose stocks with a market cap of $10 Billion or more and a dividend yield of 3% or higher. We found Duke Energy Corp, which is in our list of utilities. The company has a market cap of $50.44 Billion and pays a 4.4% dividend. We googled Duke Energy Dividend Reinvestment Plan and found out that for their DRiP you do not pay purchase fees or reinvestment fees and that purchases are made every month. The stock screen in which we found Duke Energy contains

• ConocoPhillips (80.28B, 4.2%)
• Cisco Systems (119.43B, 3.4%)
• Dow Chemical Company (55.59B, 3.2%)
• Chevron Corporation (218.24B, 3.5%)
• Dominion Resources (41.34B, 3.4%)

Note that Dominion is in our list of utilities.

High Dividends Versus Staying Power

The companies listed in the screening section are been around for years and are not going away. This is the point of buying dividend stocks and using dividend reinvestment plans. There are higher paying dividend stocks but sometimes the company is paying out huge dividends to disguise an intrinsic weakness in their company. If we apply the same requirement of a $10 Billion market cap but look for a dividend yield of over ten percent the screen gives us two stocks, Annaly Capital Management and Seadrill Limited. Annaly used to sell for $19 a share through most of the last decade and fell by half this last year. Think of it as a 5% dividend stock whose price fell by half and whose dividend could be reduced as well. When we screen for Seadrill we see an investment article that notes that Seadrill will only be able to sustain its dividend if the current weakness in the oil drilling market improves.

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