Too many starting investors are not familiar with the dividend -antrelevantie theory. This theory arises without work that was done in the sixties by Franco Modigliani and Merton Miller. A Nobel Prize was even won for this and related work. I don’t think you have to believe in this theory (although I think you should do that), but it seems strange not to understand if you are interested in the finances to read this blog.
What is the Irrelevance theory dividend?
The theory is that the dividend of a certain company should have little or something with its share price. The ability of a company to earn profit and grow that profit is what the value of it determines, not the dividend payments. Investors are not better rid of owning a company that pays dividends than a company that does not. Given the tax laws, they may be better off from companies that do not pay dividends.
What are competitive theories?
Perhaps the most important competitive theory is one that is sometimes called the bird in the hand theory. The idea here, a proposed by so -called ‘dividend investors’, is that investors would rather get cash in hand, a dividend, instead of just increasing the value of their shares. Arguments for this theory vary, but they usually sound something like: “Management can lie about winning, but it can’t lie about dividends.”
Sometimes arguments are argued that dividend payment shares have a higher return than non-dividend-paying shares, and there is some truth in that. But not for the reasons that most people think. For a stupid reason, some people also wrongly think that they can only issue income in retirement, and so they give an unnatural preference for investments that produce income.
Taxes can also come into play. If the tax rates for dividends were dramatically lower than the tax rates for power gain in a certain country or state, dividends would be much more logical than under our current tax scheme.
A better argument is that when a dividend is paid, management says: “We think you use better for this money than we do.” I actually like this argument, because that’s how I run my own company. If I want to invest in my company, I keep income in the company. Theoretically I can get a very good return on that reinvestment, or I wouldn’t do it. When the company generates more money than I know what to do with it, I get it out and invest it elsewhere. However, I am skeptical that CEOs of the most listed business company do this in the same way as small companies.
Maybe they are, however. Perhaps that is the reason why companies often change in the course of time from growing, non-dividend companies to value, dividend-paying companies. However, none of that changes the fact that the income is profit, whether it has been paid to the owner or is being re -invested in the company.
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Why so much non-qualified dividends? Let’s look through my tax information to find out
Why getting a dividend would not be exciting
A dividend is not a dessert
Some starting investors wrongly think that a dividend is the financial equivalent of a free dessert. You have had a dinner with a share price increase, and now you have a dessert with the dividend. Sorry, that’s how the accounting works. Just cook a company on its essential elements, and you will see why.
Let’s say you have an entire company. At the end of the year, the company made $ 500,000 profit. As a business owner you can leave those $ 500,000 in the company, or you can get it from the company and call it a dividend, or something in between. You can own a company that is now worth $ 500,000 more, or you can own the company plus $ 500,000 in cash. The same, the same.
Why do dividend shares perform better than?
Although this has not been true for a while, data in the long term that shares that pay dividends has a higher long -term return. However, this is not because they pay dividends. It is because they are value shares. That means that you spend less to buy a dollar of income than you would be different. A growth broth is like Apple. Everyone knows it is a great company and it often grows fast. The company is willing to pay more for a dollar in income because it thinks that income will grow faster. It is sexy to possess and sexy to work for.
A value stock is as a Procter & Gamble. It’s not sexy. The company makes diapers and detergent. Nobody grows up and says, “I want to work for Procter & Gamble.” And Procter & Gamble is actually quite growing compared to the most value shares. The PE ratio is 22.4. (Apple’s is 34). The PE ratio of VANGUARD VALUE Index Fund is now around 20. British Petroleum has a PE ratio of around 12. So you can pay $ 12 for a dollar in income with BP or $ 34 for a dollar of income with Apple.
Not in the past 10-20 years, but in the very long term, value shares have performed better than the growth stocks. That is probably because they are more risky. They will rather go bankrupt. They are not sexy either. Nobody can brag about them at a cocktail party, and it appears that this is actually an important factor for some miserable investors. Value shares are much more likely to pay a dividend and have a high dividend yield compared to a growth share. So most “dividend shares” are value shares. But the dividend yield is not really the best way to select value shares. Price-to-book ratio And other financial valuation numbers are much better.
More information here:
The notes and bolts of invest
Investing does not have to be complicated
Tax implications
Dividends are actually really stupid tax in terms of tax. In the US we pay the same tax rates about dividends that we pay on power gains. However, we can check when we realize the profit of capital. The company may decide when it publishes a dividend. If you want to keep your taxes low, you would rather only have investment income if you want to spend it, such as during pension years, instead of during your income years. Everything else is the same, you better get rid of “declaring your own dividend” by selling some shares than the company lets you send a dividend whenever.
Another tax advantage of explaining your own dividend is that the entire dividend is taxable, but that is not the case when you sell shares. Part of that share price is “basis”, ie money that you have paid for the shares. Basic is not taxable. If you sell $ 100,000 in shares and the basis is $ 40,000, you only pay tax on $ 60,000 in capital profits. This reduces your tax assessment by 40% compared to the dividend model. But wait, there is more. You can choose which shares you sell. Perhaps you choose to sell the shares you just bought 18 months ago. The basis of those shares is $ 90,000. Now you can spend $ 100,000, but you only have to pay taxes at $ 10,000. Great!
But wait, there is more. If you die, your heirs get a step based. If they sell $ 100,000 in shares in the week that you die and their basis is $ 100,000, they pay nothing in taxes. That is much better than getting a dividend. The same if you give shares to a good cause. Let’s say you invest $ 100,000 for a good cause. It pays you great dividends every year. You pay taxes on those dividends and then recover what remains in more shares of shares. Ultimately, you give the shares to a good cause. But if the company never paid dividends, you would have saved a whole series of money in taxes and the charity would have received much more benefit.
The Bottom Line
Dividends are not a good thing. They are not relevant. Before tax and after tax they are generally a bad thing. You must understand this as an investor so that you can make the right financial decisions.
Do you believe in the dividend -Rrelevantie theory? Do you like to get dividends? Why or why not?
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