First off, the SmartAsset organization's main purpose is push people to use a financial advisor of some type. From their web site:
Quote:"SmartAsset is an online destination for consumer-focused financial information and advice that powers SmartAdvisor, a national marketplace connecting consumers to financial advisors."
If you read the response, written by a CFP by the way, every two or three sentences suggest using financial advisor to figure out what to do. If you like paying 1% or more annually for someone to sell you "a plan", then that's the way to go. Personally, if I wasn't a dividend growth investor (for the most part), I'd just go with the 60/30/10 common thumb rule and invest in mutual funds and ETFs with an expense ratio far below 1% and let it compound a la the Bogleheads.
Let's address the points that you called out.
Dividends aren’t anything extra. They are an integral part of a stock’s total return. Spending dividends means reducing forward growth.
He's right. Dividends come from the retained earnings (equity) of the company. However, if the company can't invest the money profitability to grow the company the same or above the current company's ability to earn a profit (ROE or ROIC), then why are they doing it? They could hoard the cash but, eventually, it will go to boost management's pay package, ill-fitting acquisitions, or fund share buybacks at inflated prices destroying value in the company. Why not share the excess with the owners of the business?
Some great (egregious) examples include EMR, who, in the time I owned them, seemed to buy back enough shares to boost management's pay package. Luckily, they had enough lucrative businesses that they could keep raising the dividend but only by about 2.4% annually over the last 10 years.
Or you could use that cash hoard like good old Intel. They bought MobilEye in 2017 for approximately $15.3 billion. Intel management said it would be immediately accretive to non-GAAP EPS and to free cash flow. I didn't notice any major momentum. They eventually sold it in 2022 in an IPO that netted proceeds of about $800 million. I don't recall if Intel retained a portion of the business but the results don't argue for a valuable investment to me. Intel is often very insular and prefers to go its own way; NIMBY comes to mind. Also, their sales department used to be ruthless with competition. As a shareholder at the time, I would have preferred they spent the money on R&D to make their processors more efficient, more price competitive, better manufacturing capabilities, and given any excess back to me in dividends. I spent three years with a flat dividend and no exciting breakthroughs during that time frame. Now they've got Qualcomm and AMD biting at their heels in design and Taiwan Semiconductor eating their lunch in fabs.
Getting back to the original point ... sometimes companies reach a point where they don't need the extra cash to grow the business at a great clip.
ADP raised its dividend 20% last year. Do you think they're not going to continue growing at a similar pace despite them sharing that money? Maybe only an 8% increase next year. Sure beats inflation. How about Microsoft? They grow the dividend around 9% a year yet they still have a
huge cash pile. Even if/when they buy Activision and implement AI (surely they'll be paying out some cash to use other companies intellectual property), they're still going to sell more copies of Windows 11, licenses for Office, seats and storage for Azure, advertising for LinkedIn, etc. plus the extra they'll bring with the new products to end up with a pile of cash for years to come.
Admittedly, those are lower capital-intensive than some businesses but look at Eaton (7.6% dividend increases over 10 years), Deere (I don't have the dividend statistics handy right now but EPS CAGR has been over 20% for the last 5 years), Cummins (their lowest rate of dividend increases was 6% over the last 3 years), Caterpillar (also had the lowest rate of increases over the last 3 years of 5%ish). They are all old-time, heavy industry, capital-intensive businesses that have been able to grow earnings and their dividend over many years.
Sure, startups and small businesses tend to burn through their cash. That's part of the growth process. They shouldn't be pay a dividend if they need it. Eventually, they'll die or grow to a point where they can't profitably invest that cash without impairing the business' progress. And, IMHO, it's the point where they should start to share some with those shareholders that funded their start and progress in the interim.
I'm reminded of what earthtodan wrote on this message board quite a few years ago:
Quote:“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.”
The next point ...
They are inefficient both in terms of taxation and cash flow. When your portfolio is centered on dividends you hinder your ability to plan your tax liabilities and cash flows.
He's just obfuscating the reality and options to scare you into going to a financial advisor. Maybe it would be worth it to you but I'm not going to get chased into an advisor just to explain what I can read all over the Internet and You'seTubes. (Pardon the Brooklyn accent.)
Simply, Ordinary Dividends = dividends from companies that have special tax treatment because of their structure; e.g. REITs, BDCs, and some LPs/MLPs.
Qualified Dividends = dividends of C-Corps generally listed on a U.S. stock exchange that have already been taxed on the earnings that make up the equity used to pay a dividend.
If it's in a taxable account, qualified dividends are taxed at an advantageous rate if they are subject to taxes at all. If you are in the lowest two tax brackets, you will not be taxed on Qualified Dividends you receive.
Here's the 2023 tax brackets from the Tax Foundation
The next 2-1/2 brackets, you will be taxed at 15%, and above that the rate is 20%. These are approximate values but it should give you some idea. You should see there is some savings compared to the tax brackets for ordinary income I posted from the Tax Foundation.
If you hold the money in a traditional IRA or 401(k), then dividends received are going to be taxed at the ordinary rates. Proceeds from a traditional IRA or 401(k) are considered ordinary income regardless of the source. Hardly a tax planning tool in this regard.
Now if you hold it in a Roth IRA or Roth 401(k) and you meet the 5 year rule (and all the others), proceeds (your dividends) will be tax-free.
So to me, the ideal choice would be the Roth for receiving the dividends ... but not all. I'm trying to arrange it so the traditional IRAs generate enough dividends to cover the RMD so I don't have to sell shares or take in-kind withdrawals.
My taxable income, once I'm retired, should be low enough that I'm not taxed on those dividends in my taxable account either.
BTW, if you think you're going to get the tax strategies perfect, you're deluding yourself. None of us have a crystal ball. Kerim used to have one but he broke it.
The author of the article neglected to tell the subject there are lots of options. There's no
hindering if you explain all the options and how they work. Any person with a modicum of thinking ability should be able to sort this out fairly well when presented to them in an understandable fashion.
