In the previous article I collected 5 reasons why I love dividend investing. Of course there are not only positive sides of this investment method. Below I will list 3 reasons why dividend investing might not be right for you.
1. It’s not a get rich fast scheme
If you’re looking for a get rich fast scheme, dividend investing is definitely not for you. But before you’re continue looking for other investing methods, just bear in mind that most get rich fast schemes can actually make you lose money pretty fast.
It can be very tempting to think about how you will multiply your investment in a few weeks by forex trading with 1:500 leverage. Believe me, I’ve been there, done that. Chances that you won’t be among the 2% of forex traders who consistently make money is pretty high. 98% to be more specific 🙂
In the early years of dividend investing, your returns might not be that high. Most of the companies who pay reasonable, but still safe dividends are yielding around 2-4%. The real deal (besides of the continuous reinvestment of the dividends) is the dividend increase.
Let’s take a company with $100 share price and $3 dividend per year. This is a stock with 3% dividend yield. Assuming that the company is raising its dividends by 10% per year, the next year it will pay $3.3. the following year $3.63. Five years later $4.83 and ten years later $7.78. That’s already a 7.78% return on your original investment.
In addition, chances are high that continuous dividend increases will also be reflected in the share price. Assuming the same level of dividend yield, by year 10 the share price will be $259.37.
Is it impressive? I believe it is. Is it slow? Yes. You have to decide whether you can invest your time and not only your money into this.
2. It can be boring
Once you selected the stocks you wish you purchase, you press the buy button and… wait. You don’t really need to care about the stock price, just wait. It is not active trading, but pure passive investment.
I am reviewing the status of my portfolio on a monthly basis, but to be honest this does not really have an impact on the fact that I’m planning to hold the shares I bought on a long term. The most useful part of such review is to identify bigger price drops (meaning higher dividend yields) and check whether it worth to put additional money into those stocks.
If you are investing into dividend focused ETFs, you don’t even need to make such reviews. Just keep investing on a regular basis and watch the increasing dividends coming in month by month.
Do you want some more excitement? Then dividend investing is not for you!
3. Taxes can be complicated
Please keep in mind that this can hugely depend on where you live and what kind of tax advantageous vehicles (if any) are available in your country. In the Netherlands you’re taxed the following way:
When you receive the dividends into your account, you only get the net dividends after the withholding tax is deducted at the source. You can offset this withholding tax with your yearly tax liability (can cause cash-flow disadvantage).
If you receive dividends from foreign companies, you cannot offset more withholding tax than your yearly box 3 liability. If you paid foreign withholding tax over this amount, you can carry forward the surplus to the subsequent tax years (this is also not good for your cash flow).
The Netherlands has tax treaties with a large number of countries. These treaties set the percentage of tax that the originating country can withhold. The rate is typically 15%, nevertheless there are some exceptions. In some cases -mainly due to administrative errors- more tax might be withheld than the treaty rate. In such case you are still only entitled to offset 15% tax in your yearly tax return and you might face with a burdensome procedure for reclaiming the excess from the foreign tax authority.
Does it mean that I should give up dividend focused investing? Definitely not. I will always want to rely a certain amount of secured, fixed income. If the stocks in my portfolio have safe enough dividend coverage, I should not worry about dividend cuts. Many companies managed to even increase their dividends during financial crises. At the same time, selling stocks while the share prices are down would not be a wise idea.
The above just made me think about the importance of not focusing only one type of investment. This is why we have invested in our first rental property, and this is why I should further diversify even within my stock investments. In a way I already started this by adding broader European and Indian ETFs to my portfolio.
What are your thoughts on the above? I would be happy to hear your thoughts!
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Disclaimer: This post or any other information on the site is not intended to be and does not constitute financial advice or any other advice. I am solely sharing my idea, plan and progress on financial independence and early retirement.