Avoid Dividend Stocks

Disclaimer : Anything mentioned in this post is not financial advice and is for informational purposes only. We do not recommend buying or selling any securities that are mentioned in this article. All investments carry risk and there is no guarantee of profit nor protection against loss. WealthGap does not provide any legal, tax, or accounting advice.

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When a company issues a dividend, it is taking a portion of its earnings and distributing to its shareholders. Not all companies that issue dividends are bad quality companies, but we should scrutinize the ones that do more heavily. There are three main reasons why you should avoid investing in companies that pay dividends.

Double Taxation

When a company makes a profit, it already paid taxes on its earnings once. When it decides to distribute some of this profit to shareholders, it creates tax inefficiency. The shareholders that receive the dividends will have to report these dividends as income on their tax returns, so the shareholders would have to pay taxes again on the dividends.

To better illustrate this, let's assume Company A makes a $100 profit and the corporate tax rate is 40%. Company A is left with $60 after tax, and it decides to distribute all $60 to its only shareholder, Bob. Let's assume Bob's tax rate is 20% and after he pays taxes on the $60 dividend, he is left with $48. So Company A originally made a $60 after tax profit and its only shareholder Bob only received $48 value from Company A. If Company A didn't distribute the $60 dividend, then Bob (100% owner) should own a company that has $60 value. Do you see why dividends destroy shareholder value? Bob is $12 poorer because Uncle Sam took it in taxes.

Companies that don't issue dividends can compound returns for shareholders in the long run because they can reinvestment the money back into the company to make more profit. Since no dividends were issued, shareholders don't lose value on taxes and it compounds over time.

Poor Management

Any CEO should understand the double taxation concept that I described above and if he/she still issue dividends, it means the CEO doesn't know what else to do with the company's cash. If a company has too much cash, the CEO can expand its products/services into different markets and integrate horizontally and vertically. If any of the options above is not viable, then you can buy out other competition that in the same business (to the point where the government doesn't want to come after you with an antitrust lawsuit). There is no excuse for CEOs to say they don't know what to do with the cash. Go venture into another industry and expand lines of businesses. If the CEO can't identify good businesses to get into then you'd know you should avoid that company's stock because the CEO doesn't seem to be good at his job.

Companies That Issue Dividends are Mostly in Mature Stage

Most companies that issue dividends are mostly mature companies that generate stable cash flows and have excess cash. This means they probably don't have much room for high growth in the years to come. At WealthGap our goal is to make you rich at the fastest pace. While you will still be able to growth wealth by buying dividend stocks, you really should invest in growth stocks if you want to become a billionaire one day especially when we are in a fiat currency system and every central bank is printing LOTS of money.