Stock and Fund Dividends

 

When is a dividend not a dividend?

The latest thing "conservative"brokers are preaching these days is to buy stocksthat pay dividends. Everyone likes dividends. Iknow I do, but when Wall Street tells me somethingI am automatically suspicious because they lie tome every day. Is this a new scam? Let's take alook.

When you buy a bond or a CD at thebank it pays interest and is a real dividend. Youmight get a check every month, quarter or annuallyor receive a credit to your account. The amount ofyour principle (what you paid for it) remains thesame. Yes, that is a true dividend.

Companies make big splashes aboutraising their dividend. It was 50 cents per share, but we have raised it to $1.00. Big deal. Yes, youwill receive a check and at least you know thecompany has cash available to pay you. That is anindication the company is in good financialcondition, but there have been many of the bignames on the NYSE that have continued dividendseven when they have lost money. How can that be?

Currently Microsoft has announced adividend of $3.00 per share. The talking heads onCNBC-TV tell us they are loaded with cash and wantto distribute it to their stockholders. Manypeople buy the stock in anticipation of thedividend as they think they will be getting anextra $3.00 per share. They are in for a bigsurprise.

The day that dividend is paidMicrosoft stock (symbol MSFT) will automaticallydrop $3.00 per share. Today $27.00; tomorrow$24.00. Folks, this is NOT a dividend. This is adistribution of capital. You are being paid inyour own asset. The fool that believes the WallStreet mumbo-jumbo will not have one extra pennyafter the dividend than he did before. In fact hewill have less. Why?

The stockholder will now be allowed topay income tax on the "dividend" distribution. Tomake that "dividend" seem even better the Bushadministration has reduced dividend taxes from38.6% to 15%. Thanks, Mr. Bush. Thanks fornothing. I can't blame him for more Maul Streetsmoke and mirrors. He has just made it cost lessto get back your own money.

Companies seldom pay large dividendsand they are paid quarterly. A $30 stock that paysa 4% dividend ($1.20) on a quarterly basis shows adecrease in the stock price that day of 30 centsper share and is lost in the noise of trading. Fewnotice that part of the price change is due to the"dividend".

When you own the stock of any companythe most important criteria is to find one that isin a long term upward trend. Never buy a stockthat is showing a decline no matter how "good" thecompany may be. Even sideways movements should beavoided. Keep in mind you are buying the stock tomake money. Forget the dividends and all other"reasons" and remember if it isn't going up, don'tbuy it!

 



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