As much as I like dividend investing as an investor, it's not perfect. In this video, I'll review some downsides to investing in dividends.

Index:
0:00 - The Downsides to Dividend Investing
0:08 - Dividends are Taxed
1:21 - Dividends aren't guaranteed
2:22 - Unsustainable Dividend Yields
3:13 - High Yields Due To Falling Prices
3:43 - Income is Inconsistent

1. Dividend income is taxed.

With other ways of investing, where you don’t receive dividends, but instead, you’re investing for growth in the price, the only time you are taxed is when you sell your shares, and then it’s taxed as either a capital gain or loss.

But with dividends, every time you receive your dividends, either as cash or even if you reinvest them, it’s considered income. You will be taxed on that income based on your personal tax rate, through your tax return at the end of the financial year.

2. Your income is not always guaranteed.

There are no guarantees that you’ll get the expected dividend payouts.

We saw this during the pandemic with many companies either reducing, delaying, or even stopping paying dividends altogether so they could hold onto their cash flow.

There doesn’t even need to be a global catastrophe for this to happen. Companies can just stop paying dividends and use the cash for something else.


3. High initial dividends that are used to attract investors before they reduce them later

Sometimes something can be too good to be true. And that goes for those ultra-seductive high dividend yields.

This happens a lot when a company, often new, but can be an established company as well, offers a regular high dividend yield. This isn’t to be confused with a company offering a one-off special dividend which can sometimes be high (and that can be a good thing), but companies that promote their normal internal or final dividend - their yearly dividend yield as high.

4. High yields from falling stock prices

Following on from the last point, another time the dividend yield can look high, although this time it isn’t anything the company is deliberately doing to attract investors, is when the price has dropped which makes the yield look higher than normal.

That’s because of the way the yield is calculated using the current price and the past twelve months of dividend payments.

5. Inconsistent income

This isn’t as much of an issue if you’re reinvesting or relying on other sources of income though. This mostly applies to those who use the income from their dividends to either pay part or all of their lifestyle and bills. Like me.

Most companies in Australia pay dividends twice a year, and most ETFs pay four times a year. Those months will vary from company to company, so it’s possible to have income coming in every single month. I’ve curated my portfolio in the past so I did have money coming in every month, but even so some months are going to be significantly more popular to pay dividends than other months.





-----------------------------------
INSTAGRAM:
@traceyedwards.insta
------------------------------------------------------
MY SECOND CHANNEL (Lifestyle)
   / thetraceyedition  
--------------------------------------------------------------------------

DISCLAIMER:
Investing carries risk.
The content in these videos is my opinion and is not intended to be substituted for your financial situation.
Please do your own due diligence and seek professional advice where necessary.