Stock and Fund Dividends

When is a dividend not a dividend?

The latest thing “conservative”
brokers are preaching these days is to buy stocks
that pay dividends. Everyone likes dividends. I
know I do, but when Wall Street tells me something
I am automatically suspicious because they lie to
me every day. Is this a new scam? Let’s take a
look.

When you buy a bond or a CD at the
bank it pays interest and is a real dividend. You
might get a check every month, quarter or annually
or receive a credit to your account. The amount of
your principle (what you paid for it) remains the
same. Yes, that is a true dividend.

Companies make big splashes about
raising their dividend. It was 50 cents per share,
but we have raised it to $1.00. Big deal. Yes, you
will receive a check and at least you know the
company has cash available to pay you. That is an
indication the company is in good financial
condition, but there have been many of the big
names on the NYSE that have continued dividends
even when they have lost money. How can that be?

Currently Microsoft has announced a
dividend of $3.00 per share. The talking heads on
CNBC-TV tell us they are loaded with cash and want
to distribute it to their stockholders. Many
people buy the stock in anticipation of the
dividend as they think they will be getting an
extra $3.00 per share. They are in for a big
surprise.

The day that dividend is paid
Microsoft stock (symbol MSFT) will automatically
drop $3.00 per share. Today $27.00; tomorrow
$24.00. Folks, this is NOT a dividend. This is a
distribution of capital. You are being paid in
your own asset. The fool that believes the Wall
Street mumbo-jumbo will not have one extra penny
after the dividend than he did before. In fact he
will have less. Why?

The stockholder will now be allowed to
pay income tax on the “dividend” distribution. To
make that “dividend” seem even better the Bush
administration has reduced dividend taxes from
38.6% to 15%. Thanks, Mr. Bush. Thanks for
nothing. I can’t blame him for more Maul Street
smoke and mirrors. He has just made it cost less
to get back your own money.

Companies seldom pay large dividends
and they are paid quarterly. A $30 stock that pays
a 4% dividend ($1.20) on a quarterly basis shows a
decrease in the stock price that day of 30 cents
per share and is lost in the noise of trading. Few
notice that part of the price change is due to the
“dividend”.

When you own the stock of any company
the most important criteria is to find one that is
in a long term upward trend. Never buy a stock
that is showing a decline no matter how “good” the
company may be. Even sideways movements should be
avoided. Keep in mind you are buying the stock to
make money. Forget the dividends and all other
“reasons” and remember if it isn’t going up, don’t
buy it!