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Does a dividend strategy make sense? Dividends Tax Disadvantages & Co!
"Dividends are the new interest" or "With dividends to financial freedom" are phrases that are thrown around again and again.
But what do taxes make of "the new interest"? And how much do I have to invest to actually financially free through dividends to be?
In today's post you will learn 5 Dividend strategy disadvantages know. If you are a dividend hunter, you may want to rethink your strategy. And if you are planning a dividend strategy, you will (perhaps) discard it after reading this article.
I don't want to get too much ahead of myself, but here are the 5 disadvantages of a dividend strategy swiss-wide that slow down your asset growth!
Table of contents
Dividend Strategy Switzerland: These 5 disadvantages slow down your wealth accumulation!
Admittedly, a distributing strategy has an extremely strong positive influence on the mind. Who does not like to see at regular intervals Money flowing into his account? It always feels right and confirms to the conscience that you have made a good investment.
Unfortunately, a Dividend strategy Disadvantagesthat should not be forgotten. And anyone who studies the subject a little will quickly realise that this is Often money burnt will. Let's move on to the 5 biggest disadvantages of a dividend strategy and why it is (mostly) not worth it.
1. tax disadvantages due to dividends tax Switzerland
Every form of taxation reduces the increase in wealth. Under Swiss law, dividends are subject to a Tax on the gross distribution amount. Private investors must declare income from dividends in their income tax.
Added to this is the inhibition of the best financial instrument for long-term investments: the Interest-rate effect. Most investors often spend returns instead of reinvesting them to generate greater asset growth.
Depending on the marginal tax rate, the return with dividends is reduced considerably. Price gains, on the other hand, are initially tax-free. The big disadvantage of a dividend strategy lies in the Continuous taxation.
A total tax loss is a Mix of dividends and corporate returns. Imagine that you have to close a position in the portfolio with a loss and have paid additional taxes on dividends for years. That's not how wealth growth works!
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2. high costs
On the market there are numerous ETFswho pursue a dividend strategy and can help you implement them with ease. You don't have to scrutinise or keep an eye on companies with these dividend ETFs. The Workload is reduced so strong.
However, there is one striking Disadvantage of the ETF dividend strategy: The high costs (TER). The manager of the ETF wants his piece of the pie and settles on a percentage basis. Some Dividends ETFs cost 0.95% and more administration fee per year!
If your ETF has an annual dividend payout of 4%, you will effectively (before tax) receive only 3.05%! After tax, the return drops significantly again.
3. missed investment opportunities
Another disadvantage of a dividend strategy are Missed opportunities in the growth market. This point actually goes hand in hand with point 4 of limited choice.
Companies like Tesla and Amazon do not pay dividends, but show enormous corporate growth. This is reflected in the share price. If you look at the last 5 years of both companies, you would have missed out on profits of over 500% with a dividend strategy.
As a dividend investor, you must also bear in mind that the capital paid out is missing from the company and thus cannot be used for developments and other profitable aspects.
4. limited choice of companies
Building on the third dividend strategy disadvantage comes the limited selection of companies added. Through a defined investment strategy, you define the framework conditions that inevitably affect the selection of companies.
If you follow a dividend strategy, you limit yourself to companies that pay dividends. A yield of less than 4% is a very low yield. little compensation for an enormous amount of work in your research and analysis. Do you have access to a Dividend ETF back, high costs come into play.
5. unprofitable risk/return ratio
Due to the limited selection in (low-growth) companies is the Risk/return ratio unprofitable. Distributions in the form of dividends are nothing more than a repayment of the capital invested to the investor.
Companies that average dividends have reached the zenith and can pay for the No high-growth balance sheets prove.
Admittedly, there are exceptions like Procter & Gamble, which has had a share price increase of almost 100% in the last 5 years and pays a dividend of between 2% and 3%. Here, the exception makes the rule and is still laughable compared to stocks like Tesla or Amazon.
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Are there also dividend strategy advantages?
A dividend strategy can also Advantages (especially from a psychological point of view). However, dividends are generally not suitable for building up assets. As mentioned, there are exceptions.
Some advantages of a dividend strategy are:
- Available Cash flow
- High-dividend companies are considered to be "safe haven
- Regular payments have an effect motivating
What is a dividend strategy?
In a dividend strategy, the focus is on high-dividend stocks. This form of investment can be achieved through an ETF or individual shares. The higher, steadier and more stable the distributions, the better.
Large listed companies usually pay out a low single-digit percentage as a dividend. Typically a return between 1% and 4%These have a strong correlation with the current economic situation and may well fall below or exceed these values.
Dividend hunters frequently focus on so-called Dividends aristocrats. These are companies that have increased their payouts every year for the last 25 years. Well-known examples are McDonalds and Procter & Gamble.
One of the core objectives of a dividend strategy is to.., Generate cash flow. People often interpret this form of investment as "financial freedom". But most people forget that this requires a large foundation: several hundred thousand francs.
Conclusion: does the dividend strategy make sense? Only to a limited extent!
Dividends have a legitimate position as a form of investment. However, you should not adopt this investment strategy for your asset accumulation without being asked, because the above-mentioned Dividend disadvantages have a strong influence.
For many, the better alternative is probably a sophisticated ETF Savings Plan with a later withdrawal from the portfolio. At the same time, the costs are manageable, often even extremely low. Also the Return on investment lies in the High single-digit range - With a bit of luck, even in the good double digits. As an example you can look at the S&P500 index. Over the last 92 years, the index has grown by 8,92% per year. Without taking dividends into account!
If you are nevertheless thinking of focusing on dividends, you should always consider the following consider numerous aspects in your strategy and see if it is worthwhile in terms of TaxesThe following table shows the real value of a dividend strategy in terms of costs, risk/return ratio and effort.
Feel free to share your opinion in the comments!
10 responses
Well, the article has positive points that certainly have to be taken into account.
But what doesn't work at all is the comparison with shares that have gained X % in the past. If I knew which shares would rise by X% in the future, I wouldn't have to work for a long time. Buying these stocks at the right time and then selling them in time is easy for everyone in retrospect. Example: Rose Plus 300% or more and then -90%, then you have a loss of X%, of course you can set a stop etc.. But if you set a stop, you might already be out at 30%. Business on the stock exchange is not that simple.
You don't have to invest 100% in dividend shares, but rather according to strategy XY.
Hello Max
This point goes hand in hand with point 4: If the dividend criterion is never broken, there are significantly fewer investment opportunities available.
But if the strategy is broken and open, as you say, this problem naturally disappears.
This article is deliberately intended to take a somewhat critical look at the dividend strategy. But don't worry, all dividend fans will also find a Contribution with all dividend benefits 🙂
The post was shared by iffp. Has the content thus been assessed as correct?
1. "Some dividend ETFs cost 0.95% and more" - some do not. The cost of an ETF does not depend on the dividend.
2. "Investors spend the dividend instead of reinvesting" - this cannot possibly be the problem with the dividend.
How do I find the next Amazon or Tesla stock? Probably not comparable to Novartis, Nestlé and Co. in terms of risk/reward ratio. Most Teslas of the future as of 2021 are trading at -70-90% YTD as of 2022. Tesla -62.44% YTD.
4. "Companies that pay average dividends have reached their zenith and cannot demonstrate high-growth balance sheets." - so I see black for all SMI investors, pension funds, etc. with +50% in Roche, Novartis, Nestlé and Zurich. The average dividend has its origin in the high share prices because the companies have rock solid balance sheets - not the other way round.
5. 60% of the DAX are due to dividends.
6. you have not understood the principle of the dividend if you only evaluate the dividend at the purchase date. Most sustainable companies increase the dividend continuously. Their dividend yield (backdated to the purchase date) thus increases without new capital.
Unfortunately, I don't have time to go into all the points, but iffp shares a post with a recommendation on crypto and robo-investing. Unbelievable for me.
In the meantime, I look forward to the 2023 dividend season, which should break all records - even in a crisis.
Thank you for finally taking an objective look at the dividend hypetrain. Of course, it's more boring than a fancy YouTube video with Excel charts of exploding dividend totals, but at least the real-world facts are not lost.
To point 1, I would add that the "passive" interest-interest effect is massively reduced by the 35% withholding tax immediately due on dividends paid out. Even if the effective tax rate is more favourable in the end, you first have to prepare everything for the upcoming tax return and then remember to manually pay the "lost" XX% into the custody account. - If at all possible, it is better to reinvest.
Thanks for your comment, Lars! 🙂
And thank you also for pointing this out, it is in the post but was somewhat lost. Very important to underline this.
Greetings,
Eric
Point 2: The argument seems contrived, there are also quite expensive non-dividend ETFs. The "distributes" feature does not seem to me to have much correlation with higher TERs.
Point 3: And you can certainly find many counterexamples with individual shares of companies with dividends that have beaten Amazon. Which is a little easier right now because Amazon have fallen well this year. Comparing individual shares with "the market" doesn't make much sense to me anyway. It doesn't matter whether the stock is paying dividends or not. Other examples of companies that are growing and paying dividends: Microsoft and Apple.
Point 4: Again, this idea that this only applies to stocks that pay out. If you select individual stocks, you always have more work, regardless of whether they pay out or not. In addition, the filter "distributes" is not as exclusive as thought, there are still many thousands of companies left. By the way, it also works the other way round: If you exclude distributing shares, you also exclude a lot.
Point 5: Sorry, but that's just bullshit. Dividends do not usually eat into the substance of the company. Rather, they are paid out of the company's current profits. If you were to constantly pay back capital, the company in question would cease to exist in the medium term. Apple, Microsoft, Procter & Gamble, companies in the oil & gas sector - these are all growing. While some of the supposed growth companies have taken a beating this year.
Unfortunately, the article is a bit weak.
Dear CW
every opinion has its place here 🙂 your criticism may be partly justified, but you should also note that this contribution is not completely "alone" with these statements. Some excellent economists underline the points made in the article.
By the way, the aim was not to talk dividends down. Dividends also have their advantages (see other posts in the blog). The aim was to point out the disadvantages that are unfortunately all too often swept under the table in this topic.
Sorry if anyone feels stepped on. That was not the aim.
Greetings!
Thank you for the article. I'll try my hand at constructive criticism:
Unfortunately, this article pretends that there is only an either-or strategy, when in fact there is a both- and strategy, where one part is invested in high-dividend stocks (or in corresponding ETFs or other assets that generate a corresponding cash flow), and the rest can be invested differently.
Regarding financial freedom: This can indeed only be achieved from an amount well into six figures, but this is largely independent of strategy (note: geo-arbitrage can help here - Hungary or Cyprus instead of Switzerland, for example, then it can also turn out quite differently from a tax point of view), because regardless of whether distributions or piecemeal sales: Somehow the money for living expenses must be withdrawn from the portfolio.
Thanks for your advice Tomj,
with geo-arbitrage, this actually works with a 6-digit portfolio. In Switzerland, however, depending on the standard of living, 1-2 million in invested capital will quickly be necessary.
If I had to live off the portfolio today, I would do so with normal sales, but I would structure them dynamically depending on the current market situation.
Best regards 🙂
A completely forgotten point:
In which form of provision do I invest? Free or tied pension provision?
Why the question? In the case of tied pension provision or vested benefits, income is tax-free, i.e. the marginal tax burden has no negative impact on the net return.
Today, there are interesting solutions where investments can be made in the 3a sector with a focus on divide.