“Why You Should Think Twice About Dividend Stocks”

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What Are Dividend Stocks?

Dividend stocks are shares in companies that distribute a portion of their profits to shareholders. These payments, known as dividends, are typically issued quarterly, annually, semiannually, or monthly. In 2022, U.S. companies paid out over $547 billion in dividends, according to the Janus Henderson Global Dividend Index.

3 Reasons to Avoid Dividend-Paying Stocks

While dividend stocks can provide regular income, they come with certain risks and drawbacks. Here are three reasons to be cautious:

1. Dividend Payments Aren’t Guaranteed

Dividend payments can fluctuate. The dividend yield, expressed as a percentage of the current share price, can give you an idea of what to expect. However, high yields are not guaranteed to last, and companies may reduce or pause dividends during financial distress, affecting your long-term investment strategy.

2. Dividend Income is Taxable

Dividend payments are considered taxable income. Qualified dividends are taxed at the more favorable long-term capital gains rate, while nonqualified dividends are taxed as ordinary income. Heavy investment in dividend stocks can complicate your taxes.

3. Interest Rates Can Affect Dividend Stocks

Interest rate changes can impact the attractiveness of dividend stocks. When rates are low, dividend stocks are appealing because they often pay more than safer investments like CDs or Treasury bills. However, as interest rates rise, these safer investments may offer better returns.

5 Alternatives to Dividend Stocks

Diversification is key to protecting your portfolio. Here are five investment alternatives to consider:

ETFs and Mutual Funds

These funds allow you to buy bundles of stocks or bonds in a single transaction, providing automatic diversification and reducing risk compared to individual stocks.

Index Funds

Index funds track a specific market index, like the S&P 500, and are considered low-cost, less-volatile investments.

Bonds

Bonds are debt securities issued by government agencies or corporations. When you purchase a bond, you’re lending money that will be repaid with interest.

CDs

Certificates of Deposit (CDs) require you to lock up your investment for a set period. Upon maturity, you receive your initial investment plus interest. Early withdrawals usually incur penalties.

Money Market Accounts

Money market accounts earn interest like savings accounts but often come with a debit card or checkbook for easier access, combining features of checking and savings accounts.

The Bottom Line

While dividend stocks can be a valuable part of a diversified portfolio, they come with risks such as fluctuating payments and tax implications. Diversifying your investments can help mitigate these risks. For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you make informed financial decisions.

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