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stocks dividends

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April 5, 2025 Score: 9 Rep: 53,906 Quality: Expert Completeness: 30%

A truism in investing is that higher returns are almost always correlated with more risk. It is up to you to decide how much risk you are willing to accept for higher returns.

A 10% dividend company is likely fairly stagnant in price and may even be anticipated to decline, hence the reason for increasing the divided to attract investors. If the price declines, then 10% of that price also declines.

All in all, I wouldn't say it is a red flag to avoid at all costs, but tread lightly and don't put all your eggs in that basket. Do your research and make sure you understand why the dividends are higher than average and what the historical trends in dividend rates are for the company. If it suddenly jumped from 1% to 10% that would be a red flag for me. However, if they have been steadily increasing over years and the financials look solid it might be worth taking on some additional risk to chase the potential higher returns.

Just remember, there's no free lunch. This isn't a secret "Wall street hates this one weird trick" scenario. If this were a slam dunk, then smart money would be flooding into it.

Summary: 10% dividends is a yellow flag. Do extra research into why they are so high. Don't jump in with both feet.

April 7, 2025 Score: 6 Rep: 147,903 Quality: High Completeness: 30%

Dividends are not "return" - when a company pays dividends, it's price fundamentally drops by the amount of the dividend. That dividend must be paid for with cash, so the company's assets (and hence its immediate value) drop by that amount. So a stock that "pays a 10% dividend" is effectively selling 10% of itself every year and giving the proceeds to shareholders.

If you have a stock worth $100 per share and it pays a $10 dividend, after the dividend you'll have a stock worth $90 and $10 in cash.

Stocks can (and often do) recover the drop in price over time as it continues to grow, but fundamentally you'll see a drop in the price the moment shareholders are entitled to the dividend (the "ex-div" date).

There's nothing wrong fundamentally with investing in a stock that pays a 10% dividend - it's possible that they are flush with cash each quarter and don't have anything better to do with it (invest back in the company, pay debt, etc.). But it's not "income" to the shareholder, just a conversion of assets from stock to cash.

You could get the same effect (likely with different tax ramifications) from holding a stock that did not pay dividends and selling 10% of your shares every year. By receiving dividends instead, you avoid transaction costs and fractional shares.

SECONDLY

Since you mention that you are retiring soon, I'm presuming (hoping) that you're setting up your IRA to withdraw a certain amount periodically to live on. You will be taxed on the withdrawals from your Traditional IRA as ordinary income, meaning there is no capital gains tax or special tax treatment for dividends to consider. All of the facts above about dividends having no impact on "income" are also true within an IRA - you should be planning your IRA allocation not based on dividends, but based on how much risk you can tolerate. Generally, as people retire, them more more and more of their assets to "fixed income" investments that do not move up and down with the market as much. Some people think of dividends as "fixed income" which is certainly not the case for the reasons discussed above.

It may be good to keep some assets in more risky investments depending on how much you have saved and how much you plan to withdraw. But dividends are usually not a concern within an IRA because you don't get the special tax treatment.