Why Not Just Use Dividends

Because the average dividend yield on most stocks has fallen to an all-time low of around 2 percent, you would find yourself wanting if dividends were your sole source of income. The reason stock dividends currently are so low is that most companies and shareholders believe that dividends are a poor use of a corporation's earnings. Shareholders who usually are trying to accumulate wealth would rather have companies either reinvest the dividends into strengthening product lines or expansion.

In other words, why distribute dividends when the company could make more money with these funds? Add to this the negative tax aspects of corporate dividends (double taxation), and you can see why the trend favors companies not paying dividends.

Also, if you attempt to just invest in higher-yielding stocks, you may equal 6 percent per year in income that the systematic withdrawal method traditionally provides you, but overall, find very little growth in your portfolio. The reason for this is

FIGURE 1.8

Growth of a $10,000 Investment

December 31,1925-December 31,1999

$25,000,000

$10,000,000

$500,000

$100,000

Growth of a $10,000 Investment

December 31,1925-December 31,1999

$25,000,000

$10,000,000

$500,000

$100,000

Company Term

Stocks Government

U.S. Treasury Bills

Consumer Price Index

Company Term

Stocks Government

U.S. Treasury Bills

Consumer Price Index that high dividend-paying stocks are usually in the mature stage of their corporate life cycle or they are companies that stress income over growth.

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