Originally posted 04/12/2021
Over the years as a financial planner I have developed a few pet peeves. It was fun to jot a few of them down below.
Stock dividends can make some investors mouth’s water, but they shouldn’t. Dividends are simply cash distributions from companies, and investors should not have a preference whether or not a company pays dividends. All anticipated dividend payments should already be appropriately priced into the current stock price. The argument generally goes that a stock paying dividends helps investors avoid selling shares for income during a down market. Unfortunately, there is no basis to this argument as the most recent economic downturn caused hundreds of companies to cut their dividends.
The stock price of a public company will drop by its dividend amount after it goes ex-dividend, showing you could simply create homemade dividends by selling shares. A stock trading at $50 that will soon pay a $1 dividend will be at $49 per share after it goes ex-dividend (plus or minus any natural market changes on the day). A stock trading at $50 that retains all of its earnings will still trade at $50.
Phillip Murphy of S&P Dow Jones Indices compares homemade dividends versus natural dividends in the chart below:
It’s a neutral event between the two.
Corporations do not pay taxes. No I am not saying corporations avoid taxes. I am saying they do not pay taxes. A corporation is a piece of paper, and a piece of paper cannot pay taxes. Similar to how property does not pay property taxes, the property owners do.
People pay taxes, nothing else. A tax on business profits is generated from one of three ways:
1. Lower total compensation for employees
2. Higher cost of products or services to customers
3. Lower investment returns for owners/shareholders
Any tax on corporations is a tax on employees, customers, or shareholders. In other words, it’s a tax on people. It’s a good old fashioned sleight of hand.
While we’re talking taxes and in the midst of an extended tax season, it’s a good time to talk tax deferral. Tax deferral is incredibly popular, whether using IRAs, 401ks, 1031/1035 exchanges, opportunity zone investments, exchange funds etc. Further, it is common to defer selling an investment at a large capital gain due to the fact we do not want to deal with the tax implications.
But what are we deferring to exactly? Sometimes, we are not even projecting to defer to a lower rate at all. We are simply kicking the can on paying the bill. This can, at times, lead to missed opportunities elsewhere.
Tax deferral could definitely be a worth strategy if we expect any of the following to happen:
But every individual tax deferral decision should be made independently, and I am afraid rules of thumb do not apply well in this regard. Tax deferral has become the default strategy for many people, but it needs to be analyzed.
I know you will find this shocking, but I do not spend time in casinos and I do not bet on sports. I am not opposed to people doing so. If your finances are in good order and you find it entertaining, have at it. None of the clients I speak to about their casino trips actually believe it is a path to long-term wealth creation. We all know what the odds are, not good.
Every now and then I’ll run into an old acquaintance or meet someone new, and once they know what I do for a living they inevitably start telling me about their portfolio. It seems to usually consist of a couple crypto coins, a couple marijuana stocks, some electric vehicle company no one has heard of etc. They usually ask what I think of their holdings. This is where it goes off the rails a bit.
At first I think they do not know the odds of success from what they’re doing, which are also not good. Surprisingly, numerous times the response on the other end has gone “Oh I actually know that, I just really enjoy the analysis and picking individual companies”. What I heard was “I enjoy doing long-term damage to my wealth”. Mismanaging your life savings is a bit different than blowing through $100 every couple of months at the casino.
I will use the logic next time I visit my doctor “Doc, I KNOW McDonald’s french fries are bad for me, but you don’t get it. I really enjoy them!”.
You’ve likely heard a statistic like this before. I’ve heard it many times, whether it’s 75%, 80%, 90%, it doesn’t matter. The number doesn’t bother me, it’s the interpretation that really bothers me.
75% of drivers CAN be above average (but they probably aren’t). Hell, 99% of drivers could be above average (but they definitely aren’t). The people doing this surveys seem to be confusing mean with median, and if they don’t know what a median is, then they shouldn’t be on the road anyway.
Imagine you have 10 people in a room and 9 of them have $1 million each, while the 10th has $0. The average net worth in the room is $900,000. 90% of people in the room have an above average net worth.
I was talking to a friend recently and he brought up a stock that was currently at $40 per share. He said he owns it as “they’re saying it’s going to $80”.
I don’t know who “they” is, but a couple thoughts to dive into when you hear this type of analysis:
I hope you’ve enjoyed today’s rant! I’ll have to add to this one as the years go by.
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