Don't Be Fooled By Fake Dividends

Al Thomas
 


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The latest Wall Street investment advice is to buy a stock that pays a good dividend and reinvest it. Your money will compound. Another Wall Street lie.

If you have owned any stocks over the years you have received dividends - I hope. You also know that you have to pay tax on those dividends as the IRS considers them ordinary income. That does not seem right.

Let’s say you have been an owner of Microsoft stock for a long time. Recently they declared a $3.00 dividend on a $30 stock. WOW! That is great – 10% on your money. You are very happy.

Joe, your next door neighbor, heard they were going to pay a big dividend so Joe called his very smart (?) broker who confirmed it and he had the broker enter an order to buy a big block of the stock the week before the dividend was declared. Joe also received the same $3.00, 10% “dividend”.

Wait a New York minute. You waited a year to get that dividend and Joe rang the cash register in one week. That’s not right! Yes, and that wasn’t a true dividend. Don’t ask me why it is called a dividend because it isn’t. It is a capital distribution.

That $3.00 was a distribution of your own money back to you and to make it even worse you had to pay tax on it. Joe outsmarted himself and had to pay taxes when he should have stayed home in bed. The day before the Microsoft dividend the stock was $30. The day after the “dividend” the stock was $27. You got back your own money. YUK!

If you had bought a bond the day before the bond issued a dividend the cost of the bond price would have already reflected the dividend amount because the bond price would have been discounted. This is easily seen in the American Target 2020 Zero Coupon bond whose price reflects daily the cost of the bond that the purchaser pays. In other words, there ain’t no free lunch.

If you want dividends then buy U. S. Treasury bonds or bank CDs, certificates of deposit. Do what is called laddering. Buy different maturity dates: 3-months, 6-months, one, two-year notes. You can get almost any dates you want. This will give you an incremental flow of cash in smaller amounts.

These will be considered income which is taxable. Many municipal bonds are not taxable, but be very careful of these. Be sure they are Class A insured. Corporate bonds do pay more, but remember that as yield rises so does risk. Again AAA insured.

You want a return on your money, but more important, you want the return of your money.

Al Thomas’ book, “If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know. Copyright 2006 All rights reserved.

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