Personal Investments • Re: Dividend Fallacy

Here is a quandary. Is the dividend from a high-yield (i.e. junk) bond income? Because of the frequent defaults in this asset class and thus loss of principal, returns are less than dividends distributed.

That's the case with any investment where the price keeps decreasing over time, isn't it?

I think "dividend fallacy" is usually used to refer to stock dividends, not interest earned on bonds.

***

Thus, is the selling of principal income?

Is it money received through investment? Or the return of money invested? I'd say the latter.

To extend, I can structure dividends to almost any level up to 100% as you desire. I used to work with oil well trusts. Buy them at $100, receive dividends of 25% for 5 years, then cap the wells. Is that $25 dividend really income or a return of capital?

That's an example of an investment where the price decreases to $0. With a duration of 4 years.

I get your point, I think. That stock dividends are best thought of as a return of capital over time, because that is what they are.

But it doesn't matter if you think of stock dividends as income or a return of capital over time. They still have a point. It's money you are receiving from an investment you have made - and what you do with that money is up to you.

When quibbling over personal preferences (based on individual circumstances) for how capital is returned leads to a question like this:

All, if dividends aren't really income, what is their point?

Maybe it's time to take a step back for a moment and remember that the purpose of this forum is to help people, not confuse them.

There's nothing wrong with dividends - it's just that people who get dividends on stock holdings in taxable accounts don't like having to pay tax on them when they're going to turn around and reinvest them anyway. That's it. And if that's not you, there's no problem.

Statistics: Posted by Beensabu — Tue Oct 15, 2024 12:27 am

---