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Summary
- Some investors always function by estimating a set rate of return
- Others look for opportunities in dividend paying stocks and high-return assets
- People invested in dividend paying shares often end up with double bonanza
- On the contrary, there is an yearly tax liability with the dividend stocks
Investing in stock markets has been typically classified according to various characteristics of the assets and their respective risk-to-reward ratio. Some investors and traders always function by estimating a set rate of return, some manage to contain the overall risk of the portfolio, while some remain dynamic with the choices of investment as they tend to work with an objective to maximise the returns by not taking undue risks.
On the other hand, there is a strong bifurcation of the market participants on the basis of types of returns as a considerable section of people look forward to worthwhile capital gains over the years, whereas others are happy with periodic dividends.
Receiving dividends after certain intervals on the total shares is primarily considered a topping on the regular capital gains.
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This translates into a double bonanza for the investors as they garner a sizable dividend income everytime the company decides to distribute the surplus income to the eligible shareholders through dividends, alongside this, regular dividend-paying companies certainly register at least a return near to the rise in the benchmark index. In the worst of the times, the shares of a regular dividend-paying corporation generally remain in the positive territory on a long-term scale of one or two years.
While, on the other hand, the people also chase high-return stocks as the stocks with dividend yield below less than 2-3% looks less attractive as compared to the shares that have consistently posted a yearly return of more than 15%. Moreover, the individuals end up paying less taxes as compared to the people who have invested in dividend-intensive stocks as the sum of dividend income beyond a certain limit attracts heavy income taxes.
For instance, a dividend income after a permissible allowance of GBP 2,000 will be taxed at a rate varying between 7.5 to 38.1%. This implies that the person investing in dividend paying stocks will have to bear the burden of income taxes every time the company issues dividends.
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On the contrary, the people invested in non-dividend paying stocks will be obligated to pay income taxes on actual gains only, i.e., the moment they sell the assets. They are not required to pay income taxes on the notional gains, irrespective of the percentage of return, it can be 20% or 100% in the year.
Given the high tax liability due to dividend income, people still consider and lookout for high dividend-paying stocks for their portfolio. The reason is simple and clear. There will be a moderate certainty of regular income from the companies with a reputation of announcing regular dividends. The case is different with other corporations. In some cases, a high return stock ends up on a losing streak and finishes off on a negative footing on a yearly scale.
This means that there is no certainty with the return when it comes to capital gains. There can be successive sessions of notional gains, but some stocks end up losing a sizable chunk of market capitalisation at the end of year. Therefore, some beginners, risk-averse investors, and people with a poor risk appetite consider dividends over the prospective and expected capital gains in the future.
