/biz/ - Business & Finance

>>57296938
>They still think it's okay to hate.
>Reporting for racism outside /b/ helps.
Ironic. The Talmud is the most racist and hate-filled document in human history.

>OUTSIDE a tax-advantaged account, a dividend stock will lose out to a growth stock over time because the dividends are taxable as long-term capital gains. This eats into your investment capital, and saps your compounding.

>Consider two equivalent stocks -- a growth stock (Stock G) and a high-dividend stock (Stock D) -- both of which yield 10% per year. Stock G earns its 10% by price accumulation alone, and Stock D earns its 10% by paying a 10% cash dividend. You own 1 share of each, and they are both worth $100/share. At the start, therefore, both Stock G and Stock D are worth $100.

>At the end of 1 year, Stock G is now worth $110 (10% growth), and Stock D is still worth $100 but has paid you a $10 dividend which you re-invest. Your return on both stocks is the same -- before taxes. After taxes, however, Stock G is still worth $110 (no tax consequences) but Stock D has only returned you $108 because you paid 20% in capital gains taxes on the dividends. (I'm using 20% to keep the math simple in this example, but the principle is the same for any tax rate.) So after one year, Stock G is ahead by $2.

>After year two, Stock G is now worth $121 ($110 x 10%), and stock D is worth $108 ($100 original + $8 reinvested) but has paid you a $10.80 dividend, reduced by taxes to $8.64, for a total gain of $116.64. Stock G is now ahead by $4.36

>Hopefully you can now see where this is going. Every year the spread between Stock G and Stock D is going to get wider and wider because taxes aren't depleting any of your Stock G capital.

>INSIDE a tax-advantaged account, you don't suffer the tax hit when dividends are declared. You get to reinvest the full amount. Therefore, inside a tax-advantaged account, growth and distributions both add EQUALLY to your growth and your compounding. So what you should be focused on is maximizing your overall return (growth PLUS dividends) instead of focusing on one or the other.