Investing for dividends vs. capital gains

You have probably heard the investment analogy of milk vs. beef. As an investor, do you want to own a dairy cow that produces milk every day or do you want to own cattle that you slaughter for beef. Dividends are the milk for the investor and capital gains are the beef.

The investment world defines two types of financial returns: dividends and capital gains. In fact your tax collector (IRS in the USA) makes the same distinction. They tax dividends and capital gains at different rates.

The eclectic investor, YOU, will need to define your investing goals. A question that will come up is: “Should I focus on dividends or capital gains?” The investment world has made categories for you. Investors that focus on dividends are referred to as “dividend or income investors” and those who focus on capital gains are “growth investors”. There is also a category called “growth & income” which is a combination of the two.

What should be your investment preference: dividend or capital gains? I contend that the eclectic investor have their own label “eclectic”. It shouldn’t matter whether you are a dividend or capital gains seeker. Your focus should be on getting the best possible net after tax return for an equivalent level of risk taken. Don’t dairy farmers and cattle ranchers both make a living?

Again, milk or beef, shouldn’t matter as long as you are eating well. If you buy consistent dividend payers at the right prices you should do well. If you buy for growth companies that are performing well, at the right price you should do well too. If you are retired and need income but you own growth companies that don’t pay dividends, you can still simulate dividends distributions by selling a few shares every quarter and using those proceeds as if they were dividends.

The most famous investor, Warren Buffet, makes money from dividends paid to Berkshire Hathaway’s from investments in Coke, American Express and Well Fargo. But, Berkshire Hathaway itself has never paid a dividend to its shareholders. So, if you own Berkshire Hathaway are you investing for dividends or capital gains?

What do you prefer, dividends or capital gains? (Trick question for the eclectic investor)

In a future post, I’ll review in more detail how to invest for dividends, and why my Wharton Professor Jeremy Siegel in his book “The Future for Investors” says that that’s the way to go.

Please post any questions or points of view in the comment area.

Have a profitable day!


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