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I've never really invested for dividends. I've always been more concerned with share price. I'd rather see shares that I own go up in value than receive a dividend. There are a few different reasons for this. One, dividends are taxed as income, and unrealized share growth is not taxed. Second, if a company profits $30 million, it is a company with $30 million dollars. If I own 5% of that company, I own 5% of a company with $30 million dollars now in its bank account. My shares are tied to that. If the company distributes that $30 million to shareholders, then the company I own has $30 million less on their balance sheet and the company is worth less than before. That has always been my thought process on dividends.
Recently, however, an investor friend of mine that I respect told me I should buy a dividend ETF from Schwab called SCHD. I've written about SCHD before. I've always known of its existence, but I never really considered investing into it. However, my investor friend told me that the fund has outperformed the S&P 500 over the last 10 years. After verifying that that was true (taking into account dividends), although slightly, the fund became more interesting. Now, just because SCHD outperformed the S&P over the last 10 years, does not mean that it will outperform the S&P over the next 10 years. It definitely does not mean that it will outperform the S&P over the next 40 years. Past performance does not necessarily equal future performance. That said, I decided to make SCHD a small amount of my Roth IRA.
The reason I bought this fund under my Roth IRA is so that I would not have to pay taxes on my dividends. Now, the only thing that I plan on doing with the dividends that I earn from SCHD is buying more shares of SCHD. SCHD is currently a very small part of my Roth IRA. That might change in the future.
I think that this is a good strategy, but it is worth noting that one cannot take their gains out of their Roth IRA until they are 59 1/2 years old. I do not plan to touch my Roth IRA at all until I am 59 1/2, and I plan to reinvest all of my dividends into more stocks held in my Roth IRA.
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