Actually, when a company pays out a dividend, they’re taking part of the value of the company and giving it to owners of their stock in the form of cash. This reduces the value of the company, and thus the price of the stock.

This doesn’t increase (or decrease) the overall return that the stock-holders get. However, if they own the stock in a taxable account, it does mean that they have to pay more taxes than if the dividend hadn’t been paid at all.

This means that investing in dividend-paying stocks (or the mutual funds that focus on them) isn’t a slam-dunk investing idea. It has definite drawbacks, and if one insists on including these in one’s portfolio, one has to do it right.

Should You Invest in Dividend-Paying Stocks?