I can’t speak firsthand since the company I tested it with(Lending Club) was founded in 2007 with their IPO being in 2010. Prosper was the first peer to peer lending group but they all were having growing pains around the time of the last recession. I was unable to use prosper as they had no support for my state. I would encourage folks to do a test drive with a smaller amount of money before dumping large amounts of cash into them.
With the way things look on the horizon we may very well get to see how p2p lending does in a recession soon. That’s not something I’m happy about. Of the two I much prefer the dividend aristocrat’s.
Shandril, do you by chance know how to calculate the actual rate of return factoring in the tax savings? I did some searches but couldn’t find it. ie a stock paying a 2% dividend isn’t really 2% if you are taxed 15% less on it than the equivalent funds in interest income.
Well that’d depend on tax bracket. Qualified dividends get taxed at the rate of long-term capital gain distributions so either 0% (for low MAGI), 15% for most middle MAGI, or 20% for high MAGI. The most likely scenario (maybe not here though) is people with MAGI of $78-$169k getting taxed 22% marginal rate for ordinary income (and CD interest). For them, the capital gains are taxed at 15%. Same 15% rate with people in the 24% marginal rate in the next bracket up to $321k MAGI. So you’re looking at straight 7% or 9% difference in after tax rate of return.
In this scenario, a 2%, CDs yields 1.56/1.52% after tax while 2% dividends would yield 1.7% after tax. If you wanted to turn this around a bit, a 2% CD would compete with 1.84%/1.79% dividends. Similarly a 3.5% CD would yield the same after tax as 3.2%/3.1% dividends returns.
All those differences are within the ballpark of where people typically decide to switch one CD rate for another.
Obviously, this does not take into account any stock price fluctuations for actual returns but like you pointed out those are only paper gains/losses until you sell. But it does influence a bit when you decide to jump in.
The assumption here is that the underlying value doesnt really matter. A $100 stock paying 4% is paying $4, whether that share price goes up to $120 or down to $80; you’re still getting the same annual return on what you’ve invested. The primary concern is that the dividend remains constant.
With no defined “maturity date”, ongoing principle value isnt relevant. A declining stock price is in effect nothing more than an early termination penalty. Obviously you’ll want to get out at some point, but that point is solely at your own discretion and thus can adapt to any swings in underlying value.
That said, it wasnt too long ago that GE was considered one of those “dividend aristocrats”…
The other caveat is that many of the “dividend aristocrats” are pretty well known and dividend yields are only around 2%. Pretty stable if you look at trailing/forward and 5-yr dividends… So even after tax, you’re not getting much dividend yield and with prices near all time highs, not likely to make much in valuation if jumping in now.
But it’s certainly an alternative if CD rates keep going lower. If recession hits within the next year and Fed lower rates back to near 0-0.5%, 2% dividends will be pretty popular…
You got rid of your suggested stocks? I was going to add ABBV, BNS, F, VLO which have been recent Motley Fool suggestion and are not on their 52 week high with very attractive dividends.
Glad the original got sent to my email then. I liked several of your picks although at&t was already a pick of mine. I started a portfolio on m1 finance with 10 dividend stocks.
Your feedback is appreciated. My goal was to give a general intro to the topic and then let other’s contribute so I’ll consider it a success on that. I certainly am no expert. Several other people have posted more information on the topic that hopefully helped. Again the article I linked to showed 8 stock’s that had continually paid out for 125+ years.
Survivorship bias should be mentioned… I’m not going to look it up, but I suspect there are many aristocrats of the past that are now either out of business or no longer aristocrats. These would not be shown on today’s list.
on the CD forum , you said that “. Any extra funds outside the “emergency fund” will be allocated to the 10 dividend stocks I purchased (currently up 5% from purchase price which is nice to look at but is mostly irrelevant since the dividend was the important aspect).”
Can you share the dividend stocks?
thanks
I’m pretty sure I and another user already did in earlier posts. I would instead encourage you to monitor the motley fool blog posts where they regularly list stocks they think are a good buy at THAT time. The other list would be the list of dividend aristocrats here: S&P 500 Dividend Aristocrats - Wikipedia
While it’s doubtful you will find those on sale pretty much EVER the steadiness of the dividend tends to overcome that.
Yet for all that steadiness, 20 of the 52 Aristocrats a decade ago are no longer part of the club. That’s pretty substantial turnover for something being sold based on it’s consistency.
You keep bringing that up…over and over…we get the idea…it’s not iron clad, that’s why the title says “low risk” and not “no risk”. Pick the ones that have paid for the last 75+ years. I was asked and I answered.
I apologize. The other post in the cd thread and here were other people but the topic of the 2008 crash and how the dividend aristocrat’s were impacted has been mentioned a few times by various posters which is why the only ones I recommended were the initial post which were ones that had paid for 125+ years.
Personally I don’t see an alternative when money sitting in the bank is losing value and not earning interest. Any normal retirement scenario is going to have a substantial amount invested in the market. The alternative is to invest in some of the dividend appreciation ETF’s or managed funds. If you have alternative suggestions I’d love to hear them.
I liked several of your picks although at&t was already a pick of mine. I started a portfolio on m1 finance with 10 dividend stocks.