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Do dividends pay dividends?

What do Apple, Google, Berkshire Hathaway, Amazon, Microsoft and Facebook have in common?

First, they are six of the top 10 largest companies on the US stock market.

Second, each has been a far better investment over the past decade than the average large US stock.

And third, if you were a high-dividend investor, you would own none of them. Three pay no dividends and the other three pay a relatively small dividend.

So if you think a strategy that focuses on high dividends is appropriate, please reconsider.

Brokers like to push high-dividend stocks, especially for retirees, who, they say “need income”. But the real reason they push these stocks is job preservation: “You need me because I can find the best high dividend stocks.”

The far better strategy for stock investing is to buy the entire stock market, because you never know which stock will become the next Apple, Google, Berkshire Hathaway, Amazon, Microsoft or Facebook. I promise you: 10 years ago, no one could have guessed any of these stocks would do so well.

And if you need income? Create your own dividends. That is, sell a little bit of your winners. You save tax, because only the gain is taxable, whereas the entire dividend is taxable. You generate exactly the amount of income you need, instead of being hostage to whatever dividend a company decides to pay. Most importantly, you are more diversified. That D-word — not the “dividends” D-word — is the key to investing success.

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