Investing In Dividends For Dummies
Overview
Earn predictable returns, hedge against inflation, and get cash payouts with dividend investing
Investing In Dividends For Dummies gives you detailed information and the expert advice you need to successfully add dividends to your investment portfolio. In a time of market volatility, dividends are safe bets. They’re also a great choice for investors looking to supplement retirement income. This book offers clear explanations and tips to help you make careful and informed decisions about dividend stocks and their place in your portfolio. You’ll learn how to research and invest in dividend-paying companies, choosing among traditional share purchases, exchange-traded funds (ETFs), or Dividend Reinvestment Plans (DRIPs). You’ll also get ideas for increasing your dividend investments over time. With this Dummies investing guide, the check’s in the mail!
- Understand dividend stocks and develop a smart strategy for adding them to your portfolio
- Find out what to look for when researching dividend-paying companies
- Calculate the risk, growth potential, and return potential for your selected investments
- Decide whether and how to reinvest your dividend payouts to grow your portfolio
Investing In Dividends For Dummies is perfect for investors looking to find a stable and predictable way to earn income from their investments.
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About The Author
LAWRENCE CARREL is a freelance journalist who helps firms in the financial services and cannabis industries educate their clients.
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Stock market investors and analysts often take sides on the issue of investing in dividend stocks. Here, the ten most common myths and misconceptions about investing in dividend stocks are busted to provide you with a more balanced view.
Dividend investing is only for old, retired folks
Dividend investing is admittedly attractive for seniors, whose goals are typically capital preservation and income.
Here are some of the most common and serious dividend investing mistakes you can make; avoid them and eliminate some of the risk inherent in the world of investing.
Buying a stock solely on a hot tip
A hot tip is just that — a tip, an idea to follow up on. You still need to do your research, which means you should pull up the company's quarterly statements over the past year or so, crunch the numbers, see whether any insiders are buying shares, and perhaps even speak with one of the company's representatives (or at least your broker) to check on the company's prospects moving forward.
With dividend stocks, you have two ways to win: when the share value rises and when the company cuts you a dividend check, paying you a portion of its profits. If the share price rises by 4 percent, and the company pays a 3-percent dividend, you pocket a 7-percent profit, minus taxes, of course. (Or you can reinvest your dividends to buy more shares.
In the ten years following the passage of the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA), the taxation of dividends saw some changes. At the time of this writing, the most recent rates came from the American Taxpayer Relief Act of 2012. These rates are shown in the following table. As always, consult an accountant for any changes in tax rates.
Companies originally established dividend reinvestment plans, or DRIPs, to enable their employees to invest in the company through stock purchase plans. These companies soon realized that they could expand the program to investors, and because the plans were already in place, they could cost-effectively handle the expansion.
Dividends
Value, income, and growth aren't mutually exclusive. Even growth investors are looking for bargains, and all investors are ultimately trying to score some income. No investor is going to pass up a true bargain.
The sweet spot of stock investing occurs when you find a company exhibiting characteristics of all three approaches: a hot stock at a cheap price.
Total return measures a stock's total performance from both dividends and share price appreciation. If a stock starts the year at $50 and pays a $4 annual dividend, the dividend yield is 8 percent: $4 / $50 = 8 percent. If the stock gained $6 to end the year at $56 (up from $50), it saw capital appreciation (increase in value based on its market price) of 12 percent:
$6 / $50 = 12 percent
Add the dividend yield and capital appreciation together, and you get the total return of 20 percent.
Dividends
The government is constantly fiddling with the tax code in an attempt to collect taxes without choking the life out of the economy. As a result, those tax incentives can go poof any time Congress decides to pull the plug or simply fails to renew the incentives before they expire. Some changes in the way returns are taxed can even tip the scales when you're trying to decide which investment is a better deal.
Dividends
Eeny, meeny, miny, moe is no way to pick dividend stocks. Savvy investors carefully inspect the company reports — balance sheet, income statement, and cash flow statement — and crunch the numbers to evaluate the company's performance, at least on paper. As you prepare to evaluate a company, research the following figures or calculate them yourself by using numbers from the company's quarterly report.
Dividends
All dividends aren't created equal. Some qualify for the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) tax breaks, and some don't. Almost all dividends paid by U.S. corporations qualify for the lower tax rate. Notable exceptions included REITs (real estate investment trusts) and master limited partnerships (MLP).
Dividends aren't paid like clockwork. Unlike other forms of income-generating investments, companies have no legal obligation to pay dividends. This fact means the company's board of directors must actively declare, every single quarter, whether it will pay a dividend.
Because dividend stocks, like all other stocks, can be traded on the open market, companies need some way to determine who (the buyer or the seller) gets the next dividend payment when shares are exchanged.
Dividends
Discount brokers are best for the do-it-yourselfer. If you like to do your own research, understand how to trade, and don't want investment products pushed on you, you'd probably prefer a discount broker.
The difference between discount brokers and full-service brokers is the same as the difference between a cashier and a top-notch salesperson.
When you're focused on the strategies involved in dividend investing, you might forgot about some of your basic financial needs. Everybody should have a little bit of saver in them so that they have some cash on hand to deal with necessities and emergencies. Try the following saving investment strategy:
Establish a six-month savings buffer — enough money to cover monthly expenses for six months in the event you lose your job.
Dividends
Investors often talk about the beauty of passive income. Instead of having to work to earn a buck, you put your money to work for you. Dividend stocks enable this dream to come true. You buy shares, and as long as the company is profitable and paying dividends, you have a steady source of income without having to lift a finger.
Dividends
If you're buying and selling individual dividend stocks on your own, consulting a financial advisor can be beneficial, especially when you're first starting out. If you're simply buying shares in a mutual fund, hiring a financial advisor may only add another expense. If you've done your homework and chosen a mutual fund with a good manager, then you already have a financial guru on your side.
Receiving dividends is like collecting interest on money in a bank account. It's very nice but not exciting. Betting on the rise and fall of share prices is much more exhilarating, especially when your share prices soar. Placing excitement to the side, however, dividend stocks offer several advantages over non-dividend stocks:
Passive income: Dividends provide a steady flow of passive income, which you can choose to spend or reinvest.
Dividends
Having an expert around to watch your back and call your attention to potentially incredible investment opportunities may sound like an ideal arrangement, but before you take the plunge, consider the following pros and cons of hiring a full-service broker.
Full-service advantages
A trained, skilled, and experienced full-service broker who's committed to serving your best interests can save you loads of time, energy, and worry while potentially boosting your portfolio's earnings more than enough to cover his fees and commissions.
Dividends
Dividend investors tend to be more committed than non-dividend investors. They're in the market for the long haul and want to own shares in companies that deliver returns in good times and bad. As a result, dividend shares tend to out-perform non-dividend shares when the market heads south. Several factors contribute to this trend:
When stock prices are falling, investors are under pressure to sell to either secure their gains or limit their losses.
Dividends
Even if the dividends come from a qualified company, another factor that can disqualify dividends from the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA)-preferred taxed rate is a failure on your part to hold the shares long enough.
You can't just buy a dividend stock a day before the ex-dividend date (point after which the dividend is removed from the share price), sell your shares the day after you collect the next dividend, and expect to receive preferential tax treatment under the JGTRRA.
In taxing dividends, the government engages in a form of double dipping, more commonly referred to as double taxation. With double taxation, the government collects taxes on the same money twice: It taxes the company's profits (typically at a rate of 35 percent) and then taxes the dividends investors receive, which come out of the company's after-tax profits.
Dividends
With growth investing, you buy stocks in companies with earnings and revenue growth rates that exceed the market average in anticipation of big jumps in the share price; these stocks are typically young or small companies that reinvest their earnings to maximize growth and typically don't pay dividends.
Growth investors are like scouts for professional sports.
Among stock investors, income and dividend investing are one and the same; the income investing approach encourages you to buy investments, such as stocks or bonds, that promise a steady stream of income.
For most of history, investing was income investing. Whether investing in stocks or bonds, in small or large businesses, investors needed income from their investments to cover their daily expenses.
If dividends meet certain qualifications the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) reduced the dividend tax rate from the investor's ordinary income tax rate to a maximum of 15 percent for most taxpayers or 5 percent for taxpayers in the 10- to 15-percent tax brackets.
This tax cut represented a huge savings for dividend investors, as shown in the table, which compares the old and new rates, their pieces of your dividend per $1,000, and how much the new rates save you.
Dividends
In the midst of investor irrationality, dividends tend to calm the raging stock market seas by injecting some sanity into the marketplace in a couple of ways.
First, they make managers more accountable to shareholders. Shares of growth companies can be particularly vulnerable to price fluctuations. Obsessed with growth and lacking the accountability to shareholders that dividends provide, managers often spend profits to acquire businesses that don't fit strategically with their main business.
Dividends
There is no such thing as safe investing, only safer investing. When investing in dividends, you can lose money in any of the following ways:
Share prices can drop. This situation is possible regardless of whether the company pays dividends. Worst-case scenario is that the company goes belly up before you have the chance to sell your shares.
Mutual funds are pass-through investment vehicles: If the funds pass at least 90 percent of the portfolio's profits to the shareholders, the fund's tax obligation gets passed through to the shareholders as well. If the fund holds any income, it must pay taxes on that, so most funds pass through 100 percent of their profits.
In a value investing approach, you buy stocks with steady profit streams selling at prices below their true market value. Value investors search for underappreciated stocks: companies with a total stock value lower than the value of the shareholder equity, also known as working capital.
These stocks are typically well-established companies that pay dividends, especially companies way down in price compared to their historical average share price.
Dividends
Historically, widows and orphans stocks were shares (typically in utilities) that brokers bought without fear of losing money or cutting their dividend. These stocks were suitable for widows and orphans because they continued to generate income to put bread on the table in good times and bad.
The classic dividend story consisted of someone, typically a grandma or great-aunt, who bought a hundred shares of AT&T in the 1930s or 1940s and became rich by holding on for decades as the dividend and share price just kept rising.
Each year, typically in January or February, but sometimes as late as early April, you can expect to receive a late Christmas present from each of your dividend stocks and mutual funds: a 1099-DIV. The 1099-DIV reports all your taxable income distributions from the fund so you can account for them appropriately on your tax return.
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