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Dividend investing is one of the best ways to grow your assets and portfolio over the long term.
Dividends are great for several reasons.
- Owning property gives you a stable income
- Complicates over time and increases revenue
- Companies that pay dividends are usually the dominant players in their industry.
I’m sure there are many more, but let’s take a closer look at investing for dividends.
What is a dividend and why is it important?
Dividends are profits paid to the shareholders of a particular company. Many companies reward shareholders through dividends. The company’s board of directors can choose to pay him a fixed amount per share each period. Many companies pay dividends on standard time periods, such as quarterly or annually. For example, a company can pay a dividend of $1 per share per year. If you own 500 shares, you will receive $500 in checks annually.
This is a great incentive to invest in dividend companies. You’re essentially getting paid to own a good company, so what’s not to like? But that’s just the beginning.
One of the many perks of dividends is that you can usually choose to reinvest them. This means that you buy more shares in the company with your dividends. This allows for greater dividends and the power of compounding interest. This should not be ignored.it’s calculated Over the past 80 years, dividends have accounted for 44% of total stock market returns. This means that if you don’t reinvest your dividends, your 8% annual return suddenly drops to 5.5% annual return. It hurts in the long run!
Find dividend stocks
There are many ways to find high dividend stocks to invest in. Many of our great investment blogs focus on searching for these stocks. The most common way to find these stocks is through stock screening. I’ve used a stock screener in the past to walk you through the process, so check out my video if you’re not familiar with it.
The next common method is to invest in dividend stocks through mutual funds or ETFs. A very popular ETF is the iShares Select Dividend ETF (NYSE:DVY). The fund itself pays a hefty dividend as it holds the highest dividend stocks in the S&P 500.
When building the perfect portfolio allocation, consider including funds such as DVY and ETFs in your portfolio.
Problems of dividend investment
However, it’s important to remember that investing for dividends isn’t always easy, and chasing high-dividend stocks should suffice. Dividends may not matter at all, or they may paint a false image of the company. Some unscrupulous companies pay out insanely high dividends before bad things happen, simply to give investors and owners a paycheck before the company goes bankrupt.
As with any investment, it is important to do your homework and research on the company before investing, whether it pays dividends or not.
It’s also important to ask yourself why this company pays dividends. Usually, this means that the company has excess cash that they don’t know what to do with it, and they’re giving it back to you, the owner. In some cases this is a good thing. It can also create problems for future growth (such as why not invest in the next “big thing”).
Tax impact
Dividend investments are also subject to tax, depending on how you hold the dividend stock. If you invest in a retirement vehicle (such as a 401k or IRA) or within an HSA, you don’t have to worry about taxes on your dividends.
However, if you invest in a taxable account, you will be taxed on your dividends, even if you reinvest them. Please note that a reinvestment transaction is simply the receipt of a dividend and the purchase of new shares. So make sure you pay your taxes!
Dividends have two tax treatments: normal and qualifying. Ordinary dividends are taxed as ordinary income. Check your tax bracket to see what the tax rate will be.
Qualified dividends are eligible for tax benefits! According to the IRS, if you “hold the stock for at least 60 days in the 121-day period beginning 60 days before the ex-dividend date”, you are eligible for the dividend. . So basically if you own the stock for about 6 months or more before the ex-dividend date.
If you have a qualifying dividend, your dividend will be treated at the capital gains tax rate. There are three capital gains tax rates. Note that it depends on the file method. If you are a single filer, please check this.
Individual income tax category |
Eligible dividend tax rate |
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If you and your spouse are filing jointly, please check the following:
Eligible dividend tax rate |
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best place to invest in dividends
Depending on your strategy, there are some very sensible dividend investments. All of these options are included in our list of Best Online Stock Brokers.
If you’re investing in dividends through low-cost mutual funds or ETFs, you should consider Vanguard or Fidelity. They offer some of the best low cost index funds and you can reinvest your dividends in these funds.
M1 Finance is highly recommended for individual high dividend stock holdings. The reason is that M1 allows you to invest for free. If you want to own a basket of dividend stocks, you set the stock pie and M1 handles the rest. Reinvesting dividends also balances the pie.
Start M1 Finance here >>>
final thoughts
Investing in dividends is a smart strategy for long-term wealth. But before you get started, make sure you understand what dividends are, why they matter, and how best to invest in them.
Do you prefer to invest in dividend stocks?