Dividend and Conquer!
Dividend and Conquer!
That’s the first thing that comes to most people’s mind when they hear the word “investing.”
But it doesn’t have to be that way! Ryan Moran has a suggestion that could help you build your nest egg with way less risk than you might think.
Ryan is a sought-after speaker and thought leader on lifestyle freedom. He specializes in creating extremely profitable cash flow streams and businesses without compromising lifestyle.
During our Money Revealed interview he told me one of his core beliefs is as follows…
You should be investing 10% of your take-home pay into long-term wealth-building assets that you never touch.
When I asked him for an example of this type of investment he said that his favorites are dividend-paying stocks.
So I got in contact with financial guru Mike Burnick. You may have heard of him through his appearances on Fox Business or his extensive work with Agora Financial as a financial analyst.
He’s here today to explain what dividend-paying stocks are and how you can benefit from them.
Get ready to learn with Mike Burnick!
Income on Autopilot
Hi, Mike here.
When it comes to quality in the investment world, dividends are one thing that will never go out of style.
A dividend is a distribution of a portion of a company’s earnings — paid regularly (typically quarterly) to a company’s shareholders. It can be issued as a cash payment or share of a stock or other property.
Dividends originally gained widespread popularity as a way to generate income for widows to live comfortably after their husbands died.
Before the 1960s, the conventional (but stupid) wisdom was that women were incapable of supporting themselves and income portfolios were referred to as “widows’ portfolios.”
All local community banks had trust departments with veteran bank officials whose job it was to take the life insurance money from widows and put together a carefully crafted collection of stocks, bonds and other assets that would generate enough monthly income for her to pay the bills, keep the house and raise the children.
The goal was not to get rich. The goal was to make sure the family’s income needs were taken care of.
Retirees soon realized that income portfolios based on dividends were an ideal way to enjoy a secure retirement.
Sadly, income investing is considered too boring and too unproductive. The process of building an income-producing portfolio has become a long-lost practice.
Not because interest rates are much lower but because income investing has lost its appeal thanks to the great bull market, which has spoiled investors into believing concepts like risk management and dividends aren’t important anymore.
Why dividend-paying stocks over traditional fixed-income investments like bonds and CDs?
Reason #1: Stocks pay more! The dividend yield on the S&P 500 is just under 2%, but you’d have to go out to five years (or longer) with Treasury bonds to get a similar yield.
Of course, shorter-term bonds pay even less, and with the Fed’s rate hiking these past few years, long-term bonds are a dangerous proposition.
Reason #2: Half the tax! The rate at which qualified dividends are taxed depends upon the income of the recipient.
For those with incomes up to $38,600, there is no tax whatsoever on a qualified dividend. Yup — zilch, zip, nada.
For those with incomes over $38,600 and up to $425,800, qualified dividends are taxed at a 15% rate.
For those with incomes over $425,800, dividends are taxed at a 20% rate.
What are “qualified dividends”? Qualified dividends are those paid by domestic or qualifying foreign companies that have been held for at least 61 days out of the 121-day period beginning 60 days prior to the ex-dividend date.
Traditional fixed-income investments — bonds, CDs, money markets and Treasuries — are taxed at ordinary income rates, which mean as high as 37%!
I don’t care how you slice it — 0%, 15% and 20% tax rates on dividends beat the heck out of a 37% tax rate on interest income. And that is why dividend-paying stocks should be the foundation of any income portfolio.
Reason #3: Dividends grow. The S&P 500 may pay a 2% dividend today but that payout is going to increase over time. Over the last seven years, companies in the S&P 500 increased their dividends by an average of almost 7%.
Choosing the Right Companies
There are thousands of companies on the market that pay out dividends. Dividends are one of the safest and most reliable ways to grow your income.
But not all companies are the same. There are two very important criteria I look for when it comes to the companies paying out the best dividends:
- A dividend yield of 2% or higher.
- A low dividend payout ratio (click here for full explanation).
If you use these factors to determine the health of a company, you’ll also help ensure the dividend stocks you add to your portfolio will be the best of the bunch.
Then just sit back and watch the money roll in.