If you own stocks you are probably somewhat familiar with dividends, but what exactly are they? In simple terms a dividend is a portion of the excess revenue a company has available after paying all operating cost that they choose to distribute to owners/shareholders. That sounds great but is it? Personally I love dividends and see them as a sign of both maturity and stability, this is because usually a new company will reserve most of if not all earnings to re-invest in the company for growth, this isn’t bad because that growth allows them to increase earnings which will hopefully result in an increase in the value per share of the company. In contrast a large and established company may not have much room for further growth except through acquisitions, since they don’t need to employee excess revenue they choose to pay it out in the form of dividends which is attractive to many investors, especially older investors looking for income and stability. The dividend investor may also benefit from share appreciation but nowhere near the same rate as the younger faster growing company, in fact the per share price will actually fall after the dividend payout due to the fact that the company just moved hundreds of thousands of dollars off of their books, of course that money went straight to you the shareholder so it’s not really a loss but a way to earn passive income. Currently income from dividend payouts is taxed at different rates depending on your gross income, see the chart below.
|Qualified Dividend Tax Rate||Single Filing Status||Married Filing Jointly||Head of Household||Married Filing Separately|
|20%||$425,801 or more||$479,001 or more||$452,401 or more||$239,501 or more|
Some of my favorite dividend paying stocks are listed below with their current dividend yield.
Coca-Cola – 3.37% – Dividend has grown each year for 55 years
Pepsi – 3.36% – Dividend has grown each year for 45 years
AT&T – 6.08% – Dividend has grown each year for 33 years
Now we can’t talk about dividends without mentioning the Dividend Aristocrats, to meet the criteria to be called a Dividend Aristocrat, a company must be a member of the S&P 500 index and have a minimum of one dividend increase annually for at least the last 25 consecutive years. The first list of Dividend Aristocrats was published in 1989, with 26 companies on the list, this list is often times considered a list of some of the strongest and most dominant companies in the world since to have been able to earn excess profits from operations even through all the bear markets and recessions, the companies must have a great operating system and strong competitive advantages.
For the die hard index fund investor there are dividend funds that track high paying dividend stocks, two of my favorite are listed below with their dividend yields.
VYM – 3.26% – Expense ratio of 0.08%
VIG – 2.03 – Expense ratio of 0.08%
Of Course a discussion of dividends wouldn’t be complete without mentioning REITs, better known as Real Estate Investment Trust. In simple terms a REIT is a fund that owns and operates income producing land and or real estate, this usually consist of a mix of commercial properties such as retail spaces, office buildings, storage facilities, and apartments. The REIT investor/shareholder benefits from the steady stream of rental payment made by the tenants and the best part is that by law a REIT must pay out at least 90% of it’s taxable income to shareholders. Below is a list of my favorite REITs along with their current dividend yields.
VNQ – 4.29% – Expense ration 0.12%
Personally I own both VNQ and VYM in my ROTH IRA as well as the three single stock companies listed earlier with about 3 other high yield dividend stocks, however I am not nor do I plan to increase my holdings in the single stock, only in the index and REIT funds. I like owning them in my ROTH because the dividend income is earned tax free and is a not only a long term holding for me but an inheritance vehicle for my children that I hope will benefit from a steady source of tax free income for someday. I must say that I also own both VOO and VTI as well as VEU, in both my ROTH and my Traditional IRA for long term capital appreciation but I have always loved dividend stocks since my first purchase of Coca Cola stock many years ago and I still remember seeing the first dividend payment in my account:)
I hope you enjoyed this article and appreciate you taking the time to read it.
CHEF ON FIRE