How To Stream Steady Income The Easy Way
Bell-bottom pants, Pet Rocks, mood rings, mullet haircuts and disco.
Fads come and go.
The investment world is just as guilty.
In the 1960s, it was the Nifty Fifty, in the 1990s it was the dot-com stocks and today’s fads du jour are the FAANG stocks and algorithm trading.
While fads come and go in the stock market, quality never goes out of style. And when it comes to quality in the investment world, one thing that will never go out of style is dividends.
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 “widow’s portfolios.”
All local community banks had trust departments with trusted veteran bank officials.
Their job 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 to pay the bills, keep the house and raise the children.
The goal was not to get rich. It was to make sure the family’s income needs were taken care of.
The art of successful income investing
is putting together a collection of assets,
such as dividend-paying stocks, mutual funds,
ETFs and REITs, that can generate
the highest possible annual income
at the lowest possible risk.
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 not as exciting as the hottest FAANG stocks and other trendy investments.
As a result the process of building an all-weather, income-producing portfolio has become a bit of a lost art.
It’s not because interest rates are so low but because income investing has lost its appeal thanks to the great bull market that has spoiled investors into believing that concepts like risk management and dividends aren’t important anymore.
That’s a big mistake! A diversified portfolio of carefully selected, world-class dividend-paying stocks can survive fads and beat bear markets alike.
Reason No. 1: Stocks pay more! The average dividend yield on the stocks in the S&P 500 index is just under 2%, but you’d have to tie your money up in a CD for two years to get a similar yield.
Of course, shorter-term CDs and bonds pay even less and after four interest rate hikes by the Federal Reserve, long-term bonds are a dangerous proposition.
Reason No. 2: Half the tax! The 2017 Tax Cuts and Jobs Act, aka Trump tax cuts, had very little effect on dividend taxation and (qualified) dividends are still taxed at a much lower rate than bonds and CDs.
The rate at which qualified dividends are taxed depends on the income of the recipient.
For 2018, qualified dividends are subject to a 0% tax rate for taxable income up to $38,600 for single filers and $77,200 for joint filers.
You heard me right. Zero, zilch, zip, nada!
Source: Business Insider
- If you’re in the 22%, 24% or 32% tax bracket, your dividends will be taxed at a maximum 15% rate
- And if you are in the 35% or 37% tax bracket, your dividend income will be taxed at a maximum of 20%.
What is a “qualified dividend”?
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 means as high as 37%.
It really doesn’t matter how you slice and dice it, 0%, 15% and 20% tax rates on dividends beat the heck out of a 37% tax rate on interest income.
And that’s why dividend-paying stocks should be the foundation of any income portfolio.
Reason No. 3: Dividends grow. The S&P 500 may pay a little less than a 2% dividend today, but that payout is going to increase over time. Last year, the average S&P 500 stock increased its dividend by 7.07%.
In fact, the S&P 500 dividend payout has increased for the last six years in a row. Now thanks to the Trump’s tax cuts, 2018 is shaping up to be an even better year for dividend investors.
According to Standard & Poor’s, 940 companies raised their dividend in the first quarter of 2018, a 400% increase from Q4 of 2017, according to CNBC.
What’s more striking is that dividend-paying stocks have historically been much less volatile than the overall market.
For example, last Friday the Dow Jones industrial average dropped 572 points, or 2.3%.
- SPDR S&P Dividend ETF (SDY) was only down 1.7%, or 26% less.
- Guggenheim Multi-Asset Income ETF (CVY): down 1.6%, or 30% less
- iShares Core High Dividend ETF (HDV): down 1.6%, or 30% less.
As you can see, dividend-paying stocks offer some very effective defense during turbulent markets like we have today.
So what are you waiting for?
Jump on the dividend bandwagon today!
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch