The 2 Things I Look for in a Dividend Stock
Some of the most successful Wall Street types — including the Oracle of Omaha, Warren Buffett — could be considered income investors.
And who wouldn’t want the type of life Buffett’s billions offer him?
Now, I’m not saying following the strategies and ideas I lay out in Wealth Watch each day will make you a billionaire.
But over time, following the advice I put forth could help you retire a millionaire, maybe even a multimillionaire.
So the next time you think income investing is “boring” or for old widows with no market knowledge, consider this…
Does being a millionaire by 65 sound boring to you? We didn’t think so.
Today I’ll cover three reasons you shouldn’t ignore dividend stocks… and the two most important things I look for when I decide what to add to my income portfolio.
Debunking the Myth of Income Investing
Let’s start with a basic definition of income investing.
The purpose of income investing is to maximize the yearly passive income you generate through your investments. This gives you a steady stream of cash to pad your retirement savings, reinvest back into the markets or enjoy simpler pleasures like taking that vacation you always dreamed about but could never afford.
Income investing gets a bad rap.
Sure, the action with these types of stocks won’t make you rich in a day
But as an income investor, you could collect steady income four times a year while also collecting stock gains on some of the best companies around.
All you need to do is add high-quality dividend stocks to your portfolio.
Dividend stocks are the cornerstone of income investing. Even the slickest hotshots on Wall Street own a handful or more blue chip dividend payers.
It’s easy money, and that’s the basic principle behind income investing… earning passive income now to use later.
3 Reasons to Love Dividend Stocks
Why should you consider dividend-paying stocks? Well, here are three great reasons…
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 would pay even less, and 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 income 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.
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%.
How to Choose the Right Companies
There are thousands of companies on the market that pay out dividends.
But not all dividend-paying 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 are the best of the bunch.
Then just sit back and watch the easy money (aka passive income) roll in.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch