Four Reasons to Own Dividend Stocks
The key to investing in stocks for the long-term is to buy shares of American’s best companies with a strong history of returning income to investors. That’s how American’s most successful investors build financial independence. So how do you find those select few stocks you want to invest in and hold for a long time while seeing your dividends increase each year?
You can start with the Stocks from the S&P High Yield Dividend Aristocrats. This is an index of stocks with a focus on dividend growth. There are normally between 100 and 50 companies in this index that pay high dividends, The index is designed to measure the performance of companies within the S&P Composite 1500® that have followed a managed-dividends policy of consistently increasing dividends every year for at least 20 years. But an even more select set of companies are the Dividend Kings. These are strong American companies that have raised and paid out increasing dividends every year for the past 50 years. 3M for instance has paid a dividend every quarter since 1916 and you can get started with their dividend reinvestment plan for just $10 per month. What could be more simple than that?
Once you start looking at just these stocks, you want to pick out the companies that you know something about and show some strong growth at low share prices. These are stocks you will want to hold for a lifetime, to see that stream of dividends come back to you in the form of passive income.
And the best part is you don’t need a lot of money to get started, because most of these companies have a dividend reinvestment program that allows you to get started with just a few shares of stocks, and then invest a small amount each month via an automatic deduction from your checking account.
Your dividends can then also be reinvested automatically as well. Over several years, you will build up a nice group of stocks buying you passive dividend income to support your retirement.
When you reach retirement, just contact the companies you have invested in and have then start sending you checks when they buy out dividends. This is normally four times a year and you if do it right, some of those companies will have quarterly dividend cycles that differ allowing you to have an extra check in the bank every month.
Here are more reasons to invest in dividend paying stocks to building up your long-term wealth:
They’re low risk. Since the companies pay out cash, investors are more willing to hold dividend stocks through the rougher bear markets. The dividend then reduces some of the risks of owning stocks. These stocks then become magnets for investors wanting a bit more security.
They earn much better yields with lower taxes. Thanks to a recent change in the tax law, dividends are taxed at only 15%. Compare that to interest on your savings, CD, or money market account that is taxed as ordinary income up to 35%! Standard & Poor’s estimates this change should save investors more than $100 billion a year. Much of this will be invested back in dividend stocks.
They help you avoid the Enron’s of tomorrow. Let’s face it, sometimes the management of a company lie. It is tougher to do today, but it happens. Dividends don’t lie. For example, between 1997 and 2000, Enron’s “earnings” rose 69% but dividends rose only 9%. That’s a sure sign that something fishy was going on. Paper profits can fool analysts but hard cash can’t be faked.
By reinvesting dividends, you dollar-cost average and get the power of compounding automatically. Reinvesting dividends improves your portfolio’s long-term returns by buying more shares when the price is low and by helping your profits earn more profits.