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Why Dividends Are Important To The Portfolio Of Every Investor

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Let’s talk about dividends. Fixed income and old-school investors all love dividends. Dividends are a share of company’s profits that are paid out to shareholders. Many stocks, bonds, and mutual funds offer dividends to investors. Dividends provide a stable income stream that help to improve investment returns. While dividends are great for those investors, they are actually a good fit for regular investors as well. Here are a few of the key advantages of dividends:

Dividends are actual income.

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What’s the only real return that investors receive when they buy a stock? The only actual return that is received is a dividend. One of the main advantages of dividends is that they provide investors with consistent realized income on a quarterly basis. Capital gains are not realized until you actually sell shares of a stock. Capital gains can disappear by a drop in stock price. Over the past 10 years, stock indices have been virtually flat. Without the existence of dividends, many investors would have found themselves earning no income over the lost decade.

Dividends have tax advantages.

Unlike income received from your employer and other investments, most dividend payments have special tax advantages. As long as you purchase a stock before the ex-dividend date and the investment is held for 60 days or longer, it is treated as a qualified dividend. Qualified dividends are taxed at an interest rate between 5% and 15%. High income wage earners have to pay 15% of their dividend payment via taxes. Lower income earners have a dividend tax rate of just 5%. These low tax rates allow shareholders to keep a large majority of their income.

Dividends allow you to purchase more shares.

Reinvesting your dividends is a quick and easy way to grow your portfolio. Dividends make it easier for investors to accumulate more shares. Investors always have the option of reinvesting all or a portion of their dividend proceeds back into their original stock investment. Most brokers and DRIP’s (Dividend Reinvestment Plan) offer free reinvestment options to all customers.

So, where should you look for dividends?

Best Places To Look For Dividends

If you are looking for high dividend yields, start with stocks. Look at telecommunication companies, REIT’s, and utility companies. All of these industries are known to have extremely high payouts compared to other sectors. For example, telecommunication companies AT&T and Verizon are both paying investors over 6%. REIT’s like Annaly Capital and Hatteras Financial have double digit yields. Utility stocks Duke Energy and Consolidated Edison are each paying over 5% to investors.

Another way to get access to dividends is by investing in dividend growth funds. For example, the Vanguard Dividend Growth Fund primarily invests in large cap dividend paying stocks. Funds like this boast low expense ratios and consistent, modest dividend yields. Bond funds are also good investments for monthly dividend payments to all bondholders.

Are dividends an important consideration for you in your investment portfolio? What are your thoughts on allocation a portion of your portfolio for dividend paying securities.

(Photo credit: Naval History And Heritage Command)

Mark Riddix
Mark Riddix is the founder and president of an independent investment advisory firm that provides personalized investing and asset management consulting. Mark has written financial columns for Baltimore and Washington, D.C. area newspapers and is the author of the book, "Your Financial Playbook."

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