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Dividend investing kills two birds with one stone

This is a guest post by Millionaire Mob, a blog focused on ways to better your financial future. We have helped thousands of people with bettering their financial future through passive income, dividend investing and travel hacking. 

Editor- I am not as big into dividend investing as Millionaire Mob, preferring index investing instead, but this post has a lot of great information anyone investing should understand.    As such I’m very happy to present this post to you.  With that take it away MM.

One great way to accumulate wealth is to invest in dividends. If your dream is to create a passive income that allows you to earn with less work, then you should consider dividend-paying stocks. 

Dividend-paying stocks are an investment that guarantees you a steady income. It helps you to not only create constant income from periodic dividends payouts but also allows you to save for retirement. It kills two birds with one stone. A dividend paying stock helps you achieve a high level of independence. If you invest in a good dividend paying stock, you can live off dividends. 

Let’s explore how a dividend paying stock will allow you to kill two birds with one stone.

Dividends as a regular source of income

Dividend growth investors today consider dividend earnings and capital gains before they decide on the best stock investment to make.

Dividends are the portion that you are paid when a company makes profits. It is a way to compensate you for owning the common stock. 

If you want to adopt a covered call writing option as part of your dividend investment portfolio, you have to consider some of its benefits and losses. You stand to gain an option premium when you sell a call option for every 100 shares that you own. It also boosts the chances of earning a profit. Read more on the best stocks for covered call writing here.

There are four dates that you should take note of as a dividend stock shareholder:

    Declaration Date

Dividends are first declared by the company’s Board of Directors who announce their intention to pay dividends on the declaration date. On the declaration date, the company creates a liability on its financial statements because it has declared that it owes its shareholders. It announces both the payment date and the date of record.

    Ex-dividend date

The ex-dividend date is one day prior to the date of record. If you buy a dividend paying stock a day before this date, you will still earn the dividend but if you buy on the ex-dividend date, you won’t get the dividends. If you sell on or after the ex-dividend date, you will still receive your dividends.

    Date of Record

The date of record is the date a company verifies its true shareholders because an investor must be a record holder to qualify for a dividend payout. 

    Payment Date

The payment date is the actual date the dividends will be disbursed to the company shareholders. 

Companies set their own payout policies in regards to both the size and the date of dividend payments. There is no set rule to govern how companies make their dividend payouts. The number of times a company makes a dividend payout depends on the company making the payout. A majority of companies pay dividends quarterly, semi-annually, monthly while others make irregular payments or have no schedule at all.  

There are three types of dividends which include:

1.    Cash Dividends

Cash dividends are payments that a company makes to its shareholders in the form of cash, check or electronic transfer as part of the company’s accumulated profits or current earnings. If you want to maximize your gains, you can reinvest the dividends.

2.    Property Dividends

Property dividend is a substitute for cash and can comprise of a subsidiary company shares or any physical assets the company owns such as real estates, inventories, and equipment. It mostly happens if the company does not have enough cash on hand or if it wants to dilute its current share position.

3.    Special one-time Dividends

A special one-time dividend is a one-time distribution of company profits and earnings to its shareholder. It occurs when the company earns exceptional profits during a given period.

Dividends as a way to save for retirement 

Running out of retirement savings in the old age is a dreaded fear by most of us. To live stress-free during your gray years require you to prepare yourself well during your working days. Make investments that can guarantee you financial freedom in retirement to avoid getting into a financial crisis. 

A majority of pension plans today have placed the burden to save for retirement on the contributor. You are the one to ensure that you achieve your targeted payout upon retirement. It is no longer a defined benefit plan but a defined contribution plan. Don’t just rely on the pension plans. Diversify your investments. Besides buying bonds, invest in a dividend paying stock to save for the golden years. 

Some factors to consider if you want to invest in dividends for the long term are:

Benefits of investing in dividend paying stocks 

    Dividends are less volatile which makes it an ideal stock for retirement savings.

    Dividend-paying stocks accumulate quickly because of compound interest which creates substantial retirement savings if you reinvest the distributions in new shares. 

Tax considerations for dividend investing

Dividend income is taxable income after they are paid out. They may be categorized as qualified or non-qualified dividends. The qualified dividends are tax-free for investors in the 10-15%tax bracket. However, it is on condition that income from those dividends does not go above the tax bracket. If it does exceed the tax bracket and get between 25-35%, the dividend income is taxed at a rate of 15% and if it goes above that the rate is 20%.

Non-qualified dividends, on the other hand, are simply taxed at a regular income tax rates. The investors receive a tax form at the end of the year showing the amount of dividend income they receive. Dividend-paying stocks strengthen your portfolio, especially when used in tax-sheltered accounts like the rollover IRA.

How to invest in dividend stocks

Outside of investing in a dividend stock directly, there are two main options to gain exposure to dividend paying stocks in a diversified manner:

1.    Dividend Mutual Funds

Dividend mutual funds are managed funds by professionals. They help the investor to diversify. However, they attract fees which are associated with managed funds. You need to do a thorough research before you invest in these dividends.

2.    Exchange traded funds (ETFs)

These are traded through an organized exchange and are the cheapest way in. They include the investment grade credit and speculative grade credit (Junk bonds). High yield dividends usually have a lower credit rating in the equity world thus the reason they are also called junk bonds. They, however, have a potential for higher yields and can be a great addition to your portfolio.  

A steady dividend payment is a crucial indicator of an ideal investment thus most companies are reluctant to lower or stop paying dividends. To diversify your investment, find out some of the best dividend growth stocks to include in your portfolio here.

Dividend investing your way to financial freedom

A dividend paying stock help you to enjoy regular passive cash flow into your bank account in form of dividends as well as save for your golden years. Dividend investment is the true definition of financial freedom.

Author Bio: Millionaire Mob is where people come together to find the best travel deals and financial advice. We specialize in dividend growth investing, passive income and travel hacking. Our advice has helped thousands of people travel the world and achieve financial freedom.  Millionaire Mob will provide you the best advice to help you learn and grow along the way. Follow us on Instagram, Twitter and/or Facebook for all the latest updates. 

4 Comments

  1. I never understood why early retirement people ignore dividend and income producing assets on the way to retirement, but also in retirement.

    If you have a portfolio which is yielding 2.5% in retirement, then I don’t understand why you need to follow the 4% rule, when you still have 70% of that coming through income. Can you help me out with the explanation?

    • FullTimeFinance
      FullTimeFinance July 20, 2018

      The 2.5% comes out of earnings. In an efficient market earnings define the price of a stock. As such paying out a dividend decreases the value of a stock by that 2.5%. In order to have dividends a company needs earnings. Earnings decline during a down turn, thus their ability to pay out dividends also decline. In some cases that means the dividend goes away.

      Ie. a dividend is not a free lunch, just another way to payout earnings if a company cannot invest it optimally. You are no better or worse then buying a stock of the same price without the dividend provided they invest withheld earnings as efficiently as you do. So the 4 percent rule still applies.

  2. JoeHx
    JoeHx August 8, 2018

    Thanks for clarifying what the different dates were – I had been a bit confused as to what they meant, especially the ex-dividend date.

    Property dividends sound super-rare, and I’m having trouble finding real-life examples on the internet. While I can comprehend receiving stock from another company as a dividend, I can’t imaging receiving more physical assets as a dividend.

    • FullTimeFinance
      FullTimeFinance August 8, 2018

      I think the most common form of property dividend involves a spinoff. I’ve had a few holdings do it in the past. Basically they take a subset of their business, tidy it up as a new entity, and pass ownership of that entity to shareholders via a dividend.

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