Fixed income sources such as corporate bonds and government bonds are used by many investors to make money. A good number also make good returns from money markets accounts. Nonetheless, you can still earn an income from other long-term options such as dividend income from dividend stocks. Read on to know how best to maximize your earnings using this avenue.
A Look at Dividend Income and How It Works
Imagine you are a shareholder of Ford Motor Company and own 10,000 shares. For every share you own, you earn $0.15 in the quarterly dividends. The 10,000 shares will earn you $1,500 at the end of the year(0.15 x 10,000). Rather than taking the dividends earned you may choose to re-invest it back into the company and increasing the number of shares.
Dividends Stock always offer the investor a chance to re-invest the money back and it is seen as a good opportunity to increase the investment especially for small holders. However, for those who own a couple of hundreds of thousands of shares or are looking for short-term(quick) returns it may not be the best idea.
3 Main Benefits of Dividend Incomes
1.Good Returns on Investment(ROI) – Records and statistics show that the average ROI on dividend income is about 45%, and this makes it a good investment opportunity. Nonetheless, it is best suited for individuals who are looking to invest long-term and will be re-investing the dividends rather than using the gains.
2.Build a Good Investment portfolio: Long-term investors looking to build a good portfolio prefer dividend incomes as it allows them to do this without adding more money. Looking at the example above, $1500 dividend income can purchase additional shares and the investor doesn’t go into his pockets. $ 50 will increase to $ 100 then $ 500 then $ 1000 and on and on. After a period of 10 years, the dividend income can be transformed into Equity which is more secure.
3.Dividends are Less Volatile: Compared to other sources of income such as stocks, shares, forex, bills and bonds, dividend income is the less volatile. It doesn’t fluctuate as much as due to monetary policies, fiscal policies, or other market variables. Furthermore, the firms that offer this form of investment are usually well-establishment and cash-rich and can handle the market turmoil even when their market is on the lower scale of the credit rate.
Key Risk Factor
The entire dividend payment goes to the portfolio and is distributed based on weighted average. This means that if the share/stock price is high at the time of re-investing, the investor will afford lesser stocks unlike when the prices are lower. Simply put, the investor has no control on the type and number of stocks he/she can acquire.
The best approach is to work with an advisor or investment expert who will offer guidance on d the different opportunities of re-investment. Usually, rather than tracking indices you can opt to spread or split the dividend incomes and acquire stocks/shares in global equities, higher yielding companies or investment-grade bonds.
Taxes on Dividend Income
The dividend is classified as taxable income and at the end of the year, investors get a tax form that shows the amount of income earned inform of dividends. The tax payable depends on whether it is qualified or non-qualified dividends.
-Qualified Dividend: It is tax-free for individuals who fall within the 10-15% bracket as long as it doesn’t push them up to a higher tax bracket. In case it does, they will pay 15% when in the 25-35% bracket.
-Non-qualified Dividend: The earning is taxed at the same rate as regular income.
Ways of Investing Dividend Stocks
1.Dividend Mutual Funds: This is the most widespread option and is undertaken by fund managers who charge a fee. Lately, beating the benchmark set by the market is becoming harder even for the most established and experienced managers. It is therefore vital to take time when looking for a fund manager.
2.Exchange Trade Funds(EFTs): It is more affordable than dividend mutual funds and targets either investment-grade credit or speculative grade credit. Junk bonds is a term used to often describe speculative grade credit that falls below triple-B rating. It is composed of high yielding dividends that have lower credit rating. Corporate equity can attract good earnings even though it is speculative.
In conclusion, when used right, dividend-paying investment can help you grow your portfolio and should be considered when dealing with accounts that are sheltered from tax such as rollover IRA.