What is Dividend Income?

Dividend income is earnings received as a shareholder based on a percentage of a company’s earnings, generally in the form of cash payments, but may also be paid in the form of more shares or other property. Investors who have experimented with multiple strategies within their portfolio in order to generate income realize that dividend investing can create additional income while increasing the market value of their portfolio.

As long as you follow careful guidelines and make smart choices, buying stocks which pay dividends may pay out over time, giving you an additional source of income. Mutual funds and bonds, as well as stocks, also may overtime dividends to their investors. Dividend income is stable, helping to improve investment returns. They are a great for not just fixed school and old-school investors, but regular investors as well. Keep reading to find out a few advantages of dividend income.

Actual Income

Yes, that is why it’s referred to as dividend income; it is actual income. The only return investors receive when buying stock is dividends. One of the main advantages of this is that it provides investors with a quarterly based consistent realized income. Remember, until stock has been sold, capital gains are not realized. Unfortunately, capital gains can completely vanish after a drop in stock price. This means no income. In fact, over the last decade, investors wouldn’t have made any income if not for dividends due to stock indices being virtually flat.

Tax Advantages

Most dividend income has specific tax advantages, not like earnings received from other investments or your employer. To be treated as a qualified dividend, the stock must be purchased before the ex-dividend date and must be held for at least sixty days. Those that qualify are then taxed between five and fifteen percent interest rate. The fifteen percent is paid by higher income wage earners, while the low income earners only have to pay a five percent dividend tax rate. Nonetheless, shareholders get to keep a larger majority of their income due to these low tax rates.

More Shares

Receiving dividends allows you to be able to purchase additional shares. Reinvesting your dividend income is a fast and easy way to help your portfolio to continue growing. In addition, investors are able to accumulate more shares easier with dividends. This is because investors have first have the opportunity to reinvest either a portion or all of their dividend income back into their initial stock investment. In fact, it’s done so often that most brokers and Dividend Reinvestment Plans (DRIPs) offer all their customers free reinvestment options.

Where to Look

Generally, the best place to look for dividend income is stocks. Stocks typically have high dividend yields. Check out utility companies, real estate investment trusts (REITs), and telecommunication companies. All three of these sectors are known for having very high payouts in comparison with other industries. For example, stocks in Consolidated Edison and Duke Energy, both utilities, both pay over five percent in dividends. Some REITs have reported paying out in the double digits. Furthermore, Verizon and AT&T are great example of telecommunication companies which are currently paying out around six percent to their investors. All three of these are good, solid dividend income sources.

Dividend growth funds are another investment opportunity for receiving dividends. There’s some dividend growth funds which chiefly invests in stocks which yield large cap dividends. In addition, funds like these have extremely low expense ratios while maintaining modest, but consistent dividend yields. Another dividend income investment we mentioned before was bond funds, which are good for monthly dividend payments for anyone who is a bondholder.

Dividend income can definitely come in handy. As a matter of fact, some retirees use their dividends to help with retirement. You can even have your dividend income go directly to your retirement fund. Whatever you decide to do with it is up to you, but everyone can use more money. If you have decided to move some things around in your portfolio or even if you’re just starting out, checking into which companies you can get stock out which payout dividends is just a smart thing to do. Be careful choosing which companies; get help if you’re aren’t sure. Good luck!


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