Market Beat: Stock dividends for income
March 4, 2019
Investors whose primary goal is current income should consider having a percentage of their asset allocation in dividend paying stocks. The low interest rates and flat yield curve that we have today make dividend paying stocks attractive.
The amount of your portfolio allocated to stocks depends on individual factors like age, income and net worth as well as your personal goals.
Qualified cash dividends from corporations are taxed at a favorable rate. There are a couple of requirements for the dividend to be considered qualified. You must hold the stock for at least 60 days during a 121-day time frame, before and after the ex-dividend date. You must purchase a stock prior to the ex-dividend date to receive the next dividend payment. The company must also be a U.S. corporation or a qualified foreign company.
Tax rates on qualified dividends are lower than income tax rates. For 2019, married people who file a joint return will pay no tax on qualified dividend income if their income is below $78,750. The rate goes to 15 percent if you're income is between $78,750 and $461,700. Above $461,700 the tax rate tops out at 20 percent.
Investing in stocks involves risk and if you're going to consider individual stocks, your portfolio should be of a sufficient size to diversify and not have too much exposure to any one individual holding. Mutual funds can be used to achieve diversification if needed.
There are many ways to research stocks that pay a good dividend. One way is to look at their history of paying a dividend and their history of increasing that dividend over time. S&P Indices has a group of stocks known as the Dividend Aristocrats that are selected from the S&P 500 and have raised their dividend payout consistently for at least 25 consecutive years.
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Currently there are 57 stocks in the Dividend Aristocrats. Standard and Poor's has another dividend stock index known as the High-Yield Dividend Aristocrats. All the regular Dividend Aristocrats are also in the High-Yield Dividend Aristocrats. The High-Yield Aristocrats consist of stocks in the S&P 1500 Composite that have raised their dividends for at least 20 years. There are 112 stocks in the high-yield version, counting the 57 that are from the S&P 500.
One good way to screen dividend stocks is by analyzing their free cash flow to see if it's adequate to maintain the dividend payout.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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