Invest Like The Wealthy – Focus On Dividends

Wealthy investors approach the stock market differently than traditional investors. Unlike most traditional investors, they are always adjusting – looking for opportunities to capitalize on profitable investments. One of the main ways they achieve this is by focusing on dividends.

The reason is this, dividends pay you – the investor. Dividends are a portion of a company’s earnings that they pay out to all their shareholders, and the more established companies are going to be the ones that pay a dividend. Deciding to make dividends a priority and knowing how to identify which ones to move on are a crucial part of investing like the wealthy.

Two Reasons Dividends Are Worth It

Investing in dividends might be new and you may wonder if it’s an investments strategy worth pursuing. As you may already know, cash is not the best place to have your money. Unless it is earning some sort of return, $1.00 at the beginning of the year is worth about $0.98 at the end of the year (okay, $0.91 this year). This is because of inflation causing things to become more expensive over time. In the United States, historical average annual inflation is around 2 percent (yes, I know we are blowing that out of the water this year). If you are in cash, you get behind because inflation devalues your money. Just think of your money as ice left outside on a hot day. It starts to melt and get smaller. Well, so does cash and one of the best historical hedge against inflation are those dividends you receive from stock you own. As you wouldn’t give a company an interest-free loan, you really shouldn’t own stocks that do not pay a dividend.

The second reason dividends are worth it is that qualified dividends from US companies are taxed at lower rates. That is because qualified dividends (almost all US companies) are taxed as long-term capital gains which fall in the 0%, 15%, or 20% federal brackets. A consistent dividend that increases regularly over a length of time becomes a great filter for you.

Spotting the Good Ones – The Dividend Kings and Aristocrats

Within the group of companies that pay dividends, there is a very small subset of companies called dividend kings. These dividend kings are companies that have been paying out dividends and increasing that dividend every year for fifty years or more. Coca-Cola is a good example of a dividend king. They have been increasing their dividend annually for 60 years straight and show no signs of slowing down. They are paying you for using your money, not the other way around, which is critical when you are in a bear market and need cash flow. You do not want to be forced to sell something when it is beaten down.

Like dividend kings, dividend aristocrats are companies that are safe and sure bets. Companies that fall within this group are those that have been paying and increasing dividends for at least twenty-five years in a row.

Simply being categorized a dividend king or aristocrat does not mean that it will pay a particularly high yield. These lists are a great place to begin, but there are other great companies that have been paying out steady dividends over a shorter period that are also excellent.

Dividends are a strategy you should discuss with a financial advisor as you look for ways to differentiate your investment portfolio and achieve your financial goals. At the end of the day, a strategy that results in companies paying you back for your investment is one to seriously consider.