Dividend Investing

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Overview

Dividend investing focuses on selecting solid companies that pay a regular and growing dividend. Investing for dividends in the U.S. has been gaining in popularity since The Jobs and Growth Tax Relief Reconciliation Act of 2003 created qualified dividends, which are taxable at a 15% federal rate or 5% for taxpayers in the two lowest tax brackets. Many other countries, such as Canada, have preferencial income tax treatment for dividends earned.

As noted in the article Seven Important Reasons for Dividend Investing , stocks that pay dividends provide several advantages over those that do not, including:

1. Dividends provides stability to your investment
2. Dividends can't be manipulated or faked
3. Dividends provide continuous feedback
4. Reinvested dividends provided a significant portion of the historical equity returns
5. Good dividend companies grow their dividends
6. Spending dividends in retirement, does not harm your principle investment
7. A dividend portfolio is relatively low maintenance

However, as with any investment, there are some cons as well. These include:

1. Dividend payments are not consistent. They can change and should not be relied on as a guaranteed paycheck. If a company becomes less profitable, payments may decrease or be suspended altogether.
2. Payments are still subjected to income tax.
3. At the end of the day, dividend stocks may not yield as much profit to investors as common stock investors.
4. When the yields rise in the market for other shares, stock prices may go down as companies compete for investors.

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