Like many investors I have tried a number of stock picking strategies and have not always been successful in those different strategies. I’ve signed up for dozens of newsletters both subscription based and free newsletters. I usually learn a few new things about the market from these newsletters, but over time the only stock-picking that has made a difference for me is investing in dividend stocks. I have tried penny stocks, stock-picking for capital gains and all of them are lacking. Non-dividend paying stocks add more stress into your life than they should. Here are a few of the reasons I prefer dividend stocks over other investments.
1. Payments Irrespective of the Market Sentiment
One great benefit of high quality dividend paying stocks is that they continue to pay out dividends even when markets are bearish. This isn’t to say any company will continue to pay dividends even during bad times, but many of them will. The key is to find high quality dividend paying companies that have a history of increasing dividends over time. Look for industry leaders that are steady earners that aren’t the splashiest names on the business page, or the company that’s rumored to run out of cash soon. A solid company like AT&T (T), Procter and Gamble (PG), Merck & Co (MRK) are all companies that have a yield higher than 3% and consistently raise their dividends.
2. Chance of Getting a Raise
As I mentioned above, some companies have a track record of raising their dividends year after year. This is a raise for you. Many companies increase their payouts at rates much higher than inflation. This makes them a good hedge against rising costs. And who doesn’t like getting more money? as the Capitol One commercial goes.
3. Special Tax Treatment
Another benefit of dividend stocks is special tax treatment. If you put your money in a bank account earning a pathetic yield of .2%. You will pay your full tax rate on that income. If you are in the 28% tax bracket, Uncle Sam will get a full 28% of your pathetic yield. The Bush era tax cuts which were extended through 2012 and will likely get extended into the future, lowered the tax rate of dividends to 15%. This means you get to keep more of your money.
4. Higher Yields
Right now it is tough to get a decent yield on any safe asset. Banks are paying near zero percent, CD’s pay next to nothing, and bonds are trading at unheard of low levels. Dividends are one class where it is not difficult to high high quality issues that are yielding at least 3 %. Some good stocks even pay 5% or more. And there is no reason you can’t also achieve capital gains as well.
These are a few of the reasons I love dividend stocks! Setting them up in a DRIP (dividend reinvestment Plan) is another great way to compound these benefits. I’ll write about DRIPS in an upcoming article.
I am long AT&T (T) stock.