7 Key Facts About Dividend Investing

Dividend Investing is the cornerstone of any Passive Investment Strategy.  They are the most accessible vehicles for forming your portfolio and you can start with a very small investment.

Stocks pay a Dividend to their shareholders from annual profits.  The purpose of this for most stocks is to encourage people to purchase them, and it is an attractive thing to large institutional investors along with us lowly individuals.

7 Key Facts About Dividend Investing

1. They are taxable, under the current environment (post Fiscal Cliff 2013) the is 15% for those earning under $400,000 ($450,000 if married) per year, and 20% if over that.

2. The Ex Date is the date that you must own the stock on before you can claim ownership of the dividend.  This is typically 2 days before the Date of Record.  If you buy after the Ex Date you will not get the dividend payment, even though you are holding the stock.

3. T-3 is the rule for ownership, in addition to the 2 days between Ex Date and  Date of Record a trade can take a day to formally occur, you need to allow 3 days to be sure to get the payout.

4. After the Ex-Date has passed the stock will lose the value of the Dividend. EG a stock at $20 with a dividend of $1 will immediately be worth $19 the day this happens; whilst the stock will continue to move up and down due to other market forces this amount will be built in.

5. Asset Allocation for Income, if you are planning to live on dividend income then holding it in a Taxable account will mean you are paying an effective tax rate of 15% on that income, much less than income tax.

6. Asset Allocation for Growth, if you are planning to use the dividends to build a nest egg, placing them within a Tax Advantaged account such as an IRA or 401K will protect from Income Tax, but when you withdraw the funds they will be taxed at regular income tax rates.

7. DRIP programs are Dividend Reinvestment Programs, these mean that your dividend payment automatically purchases additional (even partial) shares of the same stock, compounding your ownership.  DRIP within a Taxable account will come with a Tax bill at the end of the year for 15% or 20% depending on income levels.  DRIP within a Tax Advantaged account will not have an annual tax bill.

Today I opened a position in my SEP IRA for 300 shares of HCP which is a REIT that focuses on Healthcare Properties paying an annual dividend of 4.33% I put it into my tax advantaged account and set the DRIP for this so it will grow over time.  I plan to not touch this investment for 20 years, but will keep abreast of any changes regarding REITs that could impact the value of the stock or dividend.  Remember, I’m no expert, I just liked the look of this stock.