We believe investing in companies that pay dividends is wise and has advantages over many other types of investments. Did you know that if you file jointly and have taxable income of under $75k, you are in the 15% tax bracket? This means that if your income is made up of Social Security income of $25k and dividends of $50k, you pay next to nothing in income taxes. Only a portion of your Social Security is taxable, and at only 5%. In this example, none of the dividend income is taxable.
Dividends have several unfair advantages we are going to discuss. Today I want to focus on the tax rates.
Dividend tax rates are an opportunity for investors. The favored status of qualified dividends means they are taxed at a lower rate than standard income, by anywhere from 10-20% less.
You see Qualified Dividends are taxed like long-term capital gains, which means they are taxed at a lower rate than traditional income such as wages, interest, or rental income. Qualified Dividends, those that are paid from traditional US corporations (or C-corps) pay a dividend the IRS deems as “qualified”. That lower tax rate can be significant for investors who are accumulating capital looking toward retirement, and when they receive income in retirement.
This is just one of the reasons we strongly favor dividend-paying stocks. Our strategy focuses on growth OF income, not growth FOR income. As long as you spend what you earn, or spend your cash flow, you can potentially weather any storm. Think of it like a farm. We aim to grow the acres of the farm during your working years, your accumulation years, then reap the crops during your retirement. Traditional strategies aim at a “distribution rate”, forced to sell acres of the farm in retirement, eventually depleting the entire farm AND its ability to grow crops. This dividend strategy aims to give investors a source of income without having to sell the underlying asset.
If you’d like to hear about other unfair advantages and how we are putting the strategy to work for you, give us a call. If you know someone who is in a “selling off their farm-strategy”, share this with them and we’ll show them how to put their land to work.