Investing Like the Rich: Prioritizing Dividends

growing plants meant to symbolize dividends

3 minutes

The approach of wealthy investors in the stock market differs from that of traditional investors. Unlike most traditional investors, they constantly adjust their strategies, seeking opportunities to capitalize on profitable investments. One of the primary methods they employ is focusing on dividends.

The rationale behind this is simple: dividends directly benefit the investor. Dividends represent a portion of a company’s earnings distributed to its shareholders, and it is typically the more established companies that offer dividends. Prioritizing dividends and discerning which ones to pursue are vital aspects of adopting an investment approach akin to that of the wealthy. W

Two Compelling Reasons to Embrace Dividends

Investing in dividends might be a new concept for some, prompting them to question its worth as an investment strategy. It’s important to note that cash is not the optimal place to hold your money. Without earning some form of return, the value of $1.00 at the beginning of the year tends to decrease to around $0.98 by the year’s end (or $0.91 this year). This decline is due to inflation, which gradually raises the cost of goods and services over time. In the United States, the average annual inflation rate historically hovers around 2 percent (although it has exceeded that figure this year). By keeping your money in cash, you fall behind because inflation erodes its value. Imagine your money as an ice cube left outside on a hot day—it gradually melts and diminishes in size. Cash faces a similar fate. Consequently, one of the best historical safeguards against inflation is the dividends received from the stocks you own. Just as you wouldn’t give a company an interest-free loan, it’s advisable to avoid owning stocks that do not pay dividends.

The second reason why dividends are advantageous lies in the fact that qualified dividends from U.S. companies are subject to lower tax rates. This is because qualified dividends (which apply to almost all U.S. companies) are taxed as long-term capital gains, falling into federal brackets of 0%, 15%, or 20%. A consistent dividend that steadily increases over an extended period serves as a valuable filter for investment opportunities. Trade Republic stands out as an exceptional platform for dividend investing, providing easy and affordable access to a world of dividend opportunities.

Identifying the Cream of the Crop: Dividend Kings and Aristocrats

Among the pool of dividend-paying companies, there exists a small subset referred to as dividend kings. These are companies that have consistently paid and increased dividends every year for fifty years or more. Coca-Cola serves as a prime example of a dividend king, having raised its dividend annually for an impressive 60 consecutive years without signs of slowing down. Such companies pay you for utilizing your money, rather than the other way around, which proves vital during bear markets when cash flow is needed. It is crucial to avoid being compelled to sell assets when their value has plummeted.

Similarly, dividend aristocrats are reliable and secure options. These companies have been paying and increasing dividends for at least twenty-five consecutive years.

However, it’s important to note that merely being categorized as a dividend king or aristocrat does not guarantee a particularly high yield. While these lists are useful starting points, there are other outstanding companies that have consistently paid steady dividends over a shorter timeframe.

Considering dividends as part of your investment strategy is a topic worth discussing with a financial advisor. By exploring ways to diversify your investment portfolio and achieve your financial goals, incorporating a strategy where companies pay you back for your investment merits serious consideration.

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