Frequently Asked Questions (FAQs) About Dividend Investing

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But what about total returns?


What about taxes?

Qualified dividends derived from U.S. corporations are taxed at a maximum tax rate of 23.80% to U.S. residents. This is much lower than tax rates on interest income, which is taxed much higher at the ordinary income tax rates (except muni-bonds). Unfortunately, if your income is less than $400,000 for single or $450,000 for joint returns, you would pay anywhere from 0% to 15%.

Taxation varies for REITs and MLPs, and is unique to the entity paying them and the personal situation of the individual receiving distributions from these entities. Not investing in dividend stocks and equities in general because they could result in tax liabilities is not a smart strategy to follow. It is possible for U.S. investors to defer/avoid paying taxes on investment income if it is placed in tax-advantaged accounts such as 401(k), IRA, ROTH IRA, SEP IRA etc. If you are a U.S. resident investing in foreign corporations, you might end up paying withholding taxes on dividends received, even if you held them in a tax-advantaged account however.



For example, let’s examine a situation where you bought a dividend growth stock that trades at $100 per share, earns $5 per share and pays a $2 annual dividend. If this company is able to grow earnings and distributions by 7% per year over the next decade, and inflation grows at 3% per year, you will be ahead of inflation. That means that in year two, the company would earn $5.35 per share, pay $2.14 per share and likely trade around $107 per share.

In order to maintain purchasing power in year two as year one, the stock would have had to trade at $103 per share and would have had to pay $2.06 per share.  If you add in that excess over inflation, it can lead to more wealth over time. Since 1920, dividends on the Dow Jones Industrials have increased by 5% per year, which was 2% higher than inflation. As a result, I find dividend growth stocks to be the perfect source of inflation proof source of income.



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