I’ve been a fan of dividend stocks for a few years now, ever since the Great Stock Market Sale of 2008 (I picked up a few more in the Less Volatile Sale of Mid-2011). With my longer time horizons and my hardy stomach for volatile stock prices, I found it easy to be patient and purchase shares in solid companies with good earnings and a dividend policy that was consistent and not overreaching. With a basket full of dividend stocks paying out once every quarter (or twice a year), one of the bigger questions on my mind was whether I wanted to reinvest my dividends.

Many brokerages now let you reinvest your dividends without charge. It’s a nice feature that was, many many years ago, only available through company-specific DRIPs. The question is whether automatic reinvestment makes sense?

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The S&P Dividend Aristocrats is a list of companies in the S&P500 that have increased their dividends each year for at least 25 consecutive years. It’s a starting point for a lot of dividend investors because 25 years is a long time and seen as a sign of reliability. Any one on the list has weathered not only the most recent recession but also the one in the late 1980′s as well as the dot com bust. It’s been a turbulent time but one thing must be clear – past performance is not indicative of future results. The list is a start but should not be the end of your research.

The list is updated annually to add and remove companies. There were several additions and several removals this year.

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Representative Jan Schakowsky (D-Illinois) introduced new legislation, the H.R. 1124 Fairness in Taxation Act, on Wednesday, March 16th, that would introduce new tax brackets for those who earned more than $1 million dollars a year. The current top income tax rate is 35% on income starting at $373,650 and the new legislation would introduce five new brackets, starting at $1 million dollars.

The new brackets would be:

• $1 – 10 million: 45%
• $10 – 20 million: 46%
• $20 – 100 million: 47%
• $100 million – 1 billion: 45%
• $1 billion+: 45%

I don’t know what’s more stunning: the reality that there are people who make over a $1 billion a year or that there are people who make over a billion a year and pay the same tax rates as someone making a fraction of that.

In addition to adding new brackets, the bill would also tax capital gains and dividend income as ordinary income for those whose income was over $1 million. According to the Citizens for Tax Justice, these new rates and changes would raise $78 billion, though it’s unclear how that number was calculated.

As for historical precedence, the last time the top rate was over 40% was back in 1986 when the top rate was 50%. Just a few years earlier, in 1981, the top rate was 70% for incomes over $215,400 ($524,421.99 in 2011 dollars). Before you think those rates were high, the top rates have always been very high, peaking into the ninety-percents through World War 2 until the early 60′s. The Tax Foundation has a list of historical tax rates since 1913.

What do you think of these new rates? Would youl ike to see them implemented?

Be a Dividend Millionaire by Paul Rubillo is not just a book about dividend investing – there are a million of those. Be a Dividend Millionaire is a personal finance book that shows you how to integrate dividend investing as a way of building wealth on top of a solid foundation that everyone needs to have.

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I was reading CNN Money over the weekend when I saw one of E*Trade’s latest banner advertisements, which I’ve included below. I want to salute them for using advertising that is actually useful.

It’s pretty obvious, with interest rates so low, that dividend stocks have become more and more enticing. Part of me wonders if we’re having the Time magazine effect, which is my leading indicator that something has jumped the shark, but I still think that buying a bunch of dividend yielding stocks is probably your best bet if you’re able to hold them for a while (and cash the dividend checks).
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A dividend aristocrat is a stock that has increased its annual regular dividend every year for twenty five years. A dividend champion is a stock that has paid out its dividend every year for twenty five years, not necessarily increasing it each year. The idea behind both lists is that a lot has happened in the last 25 years and if a company has kept its dividend obligation, chances are it will continue to do so (but no guarantees!). Aristocrats are kept to a higher standard, the company must increase its dividend each year to stay on the list.

What if you want to find an “almost” dividend champion or aristocrat? That’s when you have to look at Mergent’s list of Dividend Achievers (Indxis is a subsidiary of Mergent). Dividend Achievers are companies that have paid out a dividend for ten years or more (and include aristocrats and champions) and unlike the other two lists, achievers aren’t pulled entirely out of the S&P.

The current list of Dividend Achievers has 212 companies spread out across a variety of industries. Some familiar names, from the other lists, includes 3M, Abbott Labs, AFLAC and Wal-Mart. These types of lists are fun because they give you a good starting point if you want to find a few good dividend stocks (I own shares of Abbott Labs and AFLAC, but not 3M or Wal-Mart), but don’t stop your research there because history isn’t a good indicator of the future (plenty of banks fell off the aristocrat list these last two years).

One of the things most taxpaying adults realize early on is that tax law is really confusing. Nothing is every straight-forward or simple, which is why most people fear doing their taxes even when it’s a “simple” two-page 1040-EZ form! For the longest time, I didn’t invest outside of my Roth IRA and 401(k) because I didn’t want to deal with the taxes (and I didn’t have much money to invest). Fortunately, I’ve since learned that the taxes aren’t that complicated, as long as you keep good records, but one area that has confused me a little was the topic of qualified dividends versus ordinary dividends.

When you get a dividend from a company or a mutual fund, you need to find out if it’s an ordinary or qualified dividend. If it’s a qualified dividend, it “qualifies” for the lower tax rates of long term capital gains. If it’s an ordinary dividend, it’s taxed at your ordinary income tax rate. That’s the main difference that matters to you and me.

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Right now, the best savings account rates aren’t even 2% APY. They’re so low that even those people who are earning nothing, 0%, have very little incentive to move their money! If Bank of America is paying you 0.10% in your savings account, and an online bank is offering 1.50%, do you know how much more money you’d earn if you moved $1,000 over? You wouldn’t even make fifteen bucks more. That’s it. How much is your time worth? Certainly more than $15!

The Federal Reserve is making it hard for savers to save because they’re keeping the target interest rate so low. Why would a bank pay you 1% when they can get it for less than 0.25% from the Fed? It’s a miracle the rate is as high as 1.50%! The problem with trying to find a safe alternative is that in order to get the rewards, you have to take some risks. Savings accounts have zero principal risk because they are FDIC insured, the only risk you face is inflation risk (you earn 1% but inflation goes up 3%, you’ve essentially lost purchasing power) and everyone deals with that.

So what are some “relatively” safe alternatives?
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It’s probably no surprise that in the last year I’ve been buying some blue chip companies with a solid history of dividends. Dividend investing is one of those long term investing strategies that has, for the most part, fallen out of favor after the fantastic dot-com craze, crash, and subsequent bull market that saw the Dow at 14,000 before it crashed to the mid-6000s in the depths of the economic panic. Throughout that time the Dividend Aristocrats, stocks that have paid and raised their dividend in 25 consecutive years, and the Dividend Champions, stocks that have paid a constant or rising dividend for 50 years, have maintained their dividend like clockwork.

Through dividend increases, many a billionaire’s fortune have been built (Warren Buffet’s annual dividend from his shares of Washington Post and Coca Cola exceed his investment).

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If you’ve been interested in dividend investing and unsure where to begin, I recommend reading The Little Book of Big Dividends by Charles B. Carlson. I’ve had a healthy interest in the subject for the last six months, ever since the credit crisis offered a great opportunity to start picking up fantastic companies on the cheap, and this book covers just about every major topic in dividend investing.

One of the most important lessons in the book was the importance of establishing your investing goals. All too often we do things without really considering our goals and that’s dangerous in dividend investing. When it comes to dividend investing, there are two camps of investors – those looking for income today, such as retirees, and those looking for longer term returns, like myself.

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