Tuesday, January 10, 2006

I love dividends

First, a favorite quote...

The handout and the spokesman threaten our diligence, our ingenuity, our skepticism, our zeal. For zealots we must be. Not for a cause. For facts and for truth—and all of the truth.
Frank H Bartholomew, President, United Press 1958

I'm going to start offering my favorite quotes so my blog posts seem classier.

Allow me to count the ways I love dividend paying stocks...

  • At it's core, a company's stock price should be the net present value of it's future dividends. Companies that pay dividends today are, by this definition, more valuable than non-dividend paying stocks.
  • They are less risky. Most companies that pay dividends have profits that exceed their dividend rate.
  • Favorable tax treatment - sometimes. Other than REITS (Real Estate Investment Trusts) and MREITS (Mortgage Trusts), dividends are taxed at 15%. REITS & MREITS are taxed at your marginal tax rate. You can mitigate the impact of REIT taxation by placing them in an IRA or a KIDDIE TAX account.
  • Regular, no-work-required, passive income. For all you RDPDs (Rich Dad, Poor Dad) fanatics, you'll understand the draw of a monthly or quarterly check.
  • Your yield on your investment can increase significantly based on earnings growth of the company.

Here are a few of my favorite holdings, their current dividend rate, my dividend yield based on my cost basis and the tax treatment:

  • Washington Mutual (WM) - 4.3% current yield - 4.9% for me - 15% taxation
  • Ameren (AEE) - 4.9% current yield - 5.8% for me - 15% taxation
  • Hospitality Reality Trust (HPT) - 7% current yield - 10% for me - REIT taxation
  • JP Morgan (JPM) - 3.4 % current yield - 5.1% for me - 15% taxation
  • UST (UST) - 5.3% current yield - 7.9% for me - 15% taxation

I got all of these picks from The Prudent Speculator.


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