Successful Investing Requires Mastering the Inner Game

Posted on July 1, 2021 by admin

“When you learn how to control your emotions, you can derive more positive, productive meanings, even from seemingly negative events.” Tony Robbins

Inner game helps you improve yourself as you learn from your past life experiences. Learning to work on your inner game helps you develop a better outlook in life and this helps you develop your confidence as well. This new sense of self worth allows you be more successful personally and professionally, and with your over all interaction with other people.

To find your inner game, you have to know who you truly are, what you really want and how you want things to be done. This step is not easy. It takes a lot of self-reflection and looking back to your past mistakes and learning from them. It requires you to open your eyes and see yourself for who you really are now. Then try to look to the future and visualize how you want to see yourself after a couple of years.

It may take a lot of self-reflection, emotional intelligence and psychological understanding of your personal issues and how to deal with them. But the bottom line to becoming confident being the real you, is that you will have to overcome your insecurities, angsts, worries, and fears. If you fail to do so, these negative factors will reveal themselves in your personal and professional life and can cause problems.

When you get the real picture of who you truly are, you also have to learn to appreciate the traits that you have. Don’t focus on the things that you dislike about yourself. Real attractiveness come from within. Before anyone else appreciates your looks, you should be the one to appreciate it first. Know your strongest feature and use it to your advantage. If you believe that you look good then you will feel good about yourself too. Your self confidence will improve and this makes you more.

Inner Personal Scorecard

Warren Buffett frequently relates an interesting way to frame this topic:

Would you rather be the world’s greatest lover, but have everyone think you’re the world’s worst lover? Or would you rather be the world’s worst lover but have everyone think you’re the world’s greatest lover?

Or. If the world couldn’t see your results, would you rather be thought of as the world’s greatest investor but in reality have the world’s worst record? Or be thought of as the world’s worst investor when you were actually the best?

Buffett’s getting at a rather fundamental model he’s used most of his life: The Inner Scorecard. When you have an internal scorecard, no one can define success for you but you.

What Buffett and a lot of other people who have been successful in life — true success, not measured by money — have in common is that they’re able to remember what we all set out to do: live a fulfilling life! Not get rich. Not get famous. Not even get admiration, necessarily. But to live a satisfying existence and help others around them do the same.

It’s not that getting rich or famous or admired can’t be deeply satisfying. It can be! I’m positive Buffett deeply enjoys his wealth and status. He’s got more “admiration tokens” than almost anyone in the world.

But all of that can be ruined very, very easily along the way by making too many compromises, by living according to an external scorecard rather than an internal one.

Controlling your emotions

According to James J. Gross, a psychologist and professor at Stanford University and best known for his research in emotion and emotion regulation, the inability to control, or regulate, your emotions is at the root of some psychological disorders including depression, social anxiety and borderline personality. And, no matter how psychologically healthy you think you are, you can benefit from learning how to better manage your emotions in investing and everyday life.

References:

Strategies to Reduce Taxes

Posted on June 29, 2021 by admin

Taxes are one thing retirees tend to have a little control over, as long as they do deliberate tax planning.

Accumulating sufficient assets for retirement is a critical part of retirement income planning, according to Bill Thomas, Financial Adviser, Thomas Financial Services. However, it’s just as important to preserve what you’ve saved over the 25 or 30 years that you may live in retirement. That’s where deliberate tax planning comes in.

It is likely that taxes will increase during your retirement, potentially reducing your income and cash flow. Instead of fretting over increasing taxes, now is the time to figure out how to create a tax-efficient retirement where you can maximize deductions and credits while minimizing taxes.

Getting into the 0% tax bracket may be possible and easier than you think. All it takes is a smart tax strategy that allows combining tax credits and deductions, accumulating more long-term capital gains, or benefiting from qualified dividends.

You can legally decrease or completely eliminate your tax bill by taking advantage of some of the perks in the tax code.

Qualified dividends follow three rules:

The dividend must have been paid by a U.S. corporation or a qualifying foreign company. The dividends must be deemed as qualified in the eyes of the IRS and cannot be listed as a non- qualified dividend.
You’ve held the stock paying the dividend for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
Use the long-term capital gains rates shown above to see the taxable income and filing status for the 0% tax brackets.

Being an investor requires a strategy to reduce your taxes. For many, it’s tempting to buy stocks and sell them as soon as the price shoots up. But if you hold on to your investments for an over a year — you’ll be eligible for long-term capital gains tax rates.

Simply put, it pays to be patient in the stock market. If you sell a stock that you’ve owned for a year or less, you’ll have to pay a short-term capital gains tax, which can be as high as 37%. Once you’ve held an investment over the one-year mark, you’ve hit the long-term capital gains threshold.

Getting into the 0% tax bracket may be easier than you think. All it takes is a smart strategy that allows you to combine tax credits and deductions, accumulate more long-term capital gains, or benefit from qualified dividends.

Make tax-smart investing part of your tax planning

The potential impact of tax-smart investing techniques over time. As the accompanying graphic shows, employing tax-smart investing techniques over time may have a significant impact on your long-term returns. The longer you apply these techniques, the greater the potential impact.

Each line represents a client’s hypothetical value from tax-smart investing techniques at various starting dates, based on a starting portfolio value of $1 million.

Though taxes might not be the first thing you think of when it comes to how you want to spend money in retirement, planning strategically can mean more income and cash flow for the things you love.

References:

Tax Planning

Posted on June 18, 2021 by admin

“It may feel good at tax time to get a refund, but remember that the money you’re getting back is money you loaned the government at no interest.”

Benjamin Franklin famously said, “nothing is certain but death and taxes.” Skip filing your taxes, and the tax agents will come calling. And when they do, you’ll likely face penalties and interest — and even lose your chance to receive a tax refund.

Unless your income is below a certain level, you will have to file federal income tax returns and pay taxes each year. Therefore, it’s important to understand your obligations and the way in which taxes are calculated.

Every year, everyone who makes money in the U.S. must fill out a prior calendar year tax return and file it with the IRS by April 15th. The process inspires dread among anyone who performs this task without the help of an accountant. The forms are complicated, and the definitions of terms like “dependent” and “exemption” can be difficult to understand.

Tax Basics and Taxable Income

There are two types of income subject to taxation: earned income and unearned income. Earned income includes:

Salary
Wages
Tips
Commissions
Bonuses
Unemployment benefits
Sick pay
Some noncash fringe benefits

Taxable unearned income includes:

Interest
Dividends
Profit from the sale of assets
Business and farm income
Rents
Royalties
Gambling winnings
Alimony

It is possible to reduce taxable income by contributing to a retirement account like a 401(k) or an IRA.

A person can exclude some income from taxation by using a standard deduction amount determined by the government and a person’s filing status or by itemizing certain types of expenses. Allowable itemized expenses include mortgage interest, state and local taxes, charitable contributions, and medical expenses.

Anyone can make an honest mistake with regard to taxes, but the IRS can be quite strict. And since everyone’s tax situation is a little different, you may have questions.

Allowed Deductions – Deductions and Tax Exemptions

The IRS offers Americans a variety of tax credits and deductions that can legally reduce how much you’ll owe. All Americans should know what deductions and credits they’re eligible for — not knowing is like leaving money on the table.

Most people take the standard deduction available to them when filing taxes to avoid providing proof of all of the purchases they’ve made throughout the year. Besides, itemized deductions often don’t add up to more than the standard deduction.

But if you’ve made substantial payments for mortgage interest, property taxes, medical expenses, local and state taxes or have made major charitable contributions, it could be worth it to take this step. These tax deductions are subtracted from your adjusted gross income, which reduces your taxable income.

The government allows the deduction of some types of expenses from a person’s adjusted gross income, or gross income minus adjustments. A person can exclude some income from taxation by using a standard deduction amount determined by the government and a person’s filing status or by itemizing certain types of expenses. Allowable itemized expenses include mortgage interest, a capped amount of state and local taxes, charitable contributions, and medical expenses.

Depending on who you are and what you do, you may be eligible for any number of tax deductions and exemptions to reduce your taxable income. At the end of the day, these could have a significant impact on your tax exposure. Starting with the standard deduction, the links below will help you determine how to shrink your income — for tax purposes, of course.

Common Tax Credits

Tax credits are also another way to reduce your tax exposure and possibly obtain a tax refund when the dust settles. Many people don’t realize that a tax credit is the equivalent of free money. Tax deductions reduce the amount of taxable income you can claim, and tax credits reduce the tax you owe and, in many cases, result in a nice refund.

The IRS offers a large number of tax credits that encompass everything from buying energy-efficient products for your home to health insurance premium payments to being in a low- to moderate-income household. The key to benefiting from these credits is examining all of the purchases you’ve made throughout the year to see if you are owed money.

There are 17 tax credits for individuals you can take advantage of in five categories:

Education credits
Family tax credits
Healthcare credits
Homeownership and real estate credits
Income and savings credits

Taxes: What to Pay and When

Most Americans don’t look forward to tax season. But the refund that a majority of taxpayers get can make the tedious process of tax filing worth the effort.

When you’re an employee, it’s your employer’s responsibility to withhold federal, state, and any local income taxes and send that withholding to the IRS, state, and locality. Those payments to the IRS are your prepayments on your expected tax liability when you file your tax return. Your Form W-2 has the withholding information for the year.

The U.S. has a pay-as-you-go taxation system. Just as income tax is withheld from employees every pay period and sent to the IRS, the estimated tax paid quarterly helps the government maintain a reliable schedule of income. It also protects you from having to cough up all the dough at once.

When you file, if you prepaid more than you owe, you get some back. If you prepaid too little, you have to make up the difference and pay more. And, if you’re like most wage earners, you get a nice refund at tax time.

But if you are self-employed, or if you have income other than your salary, you may need to pay estimated taxes each quarter to square your tax bill with Uncle Sam. You may owe estimated taxes if you receive income that isn’t subject to withholding, such as:

Interest income
Dividends
Gains from sales of stock or other assets
Earnings from a business
Alimony that is taxable

So, it’s important to remember that taxes are a pay-as-you-go. This means that you need to pay most of your tax during the year, as you receive income, rather than paying at the end of the year.

There are two ways to pay tax:

Withholding from your pay, your pension or certain government payments, such as Social Security.
Making quarterly estimated tax payments during the year.

This will help you avoid a surprise tax bill when you file your return. If you want to avoid a large tax bill, you may need to change your withholding. Changes in your life, such as marriage, divorce, working a second job, running a side business or receiving any other income without withholding can affect the amount of tax you owe.

And if you work as an employee, you don’t have to make estimated tax payments if you have more tax withheld from your paycheck. This may be an option if you also have a side job or a part-time business.

It may feel good at tax time to get a refund, but remember that the money you’re getting back is money you loaned the government at no interest.

References:

Taxes Strategies in Retirement

Posted on June 10, 2021 by admin

“Taxes in retirement will likely be lower than you expect and not all your retirement income is taxable.”

Managing taxes in retirement can be complex. Yet, thoughtful planning may help reduce the tax burden for you and your heirs. By formulating a tax-efficient investment and distribution strategy, retirees may keep more of their hard-earned assets for themselves and their heirs.

The inconvenient truth is that you’ll continue to pay taxes in retirement, which in most cases will be typically at a lower effective tax rate. And, there are a variety of reasons why your tax rate in retirement will be lower.

When you’re working, the bulk of your income is earned from your job and is fully taxable (after deductions and exemptions) at ordinary income tax rates.

When you’re retired, different tax rules can apply to each type of income you receive. You should know how each income source shows up on your tax return in order to estimate and minimize your taxes in retirement.

In retirement, only pension income, withdrawals from taxable retirement accounts such as 401(k), and any rental, business, and wage income you have is taxable at ordinary income tax rates.

Withdrawals from tax-deferred retirement accounts are taxed at ordinary income rates. These are long-term assets, but withdrawals aren’t taxed at long-term capital gains rates. IRA withdrawals, as well as withdrawals from 401(k) plans, 403(b) plans, and 457 plans, are reported on your tax return as taxable income.

Social Security is taxed at ordinary income rates, but only part of it is taxable.

You probably won’t pay any taxes in retirement if Social Security benefits are your only source of income, but a portion of your benefits will likely be taxed if you have other sources of income. The taxable amount—anywhere from zero to 85%—depends on how much other income you have in addition to Social Security.

Withdrawals from Roth accounts are tax-free if you’ve had the account for at least 5 years and are over age 59 1/2.

Accessing the principal from savings and investments is tax-free and long-term capital gains are taxed at lower rates or can even reduce other taxes if you’re selling at a loss.

You’ll pay taxes on dividends, interest income, or capital gains from investments. These types of investment income are reported on a 1099 tax form each year. Each sale of an asset will generate a long- or short-term capital gain or loss, and is reported on your tax return. Short term capital gains are taxed as ordinary income and long term gains are taxed at lower capital gains tax rate.

Tax rate: Marginal vs. Effective

Marginal tax rate is the tax rate you pay on an additional dollar of income. The reason is because the next dollar that you contribute to your retirement account would normally be taxed at the marginal tax rate.

For example, a single person with a taxable income of $50k would have a 22% marginal tax bracket for 2021. But according calculations, the effective tax rate would be 13.5% of taxable income since only taxable income over $40,525, or $9,475, would be taxed at that 22%.

When you take funds out of your 401(k) in retirement, some of your income won’t be taxed at all because of deductions and exemptions. In fact, your standard deduction would be $1,700 higher if you were age 65 or older this year.

The first $9,950 of taxable income would only be taxed at 10%. Then the next bucket of income up to $40,525 would be taxed at 12%. Only the income over $40,525 would be taxed at the 22% rate.

Ideally, you want to use the lower effective tax rate when you’re estimating how much of your retirement income will go to pay taxes.

Tax strategies

Less taxing investments

Municipal bonds, or “munis,” have long been appreciated by retirees seeking a haven from taxes and stock market volatility. In general, the interest paid on municipal bonds is exempt from federal income tax and sometimes state and local taxes as well. The higher your tax bracket, the more you may benefit from investing in munis.

Also, tax-managed mutual funds may be a consideration. Managers of these funds pursue tax efficiency by employing a number of strategies. For instance, they might limit the number of times they trade investments within a fund or sell securities at a loss to offset portfolio gains. Equity index funds may also be more tax efficient than actively managed stock funds due to a potentially lower investment turnover rate.

It’s also important to review which types of securities are held in taxable versus tax-deferred accounts. Because the maximum federal tax rate on some dividend-producing investments and long-term capital gains is 20%.

Securities to tap first

Another major decision facing retirees is when to liquidate various types of assets. The advantage of holding on to tax-deferred investments is that they compound on a before-tax basis and therefore have greater earning potential than their taxable counterparts.

On the other hand, you’ll need to consider that qualified withdrawals from tax-deferred investments are taxed at ordinary federal income tax rates of up to 37%, while distributions — in the form of capital gains or dividends — from investments in taxable accounts are taxed at a maximum 20%. Capital gains on investments held for one year or less are taxed at regular income tax rates.)

For this reason, it potentially could be beneficial to hold securities in taxable accounts long enough to qualify for the favorable long-term rate. And, when choosing between tapping capital gains versus dividends, long-term capital gains may be a consideration from an estate planning perspective because you could get a step-up in basis on appreciated assets at death.

It may also make sense to consider taking a long term view with regard to tapping tax-deferred accounts. Keep in mind, however, the deadline for taking annual required minimum distributions (RMDs).

The ins and outs of RMDs

Generally, the IRS mandates that you begin taking an annual RMD from traditional individual retirement accounts (IRAs) and employer-sponsored retirement plans after you reach age 72.

The premise behind the RMD rule is simple — the longer you are expected to live, the less the IRS requires you to withdraw (and pay taxes on) each year.

In most cases, RMDs are based on a uniform table based on the participant’s age. Failure to take the RMD can result in an additional tax equal to 50% of the difference between the required minimum distribution and the actual amount distributed during the calendar year. Tip: If you’ll be pushed into a higher tax bracket at age 72.

Estate planning and gifting

There are various ways to reduce the burden of taxes on your beneficiaries. Careful selection of beneficiaries of your retirement accounts is one example. If you do not name a beneficiary of your retirement account, the assets in the account could become distributable to your estate. Your estate or its beneficiaries may be required to take RMDs on a faster schedule (such as over five years) than what would otherwise have been required (such as ten years or over the remaining lifetime of an individual beneficiary). In most cases, naming a spouse as a beneficiary is ideal because a surviving spouse has several options that aren’t available to other beneficiaries, such as rolling over your retirement account into the spouse’s own account and taking RMDs based on the surviving spouse’s own age

Key takeaways

“Nothing in life is certain except death and taxes.” Benjamin Franklin

When it comes to investing, nothing is certain but taxes.

Taxation and rates varies depending on the type of retirement income you receive.
You may pay taxes on Social Security benefits if you have other sources of income.
Income from pensions, traditional IRAs, 401(k)s, and similar plans are taxed as ordinary income.
You’ll pay taxes on investment income, including capital gains taxes if applicable.
Know and calculate your effective tax rate, which in most cases, will be lower than your marginal tax rate.

https://twitter.com/kiplinger/status/1401655591320313868

Strategies for making the most of your money and reducing taxes in retirement are complex. Plan ahead and consider meeting with a competent tax advisor, an estate attorney, and a financial professional to help you sort through your options.

References:

Cash Flow in Retirement | Fidelity Investments

Posted on May 14, 2021 by admin

Cash flow simply means the amount of cash you have coming in and going out each month.

Think about cash flow as mapping your income versus your expenses. If you anticipate risk factors that can often come with retirement (health care expense, a downturn in the market, or a family emergency) then consider increasing your position in cash (or cash equivalents like Treasury bills, CDs, and money market accounts).

How will you help maintain a steady flow of income in retirement?

You’ve spent years saving money in anticipation of retirement, and while accumulating retirement savings is indeed important, it’s only half the story. Once you stop working, your focus shifts away from saving money and toward using that money to live the retirement you want.

Generating your retirement income

Retirement is an exciting stage of life that many Americans eagerly anticipate, yet retirement as we’ve known it has changed. Different concepts of retirement are emerging — your personal vision of retirement likely differs from how your parents, neighbors, and friends expect to spend their retirement years. In addition, Americans today are living longer and are more responsible for funding their retirements than past generations.

As we navigate this continually evolving retirement landscape, it’s important that your retirement-planning process reflect your unique situation. And remember that retirement income (or cash flow) planning requires a different set of strategies, products, plans, and choices than saving for your retirement. Education and guidance can help you develop an income plan and a spending strategy that are right for you.

Understanding retirement income

While most people understand the importance of saving money for retirement, the concept of retirement income planning is less familiar. Some basic definitions are.

Retirement income is the money you use to cover your expenses when you stop working.
Potential retirement income sources include Social Security, pensions, annuities, retirement savings from a qualified employer sponsored plan (QRP) like 401(k), 403(b) and governmental 457(b) as well as IRAs.
Retirement income planning is the process of determining how much money you’ll need in retirement, and where your cash flow will come from each year. Retirement income planning involves four components:
- Planning: Write a plan that includes your expected retirement expenses to help provide a roadmap through retirement.
- Retirement investing strategies: Determine your various retirement income sources and consider the best way to invest your assets to help meet your retirement income goals.
- Managing your retirement money: Decide how to manage your money to help maintain a steady flow of income that will cover your expenses throughout your retirement years.
- Ongoing monitoring: Revisit and adjust your retirement income plan whenever your circumstances change, but at least once a year.

Benefits of planning your retirement income

Developing a written income plan can help you retire with confidence by considering questions such as: What do I want to do in retirement? Where do I want to live? Do I have enough to retire when I’d like? How do I create a steady income stream to take the place of my paycheck? How can I plan for the unexpected, such as extreme market fluctuations, health care needs, and other financial needs? And, will my money last throughout my retirement years?

For illustrative purposes only.

Starting the retirement income planning process five to 10 years before you retire allows you time to develop a thoughtful, personalized plan that will help make the most of your hard-earned savings.

cash flow to help meet both your near-term liquidity needs and longer-term needs for both income and growth

One approach to consider is to bucket cash for different shorter- and longer-term needs, such as living expenses, short-term goals, and emergencies. Here are some ways to implement each:

Read Viewpoints on Fidelity.com: Budgeting for retirees

References:

https://www.fidelity.com/viewpoints/retirement/managing-cash-flow

Dividend Growth Stock Investing

Posted on April 29, 2021 by admin

Dividend growth stocks, known for steady dividend increases over time, can be valuable additions to your income portfolio.

Since 1926, dividends have accounted for more than 40% of the return realized by investing in large-cap U.S. domestic stocks, according to American Association of Individual Investors. The 9.9% historical annualized return for stocks is significantly impacted by the payment of dividends. Research shows that if dividends were taken out of the equation, the long-term annual return for stocks would fall to 5.5%.

Dividend stocks have long been a foundation for steady income to live on and a reliable pathway to accumulating wealth for retirement. Even in times of market stress, companies could be counted on to do everything possible to maintain their payouts. Most dividend-paying companies follow a regular calendar schedule for distributing the payments, typically on a quarterly basis. This gives investors a reliable source of income.

This stream of income helps to boost and protect returns. When stock prices move upward, dividends enhance shareholders’ returns. Shareholders get the benefit of a higher stock price and the flow of income; when combined, these elements create total return. Dividend payments provide a minimum rate of return that will be achieved, as long as the company does not alter its dividend policy. This helps cushion the blow of downward market moves.

Yet, dividend stocks typically don’t offer dramatic price appreciation, but they do provide investors with a steady stream of income.

“I do not own a single security anywhere that doesn’t pay a dividend, and I formed a mutual-fund company with that very simple philosophy.” Kevin O’Leary

Kevin O’Leary, known to many as “Mr. Wonderful”, is Chairman of O’Shares Investments and can be seen on the popular TV show Shark Tank, invests only in stocks that have steady “cash flow” and “pay dividends” to shareholders. He looks for stocks that exhibit three main characteristics:

First, they must be quality companies with strong financial performance and solid balance sheets.
Second, he believes a portfolio should be diversified across different market sectors.
Third, and perhaps most important, he demands income—he insists the stocks he invests in pay dividends to shareholders.

Kiplinger

Dividend Increases: 15 Stocks Announcing Massive Hikes
Looking for more than token dividend increases? Consider this list of 15 companies announcing substantial payout hikes over the past few months.@Kiplinger https://t.co/c02FSqQ0Ae

— ELB (@ebrownl33) April 28, 2021

Power of Dividend Investing

Dividends are a commitment by a company to distribute a portion of its earnings to shareholders on a regular basis. Once companies start paying a dividend, they are reluctant to cut or suspend periodic the payments.

Dividends are payments that companies make to shareholders at regular intervals, usually quarterly. Dividends and compounding may be a strong force in generating investor returns and growing income.

Dividend-paying stocks are not fancy, but they have a lot going for them. Dividends have played a significant role in the returns investors have received during the past 50 years. Going back to 1970, 78% of the total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding.

“High” dividend yield stocks beat “Highest”

Investors seeking dividend-paying investments may make the mistake of simply choosing those that offer the highest yields possible. A study conducted by Wellington Management reveals the potential flaws in this thinking.

The highest-yielding stocks have not had the best historical total returns despite its ability to pay a generous dividend. The study found that stocks offering the highest level of dividend payouts have not always performed as well as those that pay high, but not the very highest, levels of dividends.

With the economy in recession, equity income investors may be at risk of dividend cuts or suspensions in their portfolios. Dividend quality matters more today than it has in a long time. Thus, it’s important to select high quality U.S. large-cap companies for their profitability, strong balance sheets and dividend quality, which increase the likelihood that they will be able to maintain and grow dividends paid to investors even during periods of economic uncertainty.

Income-producing dividend stocks

Dividends have historically played a significant role in total return, particularly when average annual equity returns have been lower than 10% during a decade. Seek dividend stocks that possess the following characteristics:

Currently pays a dividend;
Dividend yield above bench mark yields;
Higher dividend payments this year relative to last year, or a reasonable expectation that future dividend payments will be raised (in certain cases, a company that recently initiated a dividend will be considered if there is a reasonable expectation that it will increase its dividend in the future);
A free-cash-flow payout ratio below 100%(utility stocks are allowed to have a ratio above 100% if free cash flow is positive when calculated on a pre-dividend basis);
Improving trends in sales and earnings;
A strong balance sheet, as measured by the current ratio and the liabilities-to-assets ratio;
An attractive valuation, as measured by the price-earnings ratio;
Has no more than one class of shares; and
Dividends are paid as qualified dividends, not non- dividend distributions.

Dividend Growth Key to Outperformance

You should invest in corporations that consistently grow their dividends, have historically exhibited strong fundamentals, have solid business plans, and have a deep commitment to their shareholders. They also demonstrate a reasonable expectation of paying a dividend in the foreseeable future and a history of rising dividend payments.

You should also take into consideration the indicated yield (projected dividend payments for the next 12 months divided by the current share price) for all stocks, but place a greater emphasis on stocks with the potential to enhance the portfolio’s total return than those that merely pay a high dividend.

The market environment is also supportive of dividends. A pre-pandemic strong US economy has helped companies grow earnings and free cash flow, which resulted in record levels of cash on corporate balance sheets. This excess cash should allow businesses with existing dividends to maintain, if not grow, their dividends. And while interest rates have risen from historic levels, they’re expected to stay stable for another year or so. This means dividend- paying stocks should continue to offer attractive yields relative to many fixed-income asset classes.

Furthermore, dividend growers and initiators have historically provided greater total return with less volatility relative to companies that either maintained or cut their dividends. There is ample evidence that dividend growers outperform other stocks over time with much lower volatility. For instance, a Hartford Funds study of the past 50 years showed dividend growers outperforming other dividend payers by 37 basis points annually and non-dividend payers by 102 basis points.

One reason dividend growers tend to outperform may be the expanding earnings and cash flow and shareholder-friendly management teams that often characterize these companies. In addition, consistent profitability, solid balance sheets and low payouts enable dividend growers to weather any economic storm.

Trends that bode well for dividend-paying stocks include historically high levels of corporate cash, historically low bond yields, and baby boomers’ demand for income that will last throughout retirement.

Traits of consistent dividend payers

Today’s historically low interest rates have caused investors to invest heavily in dividend- paying stocks and strategies, which has helped bolster their performance. This trend shows no sign of abating as long as interest rates continue to remain relatively low, and demand for these investments will only grow as investors continue to seek income and return.

Here are several financial traits investors should look for in consistent dividend payers:

Relatively low payout ratios. A payout ratio measures the percentage of earnings paid out as dividends. The median is 38% for S&P 500 companies, according to Goldman Sachs. In theory, the higher the ratio, the less financial flexibility a company has to boost its dividend
Reasonable debt levels. As with payout ratios, this isn’t a one-size-fits-all metric. But if a company has a big debt load, there’s less cash available for the dividend.
Strong free cash flow. This typically measures operating cash, minus capital expenditure. It’s important for a company to cover its dividend with its free cash flow.
Stable earnings growth. Put another way, dividend investors should be wary of companies with volatile earnings, which can pressure the ability to maintain, let alone raise, payouts.

It’s important to know that not all dividends are treated the same from a tax perspective.

There are 2 basic types of dividends issued to investors:

Qualified dividends: These are dividends designated as qualified, which means they qualify to be taxed at the capital gains rate, which depends on the investor’s modified adjusted gross income (MAGI) and taxable income (the rates are 0%, 15%, 18.8%, and 23.8%). These dividends are paid on stock held by the shareholder, which must own them for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. This means if you actively trade stocks and ETFs, you probably can’t meet this holding requirement.
Nonqualified dividends: These dividends are not designated by the ETF as qualified because they might have been payable on stocks held by the shareholder for 60 days or less. Consequently, they’re taxed at ordinary income rates. Basically, nonqualified dividends are the amount of total dividends minus any portion of the total dividends treated as qualified dividends. Note: While qualified dividends are taxed at the same rate at capital gains, they cannot be used to offset capital losses.

Dividend growth stocks, known for steady dividend increases over time, can be valuable additions to your income portfolio. A dividend grower typically has a cash-rich balance sheets, formidable cash flow and meager payouts allowing room for more dividend growth. Additionally, dividend growth stocks can provide an hedge against inflation by providing a bump in income every time the dividend is hiked.

References:

Past performance does not guarantee future results. Dividend-paying stocks are not guaranteed to outperform non-dividend-paying stocks in a declining, flat, or rising market.

Saving and Investing

Posted on April 24, 2021 by admin

“The easiest way to wealth are saving and investing in your mind and in appreciating assets.”

Save and invest today for the life and financial freedom you want later. Investing for the long-term is the only way to truly build wealth and achieve financial freedom.

Retirement doesn’t mean what it used to for a lot of Americans. It used to be something you could count on — and when it came, you were going to pursue the goals and lifestyle you dreamed about and love.

Today, many Americans don’t believe that they will retire, while others are not waiting until retirement and are doing what they love now.

Regardless of your unique circumstances or life’s priorities, it important to save and invest now so later the resulting financial freedom will allow you – in a tax advantaged way – to enjoy a better and happier life later.

The easiest and most effective way to save is automatically.

Start small, think BIG: Even a little savings can go a long way! You can start with a small amount, and you can save daily, weekly, or monthly for ANY savings goal you have.

Set your goal and start saving today! 👏 pic.twitter.com/fE5Lxel2iB

— America Saves (@AmericaSaves) April 1, 2021

A smart investor:

Plans for life’s unexpected challenges and investing in uncertain times
Conducts research on a product before investing
Assesses the impact of fees when choosing an investment
Understands that risk exists in all investments
Avoids “get rich quick” and “can’t lose” schemes
Recognizes the power of compound interest
Recognizes the importance of diversification
Plans for and invests according to his/her future needs and goals
Recognizes the benefit of long-term, regular and diversified investment
Verifies that an investment professional is licensed

Establish Emergency Savings

Unexpected emergencies often sabotage our financial goals, so getting in a savings mindset and building an emergency fund is crucial. Start small and think big by setting a goal of a $500 rainy day fund. Once you’ve reached that goal, it will be easy to continue!

Open Your Savings Account

If you don’t have a savings account, now’s the time! Ensure your savings account is federally insured with a reputable financial institution with no fees (or low fees).

Set up Automatic Savings

The easiest way to save is to save automatically!

Choose the amount you would like to automatically save each period. Even $10-50 of your paycheck, weekly or bi-weekly, can provide substantial savings over time.

Contact your employer to set up a direct deposit into your savings account each pay period or set up an automatic transfer from your checking account to your savings account at your financial institution.

Even small amounts, saved automatically each pay period, make a big difference.

Q8. How do good saving habits affect your creditworthiness? #CreditChat #ASW2021 pic.twitter.com/Ve9vKkRr1o

— Experian (@Experian) February 24, 2021

Get Serious About Reducing Your Debt

Paying down debt is saving!

When you pay down debt, you save on interest, fees, late payments, etc. Not only that, by having savings you’re less likely to need credit for emergencies – allowing you to keep a lower credit usage percentage.

When you reduce your debt, you save on interest and fees while maintaining or improving your credit score! Create a debt reduction plan that works best for you. Utilize America Saves resources to see the different options to pay down debt.

Get Clear On Your Finances

Create a Spending and Savings Plan that allows you to easily see your income, expenses, and anything leftover. Once you have a clear view of your finances, you can determine where to make changes and what else you should be saving for based on your financial goals.

It’s always the right time to create a saving and spending plan (aka a budget). It’s also a good idea to revisit that plan annually or when a major shift occurs in your income or expenses.

Here are several tips to help ensure that your money is working smarter and harder for you.

Step 1. Determine your income.

To create an effective budget, you need to know exactly how much money you’re bringing in each month. Calculate your monthly income by adding your paychecks and any other source of income that you receive regularly. Be sure to use your net pay rather than your gross pay. Your net pay is the amount you receive after taxes and other allocations, like retirement savings, are deducted.

Step 2. Determine your net worth which is your assets minus your liabilities

Net worth is assets minus liabilities. Or, you can think of net worth as everything you own less all that you owe.

Calculating your net worth requires you to take an inventory of what you own, as well as your outstanding debt. And when we say own, we include assets that you may still be paying for, such as a car or a house.

For example, if you have a mortgage on a house with a market value of $200,000 and the balance on your loan is $150,000, you can add $50,000 to your net worth.

Basically, the formula is:

ASSETS – LIABILITIES = NET WORTH

And by the way, your income is not included in a net worth calculation. A person can bring home a big paycheck but have a low net worth if they spend most of their money. On the other hand, even people with modest incomes can accumulate significant wealth and a high net worth if they buy appreciating assets and are prudent savers.

Step 3. Track your cash flow which is both your expenses and your spending.

This step is essential. It’s not enough to write out your actual expenses, like rent or mortgage, food, and auto insurance, you must also track what you are spending.

If you’ve ever felt like your money “just disappears,” you’re not the only one. Tracking your spending is a great way to find out exactly where your money goes. Spending $10 a day on parking or $5 every morning for coffee doesn’t sound like much until you calculate the total cost per month.

Tracking your spending will help you pinpoint the areas you may be overspending and help you quickly identify where you can make cost-efficient cuts. Once you’ve written out your expenses and tracked your spending habits, you’re ready for the next step.

Step 4. Set your financial goals.

Now you get to look at your present financial situation and habits and decide what you want your future to look like. Ask yourself what’s most important to you right now? What financial goals do you want to achieve?

Some common goals include building an emergency fund, paying down debt, purchasing a home or car, saving for education, and retirement.

Step 5. Decrease your spending or increase your income.

What if you set your financial goals and realize there’s not enough money left at the end of the month to save for the things you want?

You essentially have two choices. You can either change the way you manage your current income or add a new source of income. In today’s gig economy, it’s easier than ever to add a stream of income, but we know that everyone’s situation is different, and that’s not always an option.

Even if you can add income, you may have identified some spending habits you’d like to change by decreasing how much you spend.

Take a look back at your expense tracking. For the nonessential items, consider reducing your spending. For example, if you find that you are spending quite a bit on entertainment, like movies or dining out, reduce the number of times you go per month.

Then apply the money that’s been freed up to your savings goals.

For more ideas on how to increase your savings, read 54 Ways to Save.

Step 6. Stick to your plan.

Make sure you stick to your spending and savings plan. To make saving more efficient, set up automatic savings so that you can set it and forget it! Saving automatically is the easiest way to save.

Reassess and adjust your plan whenever you have life changes such as marriage, a new baby, a move, or a promotion.

Following your plan ensures that you’re financially stable, are ‘thinking like a saver,’ and better prepared for those unexpected emergencies.

The top 10 investing terms people Google the most https://t.co/15SdaKrH8h

— ELB (@ebrownl33) March 17, 2021

References:

5 Simple Rules for Investing Success

Posted on April 6, 2021 by admin

“Definiteness of purpose or single-mindedness combined with PMA (positive mental attitude) is the starting point of all worthwhile achievement. It means that you should have one high, desirable, outstanding goal and keep it ever before you.” W. Clement Stone

Investing is a mental game. And to be successful at the mental game, you must adjust your mindset and retrain your thinking that as a long-term investor, you need to be able to buy stocks and open new positions when the market is crashing or correcting. You’re genetically programmed to be a lousy investor. You must set up systems and rules to fight our normal urges and invest at what appears to be the absolute worst time and when everyone else is fearful and selling.

It is important to accept the fact that you will absolutely enter a position at the wrong time and make a bad buy in the short term. It happens to every investor at sometime in their life.

Investing doesn’t have to be intimidating or challenging. To get started investing in stocks and bonds, you should follow with deliberate purpose and action five simple rules for building a long-term portfolio, according to TD Ameritrade:

Contribute early and often – The single most important thing you can do in investing is to invest early and save often. Thanks to the magic of compounding, money invested early has more time to grow. Delaying investing can have a significant effect on your portfolio. In fact, for every 10 years you wait before starting to investing, you’ll need to save roughly three times as much every month in order to catch up.
Minimize fees and taxes – Charges and taxes will have an impact on your overall returns, so it’s important to take these into consideration when choosing your investments.
Diversify your portfolio – We all know the saying ‘don’t put all your eggs in one basket’, but it’s particularly important to apply this rule when investing. Spreading your money across a range of different types of assets and geographical areas means you won’t be depending too heavily on one kind of investment or region. That means if one of them performs badly, some of your other investments might make up for these losses, although there are no guarantees.
Consider how much time you have – Investing should never be considered a ‘get rich quick’ scheme. You need to remain invested for at least ten years, but preferably much longer to give your investments the best chance of providing the returns you’re hoping for. Even then you must be comfortable accepting the risk that you could get less than you put in. If your investment goals are short-term, for example, two or three years away, investing won’t be right for you, as you’ll need to keep your money readily accessible, usually in a savings account.
Have a financial plan and focus on long-term goals – A financial plan creates a roadmap for your money and helps you achieve your goals. It is a comprehensive picture of your current finances, your financial goals and any strategies you’ve set to achieve those goals. Good financial planning should include details about your cash flow, savings, debt, investments, insurance and any other elements of your financial life. Knowing what your financial goals are and what sort of timeframe you are investing over may help you stick to your plan and strategy. For example, if you have long-terms goals, perhaps saving for retirement which may be several decades away, you may be less tempted to dip into your investments before you stop work.

https://youtu.be/NxEcO7ITtMo

And, never forget the top two and oldest rules for investors, according to Warren Buffet:

Rule #1 of investing is “Don’t Lose Money.”
Rule #2 is “Don’t forget rule #1.”

What Buffett is referring to is a state of mind and philosophy for investing. Simply, it means that there’s no such thing as “play money.” You don’t go out and speculate on a stock. You remain patient and disciplined, whether your tax deferred or brokerage accounts are up or down for the month or year.

Investing is not gambling and the stock market is not a casino. There’s no such thing as the house’s money in investing. It’s all your money, and it has to be protected.

So, don’t become anchored to the price of stocks, instead focus on buying good businesses at fair prices. Only thing that truly matters in investing is the long-term future prospects (innovation, moat, management acumen) and growth opportunities of businesses. Don’t let the loss in the price of a stock get in your head and don’t let a short-term paper loss sway your emotions, behaviors or actions.

Better to be a regular investor rather than be perfect or optimize to price of the stock. And remember, celebrate good stock buys, and recognize and learn from bad buys.

References:

Creating a Budget

Posted on March 23, 2021 by admin

“A budget is telling your money where to go instead of wondering where it went.” John C. Maxwell

Spending within your means may sound like a simple rule to follow, but many Americans spend more than they save, which can result in debt. The good news is that it’s completely avoidable, and it’s reversible over time. With a little budgeting, planning, tracking and adjusting your spending, you can live happily within your means.

Keeping your personal finances in tip-top state does takes some planning, effort and time. Yet, many people live above their means and don’t even realize it. More than three-quarters of American workers (78 percent) are living paycheck-to-paycheck to make ends meet, according to survey conducted by Harris Poll on behalf of CareerBuilder in 2017. Thirty-eight percent said they sometimes live paycheck-to-paycheck, 17 percent said they usually do and 23 percent said they always do.

To improve your financial health and money management awareness, the one piece of advice you hear most often from financial experts is to create a budget.

“Budgeting helps you better understand how you spend your money and shows you ways to manage your money, pay off debts and save for future financial goals.”

Budgeting is one of the single most effective tools for money management. Making a budget simply means examining your income and expenditures in order to determine exactly how much money you have coming in and where you’re spending it. Once you’ve got a clear understanding of your current budget – what income you’re receiving and what expenses you’re responsible for – take a closer look and find places where you can spend less.

A budget will help give you a clearer picture of how much money you have coming in (income) and how much is going out (expenses). It’ll set guidelines for your expenses that will help you understand how much you can set aside for those bigger ticket items like a house and long term goals, like saving for retirement or an emergency fund. A budget is a personal cash flow roadmap. It can span a week, month, quarter—three months—or any set length of time. They are created by individuals and businesses.

"A budget is a guide but no one has it down 100%." Presented by @Fidelity https://t.co/asujE1QqRu

— Business Insider (@BusinessInsider) December 30, 2020

Begin planning your monthly budget by figuring out how much you have coming in versus how much is going out every month. Ultimately, you want to end up with a blueprint that specifically breaks down your cash flow (income minus expenses), so you know how much you can spend and how much you can save each month. Building a budget starts with a few simple steps.

Budgeting is Important

“When making a budget, the idea is to make sure your expenses don’t exceed your income.”

A budget is a foundational piece of a financial plan. If you’re serious about reaching your financial goals, making a budget and sticking to it can help you achieve them. Here are some of the benefits of making and following a budget:

Live within your means: If you haven’t been budgeting up to this point, you may often wonder at the end of the month where all your money went. It’s even possible that you’re running a deficit and taking on credit card debt to cover the difference. A budget can help you live within your means when you use it to set clear boundaries for your spending.
Pay off debt: Making a budget is about taking control of your finances. If you’re working to get out of debt, decide how to allocate your spending to prioritize paying more toward debt payments. For example, if you notice that you spend a lot on entertainment, you can set a budget to only allow yourself to spend up to a certain amount on that category. Then use the savings to pay down debt.
Save money: Long-term savings goals are also an important part of a personal budget. Think about setting aside money each month to save for retirement, a vacation or a home down payment. In the short term, make sure to save enough for an emergency fund. A budget can give you better control over how you spend your money, allowing you to cut back on spending and save more.
Reach financial goals: You likely have financial goals you’re working toward. But if you don’t have a budget, it can be tough to know where to focus your efforts and make meaningful progress. A budget can help you decide how much money to allocate for each goal to keep yourself accountable.

While these are general benefits of budgeting, take a moment to think about why you want to budget. Whether it’s due to a short-term need, long-term goals or simply to understand where your money goes, knowing your reasons for budgeting can motivate you to keep up with it.

Step 1: Look at your paycheck.

To create a budget, you first need to know your net monthly income, or after-tax income. This is your monthly take-home pay, not your total salary — an important distinction when figuring out how much you can spend on a monthly basis. Knowing this number is the first step to creating a spending strategy.

To start, make a list of all your sources of income coming in the door every month. Every paycheck you get. Maybe a regular side hustle. Do you get alimony or child support? What about income from investments? Everything.

Step 2: Distinguish your essential needs from your wants and discretionary spending.

Start listing your expenses. Start with the big stuff: rent, car payments or transportation, utilities, groceries, any debt payments you need to make — things like that. Now it’s time to make a list of your essential expenses. This involves separating your “wants” from the “needs.” Needs usually include things like:

Housing costs (monthly rent or mortgage payment)
Transportation costs (car payment, fuel, public transportation)
Utilities
Food
Insurance
Internet, cable, and phone bills

Once you’ve tallied those costs, add them up and deduct your needs total from your after-tax income. Make note of that number. What about everything you spend money on that you like, but maybe don’t need? Eating out, entertainment, that new pair of shoes. Add those as a list to your expenses. Treating yourself is great! But you want to do it within your budget.

Step 3: Calculate how much your wants cost you.

Next, outline all the things you spent money on that don’t fall into the “needs” bucket, and tally up the total. The easiest way to do this is to look at your credit card statements from the last month or two. If you use cash to pay for things, keep a log for several days (or better yet, a couple weeks) of all your expenses.

Once it’s all written down, use a critical eye and note where you’re being your own worst enemy by overspending or wasting money on things you don’t need (or even want). Strategize on how you can modify your behavior to reduce these unnecessary expenses.

While it’s a-okay to splurge on occasion, it’s important to do so in moderation.

Step 4: Add up all your costs.

Jot down the total amounts of your “needs” and “wants” and see how they stack up against a common rule of thumb: the 50/30/20 budget. This popular money management plan says you should spend 50 percent of your take-home pay on needs, 30 percent on wants, and put the remaining 20 percent toward savings, investments, and any debts you may have, like school loans or revolving credit card debt.

Don’t panic if your current financial picture doesn’t align with this ideal ratio. It can be difficult to stick to this plan, especially if you’re new to the workforce and possibly paying down student loan debt.

But that’s exactly why a budget can be so useful. Matching up how much you spend to established guidelines can be a helpful way to identify where everything’s lining up — and where you can put in a little more effort and reduce your spending.

Step 5: Keep it up.

Now that you have your budget created, here comes the harder part: sticking to it.

The primary part of your budget should always cover your needs. What’s left over is split between the things you want and your savings. When it comes to minding your numbers, try out some of these tips:

Be a stickler and set aside some savings for an emergency fund. It’s smart to have it an intrinsic part of your budget.
While putting 20 percent of your take-home pay toward savings and debt isn’t technically considered a “need,” you should treat it as one. Avoid dipping into that bucket to pay for “wants,” so you can pay down debts and afford future unknowns, should something arise. In fact, you could remove temptation by setting up monthly automatic savings transfers.
Break it down. If a budget isn’t as manageable, try chopping it up into monthly or weekly segments. A shorter time frame can make it easier to stay on track. That way, you won’t discover that you’re already pushing the limit of your budget.
Review regularly. Along those same lines, keep track of your purchases as they happen instead of totaling them up at the end of the month. Checking your balance online or reviewing your recent credit card charges is a great reality check for daily expenditures.
Get everyone on board. If other people, like your spouse, are supposed to follow your budget, make sure they’re on board with the financial goals you’re trying to meet. To help create a comprehensive budget, most financial advisers recommend following the 50/30/20 model for budgeting. This model suggests you use 50% of your take-home pay for essential needs, 30% for wants or discretionary spending, and 20% for savings.

Trim your expenses if your budget proves your expenses outweigh your income. One of the easiest ways to trim your expenses is to evaluate how much money you’re spending on the things you want but don’t necessarily need. For example, a night out with friends costs an average of $81, which really adds up if you go out multiple nights a week. This doesn’t mean you can’t go out and have fun, but you may need to limit your spending to make your budget work.

Another way to cut your expenses and get control of your finances is to see if you can lower the cost of certain services. Contact cellphone, internet and cable television providers to see if a competitor offers a better deal or if you can save money by bundling. Consider dropping premium cable television channels and opt for an economical basic package.

Setting goals

Successful budgeting starts with aligning your spending with your priorities. Creating goals and rewards is a fantastic way to increase your chance of budgeting successfully. For example, set a goal to save a specific amount to pay off debts by spending less on unnecessary expenses like dining out, buying lattes or shopping. Put this money into a savings account to earn interest. When you meet your savings goal, reward yourself with a reasonable splurge on something fun. Typical goals and priorities include:

Planning and paying for college and post graduate educational expenses
Saving a down payment to buy a home or paying off the mortgage early
Paying off high-interest student loans and credit card bills
Saving and investing for early retirement

Budgeting doesn’t have to be the complicated or intimidating task that it’s often made out to be. Follow this simple process, and your monthly budget will help keep your finances in check.

Now you have the beginnings of your monthly budget! It’s most efficient to build this your budget in a spreadsheet or budgeting software. Then add new expenses as you spend.

Keep it Simple: The 50/30/20 rule

Tracking your finances doesn’t have to be complicated. A budget starts with a list of your income and your expenses, and following a simple strategy as the 50/30/20 rule.

The 50/30/20 rule is a popular budgeting method that splits your monthly income between three main categories. It’s pretty straightforward: You split your money between your needs, wants and savings, according to those ratios.

Here’s how it breaks down, according to NerdWallet:

Monthly after-tax income. This figure is your income after taxes have been deducted and the cost of payroll deductions for health insurance, 401(k) contributions or other automatic savings have been added back in.

50% of your income: needs. Necessities are the expenses you can’t avoid. This portion of your budget should cover costs such as:

Housing.
Food.
Transportation.
Basic utilities.
Insurance.
Minimum loan payments. Anything beyond the minimum goes into the savings and debt repayment bucket.
Child care or other expenses that need to be covered so you can work.

30% of your income: wants. Distinguishing between needs and wants isn’t always easy and can vary from one budget to another. Generally, though, wants are the extras that aren’t essential to living and working. They’re often for fun and may include:

Monthly subscriptions.
Travel.
Entertainment.
Meals out.

20% of your income: savings and debt. Savings is the amount you sock away to prepare for the future. Devote this chunk of your income to paying down existing debt and creating a comfortable financial cushion to avoid taking on future debt.

How, exactly, to use this part of your budget depends on your situation, but it will likely include:

Starting and growing an emergency fund.
Saving for retirement through a 401(k) and perhaps an individual retirement account.
Paying off debt, beginning with the toxic, high-interest type.

Making a budget can be an important step in the right direction for you. But budgeting for the sake of budgeting isn’t fun. As you work with your budget each month, remind yourself of the reasons why and purpose you’re doing it. Also, evaluate your progress periodically to make sure you’re on track to meeting your financial goals.

References:

Dividends are Important in Retirement

Posted on January 16, 2021 by admin

“Get paid to wait” Kevin O’Leary

Noted Shark Tank investor, Kevin O’Leary aka “Mr. Wonderful”, has one simple rule when it comes to investing in a stock. If it doesn’t pay a dividend, he does not consider the stock. His investment mantra is “get paid to wait”.

“My whole investment strategy is built around cash flow”, O’Leary said. “I have a little Charlie Munger on my shoulder every day when I look at a deal, and he’s just saying two words: ‘cash flow, cash flow.'”

KEVIN O’LEARY Only Buy Stocks that pay DIVIDENDS & other Investing Tips https://t.co/9BYUjZF9Kl pic.twitter.com/P30IMHdZzu

— Money Maker Masters (@MoneyMasters01) December 25, 2016

Know your cash flow.

How much do you make after taxes? How much do you spend. Investors in retirement must figure out how to generate cash flow without a job from multiple income streams to meet essential living expenses and spending while also making sure they don’t outlive their income stream.

Receiving regular dividends, or “getting paid to wait” reduces an investor’s dependence on the market’s volatility and the roller coaster like price swings by stocks to make ends meet.

Essentially, dividends could become investors “cash flow” in retirement. Naturally, then, the best retirement stocks to buy in 2021 (or any other year) to accomplish those objectives are ones that pay dividends.

Regular dividends lessen an investor’s dependence on the market’s fickle price swings because it reduces or eliminates the need to sell shares to generate income. Regardless of whether the market rises or falls in 2021, a portfolio of high-quality companies can provide you with predictable, growing dividend income.

And in today’s low-interest-rate environment, dividend stocks can generate much higher income than many fixed-income instruments. Better still, many dividend-paying stocks grow their payouts, which preserves those dividends’ purchasing power. And dividend stocks, like other equities, also provide meaningful long-term price appreciation potential.

Whether or not the market rises or falls, a portfolio of quality businesses delivering predictable, growing dividend income is always preferred.

Dividend stocks, like other equities, can provide long-term price appreciation. Dividends are the periodic payouts investors can earn by investing. And because many companies pay a dividend — more than 80% of the S&P 500 stocks currently pay dividends, according to data from FactSet — investors can actually earn money even when the market is down.

Research firm Simply Safe Dividends published an in-depth guide about living on dividends in retirement here. However, a key component to this strategy is finding the best retirement stocks that can deliver safe dividends and grow in value over time.

What are Dividend Stocks

When investors buy stocks, they can make money two different ways. The first is by selling their shares for a price that’s higher than their original cost. The second is by collecting dividends. Dividend stocks are companies that pay shareholders a portion of earnings, as dividend, on a regular basis. Not all stocks pay dividends, but those that do offer shareholders a steady stream of income.

These payments are funded by profits and cash flow that a company generates but doesn’t need to retain to reinvest in the business. Shareholders can receive dividends as cash or additional shares of stock. As an investment category, dividend stocks also have an impressive track record of helping people build wealth over the long term.

To live on dividends in retirement, a key component to this strategy is finding the best retirement stocks that can deliver safe dividends and grow in value over time. Look for companies with a history of paying and increasing dividends, as well as sufficient earnings and cash flow from current operations.

Dividend Aristocrats

Dividend Aristocrats are a select group of S&P 500 Index stocks with a history of 25+ years of consecutive dividend increases. These businesses have both the desire and ability to pay shareholders rising dividends year-after-year. They are considered the ‘best of the best’ dividend growth stocks.

The Dividend Aristocrats have a long history of outperforming the market. The requirements to be a Dividend Aristocrat are that they’re in the S&P 500, have 25+ consecutive years of dividend increase, and must meet certain minimum market cap and liquidity requirements.

A great list of dividend stocks to consider if you are unsure where to start.https://t.co/XmmnjbE0Fd

— Mary | Business, Trading and Money (@my777) December 30, 2020

Dividend Yield

Dividend yield refers to a stock’s annual dividend payments to shareholders expressed as a percentage of the stock’s current market price. A stock’s dividend yield can and frequently does change over time, either in response to market fluctuations or as a result of dividend increases or decreases by the issuing company. And, it’s important to keep in mind that a high dividend yield alone doesn’t make a stock a great investment.

Dividend amounts and yield might seem small in mid-2019. The average dividend payment for U.S. stocks was 1.87% of your investment, according to Siblis Research. Regardless the size of the ratio, they can drastically impact an investor’s long-term investment performance and retirement income.

GE’s Dividend Story

General Electric (GE) has been one of America’s most widely held stocks, and countless retirees relied on the dividend payments. But, the company was under enormous balance sheet and cash flow pressure, and it became necessary to cut the dividend in half. By cutting, GE saved significant cash flow making it one of the largest dividend cuts in the history of the S&P 500 and the biggest for GE since 2009, according to S&P Dow Jones Indices.

But dividend cuts had been rare at the time since many companies were increasing them because the U.S. economy was healthy and the stock market was booming. GE’s dividend had been reliably paid for multiple decades.

Prior to GE Board’s decision to cut its dividend, GE was having problems and could not earn enough money to cover its dividend payments. Free cash flow, which measures how much cash is being generated after investing in the business, had deteriorated for six straight years.

Dividends: Cash Flow is King during Retirement

The distinction between income and cash flow is important during retirement. Generating income in retirement is focused on finding investments that pay a high yield, which necessarily means taking on more risk. Focusing instead on cash flow allows investors to take a broader perspective, assessing various aspects of their finances to determine how to creatively produce the money required for expenses. Cash flow strategies may allow retirees to reach their financial goals while not necessarily taking on a higher level of risk.

A primary financial goal in retirement is to guarantee a minimum daily standard of living so you don’t outlive your nest egg and can sleep well at night. Some folks are able to meet that minimum income amount they need through some combination of pension income, Social Security payments, and guaranteed interest from certificates of deposit.

“I have found that retirement is all about cash flow, not net worth, especially after the real estate crash. I have met people who have a net worth of $2 million, which looks great on paper, but when it comes to retirement income, they are just barely squeaking by on their Social Security and a small pension. It’s great that you are worth $2 million, but ultimately, it’s your cash flow that will determine your quality of life in retirement, not your net worth.” Jason R. Parker, Sound Retirement Planning: A Retirement Plan Designed to Achieve Clarity, Confidence & Freedom

When picking dividend stocks, chasing yield can cause issues where the price has declined, which may be an opportunity for capital appreciation, but may create greater risk for income seekers since the stock may be cheap for a legitimate idiosyncratic reason.

It’s important for investors to find a company they feel comfortable with, and whose product line they understand. Next, they can look at the company’s ability to generate sufficient earnings and cash flow to pay their annual dividends, operate their business, and have enough left over to grow, remembering that not all quarters must indicate growth.

Recently retired, or getting ready to leave the workforce? This short video series will help you understand the process of generating cash flow in retirement: https://t.co/IiGiUkdAuE pic.twitter.com/ogLWLMvcVn

— Fidelity Investments (@Fidelity) December 6, 2020

An investor’s particular situation must be considered such as their required income needs during retirement, weighed against their desire for capital growth— typically, lower-growth segments, such as utilities, pay more yield. Investors who allocate upwards of 80-100% of their portfolio to dividend-paying stocks to generate more income and achieve stronger long-term capital appreciation potential and income growth, are incurring greater risks.

Additionally, their specific risk/reward trade-off (and there is risk in all stocks), keeping in mind their ability to ride out a downturn without having to sell the stock on the way down.

References:

From Gratitude to Greatness: Brownlee Global's Path to a Purposeful Life

Guide and Educate Individuals How to Build Long-Term Wealth, Better Manage Their Money, and Achieve Financial Freedom

Tag Archives: Cash Flow

Successful Investing Requires Mastering the Inner Game

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Strategies to Reduce Taxes

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Tax Planning

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Taxes Strategies in Retirement

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Cash Flow in Retirement | Fidelity Investments

Generating your retirement income

Understanding retirement income

Benefits of planning your retirement income

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Dividend Growth Stock Investing

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Saving and Investing

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5 Simple Rules for Investing Success

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Creating a Budget

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Dividends are Important in Retirement

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