Places to get Dividends

Do you need to diversify beyond the S&P 500?  Are you looking for dividend paying equities that are outside the S&P 500?  Dividend are taxed at a maximum rate of 20% and for high income earners they can have a tax rate on ordinary income of 39.6%.  So regardless of where you fall on the tax tables dividends can give anyone a good return on a tax basis.  The lower your earnings the lower the taxes will be on dividends earned.  Also equities that pay dividends will generally lower the overall risk and volatility in a portfolio as compared to one that does not pay dividends.  And the reason for that is mainly due to the fact companies that pay dividends tend to be more stable and older established firms as compared to younger companies that are re-investing in themselves for growth.  In general the average yield on the S&P 500 is 1.8% which is not all that great but it is still better than short term Treasuries.

But the low return of the S&P 500 is due to several factors.  Some are simple such as companies are doing stock buy backs instead of returning money to the shareholders through dividends.  By buying back shares a company is able to increase the average price by reducing the number of shares outstanding.  Acquisitions of other companies to enable some growth in more mature firms is another use of capital that can replace the payment of dividends.  Or in the case of some firms the taxes they would have to pay to bring the money back into the United States is more expensive than leaving the money overseas.  But something that the financial crisis of 2008 and 2009 many firms just want to save in case of another downturn.

Large cap equities are still the best way to find dividend paying stocks but the S&P 500 is not the only place in which to find them.  There are many Exchange Traded Funds that specialize in dividend stocks and in most instances they focus on large cap companies.  While most small and medium sized companies will generally re-invest in the company’s growth some do in fact pay dividends.  In smaller specialized companies growth may not be an advantage or even a desired activity so instead of keeping or re-investing they have decided to pay their shareholders a dividend.  And believe it or not there are more small caps that pay dividends than you might think as seen in WisdomTree’s small cap dividend ETF as they own almost 700 individual equities in the ETF.  And that one ETF has a yield of about 2.4% which is very good considering the number of equities it owns.  But the Price to Earnings on a small cap company is much higher than on an established large cap equity resulting in an inflated price at the moment.

And if you own both large and small cap dividend ETFs also consider an ETF that owns equities from established and developed foreign countries.  For the past decade these markets have returned a yield that on average have been over a percentage point higher than those companies based in the United States.  And currently foreign equities seem to be priced lower than United States equities also resulting in a higher yield.  But there could be tax issues in owning an ETF of foreign equities so read any prospectus prior to investing and if you are not sure of the consequences consult a tax professional or financial planner.

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