It is a common belief among most investment experts that the fastest way to financial growth is to invest in long-term ventures or to set a gestation period of at least 10 years for enhancing one’s prospects for bigger revenues instead of building a portfolio of short-term assets (for example, bonds and mutual funds). Hence, experienced leaders recommend diversifying investment portfolios with top-quality stocks that pay high dividends. This strategy has proven to be an efficient approach for investors to gain high long-term revenues that can sustain a stable retirement future for them.
Remember that this investment option is suitable only for investors who can have the patience and endurance to go for the long haul and choose to invest back dividends into the firms that offer payouts. For novice dividend investors, these primary advantages of investing in dividend-paying stocks on a long-term basis:
1. Highly rewarding with a potential return of a maximum of 45% when you re-invest.
2. You stand to gain a large number of shares, resulting to greater returns when you finally retire.
3. Dividends provide a lower volatility than earning over time.
4. Companies offering dividend stocks are most often well-managed, stable businesses in their particular areas and can, therefore, sustain their operations through unpredictable market conditions.
Nevertheless, be ready to apply many approaches of investing in dividend stocks in order to maximize your opportunities to gain big returns. Visit websites or consult experts to find out other essential investing tips any dividend-growth investor should implement to enhance your portfolio’s long-term viability.
Aim for the overall return
Investing in stocks that produce high revenues does not readily bring in your expected overall returns; the process all hinges on the results of capital growth and the actual dividend outcome. However, do not give up on dividend returns. The top dividend-producing stocks have the highest payout ratios, although it also means having less money to invest back with below-average dividend growth in the future. Hence, the best strategy would be to aim for the overall return rather than aiming for high yields; this is due to the fact that dividend growth depends heavily on the future outcome and not on the present performance.
Dividend growth has nothing to do with time; therefore, persevere as you implement your long-term strategies. Wait patiently as you hold on to your stocks over a long period of time, not panicking even when market values dip. Buying and selling on impulse could cost you more than you have to because of the burdensome expenses, such as brokerage fees and taxes; and, moreover, you lose the compounding benefits of potential returns from high-yielding dividends. Nevertheless, when stock prices decrease in times of recession, stocks offering high-quality dividends can sustain large payouts to investors. Remember that firms that consistently provide sizeable returns yearly will help you accumulate stable revenue on the long-term basis.
Well-known investment guru Jeremy Grantham was quoted by Reuters as saying this: “Be patient and keep your eyes on the light ahead…. Endure the pain in the meantime since an excellent investment will grow eventually. More often than not, individual stocks will recover; and all markets eventually do.”
Measure the risks involved
Besides persevering over the long-term, investors must also know when they have to invest and when to reduce any losses, the common qualities possessed by well-seasoned industry traders. FXCM recommends that traders must fully understand their trading personality, or, as in your situation, your investing personality. Ask yourself this: “Am I a risk-taker?” for it will show the type of investor personality you have to maintain and the best strategy to build wealth. As in all investment ventures, investing in dividend growth stocks likewise demands measuring risks and using your instincts often. All investors must learn to cut their losses and to let profits roll. Avoid the common human weakness to cling on to one’s losses and calculate early both the degree of risk and the potential returns to diminish or eliminate the effects of human emotions on your investment decisions.
Finally, it is important to stick to a well-designed strategy (meaning, the dividend income need you have set as your goal, investment approach to apply), as a dividend growth venture lends well to a systematic investment approach. From here on, you are all set to raise your investment portfolio to a higher level of performance by using these recommendations. All the best in your investment journey!
With the New Year with us, it is appropriate to consider your retirement savings and find out if you are benefitting at all from any applicable tax law with regard to your retirement future.
Melissa Sotudeh, a certified financial planner in Washington, D.C., offers tax-savvy advice on retirement savings.
What is the most vital aspect in retirement accounts tax-planning?
To a certain degree, you can control your income tax bracket by maximizing salary deferrals — for instance, by maxing your retirement accounts, such as 401(k) and IRA plans; hence, reducing your taxable salary. On the other hand, you can become tax-efficient when you invest money for college education, retirement or other objectives.
If you are in a lower tax bracket, take advantage of specific deductions, such as those for seeking a job or relocating for work, and tax credits, such as the education credit or the child-tax credit. Contribute to a Roth 401(k) as well, allowing you to pay lower-rate taxes today and then take out your Roth funds free of tax when you retire.
When you reach a higher tax bracket, salary deferral could be the best choice for a lower taxable income. Maximize your contributions to 401(k) or Health Savings Accounts.
Approach your investment planning as tax-efficiently as you can. This has nothing to do with tax brackets, rather, with the tax treatment of your portfolio investments. Strategies involve keeping the right investments in the right account (e.g., keeping tax-advantaged investments such as municipal bonds in a taxable account), annual tax loss harvesting and selecting funds with tax-effective features, such as low turnover ratios.
What is the most common pitfall in terms of income and tax brackets?
People do not leverage tax-advantaged savings instruments before they are phased out -- which is a common error with Roth IRAs. Although a great savings tool, your capacity to contribute starts to get phased out beyond specific earning levels. For 2017, the Roth IRA salary limits start once you begin receiving more than $118,000 ($186,000 for married, filing jointly). At the $133,000 income level ($196,000 for married, filing jointly), you are not qualified to contribute.
Likewise, not using the catch-up allowance for tax-deferred retirement accounts and HSAs, which allows you to contribute way above your retirement account when you are 50, is a big mistake. If you can, take full advantage of this chance to rev up your saving and limit your taxable salary. The catch-up contribution for retirement accounts, for instance, 401(k)s, is presently $6,000, aside from the regular $18,000 limit. It should give you a total maximum contribution of $24,000 every year for 50-above individuals.
$1,000 catch-up contributions for HSAs are permitted beginning at age 55, aside from the maximum yearly contribution of $3,400 for individuals or $6,750 for families.
What else can people do about optimizing their tax status?
Giving to charity through Donor Advised Funds is an efficient way to optimize tax management in any particular tax year. Using these funds, you will be able to give money or appreciated assets and avail of the tax deduction for your donation during the year that you contributed the amount. Nevertheless, you need not choose a recipient beneficiary for your donation within that year. You may let assets in the fund to increase in time and contribute to any 501(c)(3) charitable group any time you desire.
No matter what investment method you choose, choose the appropriate tax strategy needed to optimize investment taxes.
Ready to become a million-dollar retiree?
Who would not want to become one?
From a recent survey conducted by Time Magazine, 1 of every 3 Americans has saved practically nothing for their retirement. And a surprising 23% of Americans -- almost a fourth -- have saved less than $10,000.
In short, a total of 56% of all Americans have saved below $10,000 for their retirement. That should be cause for great concern.
Moreover, 42% of millennials (people aged 18 to 35), unfortunately, have not started saving for retirement.
It seems that this generation is bound to commit the same mistakes that their parents and grandparents, in general, committed.
But there is hope! Building a million-dollar retirement fund is not too difficult to accomplish. With enough discipline and by following these three simple steps, anyone can be assured of a secure future.
The benefit of following these effective guidelines, aside from obtaining a million-dollar retirement fund, is that you can reach your goal earlier by seven years. Yes, that is an additional solid seven years of retiring earlier than expected to allow you to fulfill your dream of buying that vacation home, travelling around the world or just enjoying your life in the peace and comfort of your home.
If you believe that plan is for you, begin the journey this very day.
If you still have doubts as to the reliability of this claim or if you think that you will need a CEO’s salary or, perhaps, have to risk your very life to achieve that big a nest egg, you are gravely mistaken.
In reality, all you need is a salary of about $60,000 yearly in order to create a million-dollar retirement.
How? Follow the steps below:
STEP 1 – Commit a part of your yearly income into savings.
That easy! Do not follow the crowd headed for the precipice of unsecured retirement – that crowd that is about half of whom are millennials.
Planning to save a reasonable part of your salary is the initial step to attaining your niche in the millionaires’ club. Every giant undertaking starts with a small step. Trust the experiences of so many before you; unless you commit to this plan, you are most likely to lose the opportunity of gaining a million-dollar retirement fund in the future.
With your yearly $60,000 income, setting aside $5,500 or about 9% of your gross income for your retirement gets you through the initial and crucial step. Congratulate yourself for doing this!
Doing so, you would have saved $458 monthly. The best strategy is to set up an automatic draft payment which allows you to transfer your funds from a checking account toward an investment account. That will help you sustain your objective of achieving a million-dollar retirement fund.
STEP 2 — Set up a tax-advantaged Individual Retirement Account (IRA).
Get hold of this free and easy approach which allows you to trade in and out of investment securities with minimal costs. Majority of transactions will be cheaper than your favorite cup of latte at the coffee shop. Sometimes, commissions are even disregarded. Open up an IRA today if you still do not have one.
An IRA provides a viable investment instrument for creating wealth due to its deferred capital-gains tax as well as its tax-deductible annual contributions. In short, the government practically helps you become a millionaire while minimizing your income-tax expenses. At present, the minimum IRA yearly contribution is $5,500 annually ($6,500 for 50 or older individuals), right within your ballpark.
You can also make contributions on a lump-sum basis or at regular periods. The latter is a great option for leveling out fluctuations in the investment portfolio, since prices tend to become volatile within the year. The outcome will be what is called “dollar-cost averaging” of your contributions. This strategy reduces the emotional stress in your decisions with respect to your savings.
Two down and only one more to go! You may celebrate at this point.
To show you clearly what happens: Simply investing $5,500 yearly for 30 years, or a total of $165,000 principal investment, will earn you $1,036,000 in the end.
This “miracle” is possible through the compounding power of money, since compounding can generate returns, which are then invested back in order to generate more income.
The figures used -- that is, $165,000 becoming $1 million -- are based on the actual yearly return of 9.5% for the U.S. Stock market way back to the year 1927.
This simply means that on the long-term basis, investors who buy and hold on to securities that track the overall performance of the general stock market can gain a 9.5% yearly return.
But you can even do better than that! You can actually turn that same $165,000 principal investment into $3 million within the same length of time. Yes, 30 years! No, within only 23 years, in fact!
How? There is a way to do it without any additional risk on your part.
Are you really excited now? The third step is the key to gaining greater wealth at a more rapid rate.
STEP 3 — Relative Strength Investing gets you faster to your retirement goals.
The Relative Strength approach basically measures a security’s performance in relation to that of another. Although there are various means of evaluating relative strength, the primary point is that a relative strength measurement can be done on any instrument.
Relative Strength, in short, can determine the parts of the general market which are strongest and those which are weakest.
This will allow us to see what is performing below par and, therefore, guide us to invest in the parts that are performing well, increasing the potential to gain greater returns. This is how we can accelerate even more the rate of compounding.
According to a research done by Dorsey Wright & Associates, momentum methods such as Relative Strength investing have overtaken the Total Market return by 4.6%, as determined by an extensive track-record analysis.
Hence, from way back in 1929, instead of accumulating only a 9.5% annual return, focusing your investment wholly on the best-performing portions of the market would have produced a 14.1% return. Moreover, within that long period, the difference in yearly return — while appearing minimal — resulted in increased worth of a portfolio of over 66 times.
As you can see, combining the power of compounding and the advantages of Relative Strength investing can help you earn that million-dollar retirement fund!
While we use up much of our employment income toward paying for our retirement accounts, we rarely consider what we need to do when taking it out in retirement. For example, if you have pre-tax, Roth, and taxable accounts, how much money should you take out from each account? Consider these few suggestions:
1) What is the safe amount to withdraw? Your safest choice is to only take out earnings and the principal but at present dividend yields and interest rates, not expecting to get anything beyond more or less 2% of your portfolio. It is not much for majority of people and the amount can shift and will not catch up with inflation over the long haul.
The normal rule-of-thumb is that you can securely take out about 4% of the initial value of a diversified portfolio and raise that amount to keep pace with inflation for 30 years or so. But the rule was conceived back in the 1990s when interest rates were higher and many financial experts consider the rule as passé, including the financial planner who developed it. Likewise, it does not include the possibility of you withdrawing higher amounts while you are paying a mortgage or before you begin using your pension and Social Security benefits; hence, a fixed withdrawal rate may not actually be practical at all.
The other way is to make use of a retirement calculator (you can browse for a free app online) to help you appreciate how your portfolio withdrawals might have progressed historically. Although not a certainty, if you would have endured every rolling-time event since 1871, you are bound to outlast others.
2) How are your accounts taxed? Withdrawals from a conventional pre-tax retirement account will be fully taxed as regular income. A Roth account that you have held for a minimum of 5 years and you are, say over 59½ years of age, will be offer tax-free withdrawals. Likewise, loans from cash-value life insurance and reverse mortgage payments are tax-free. In general, investments in regular taxable accounts can be taxed as long as you withdraw gains and not your principal.
3) Do you plan to buy health insurance under the Affordable Care Act? If you intend to retire prior to becoming eligible for Medicare at 65, you have to determine where you will get health insurance. One choice is under the Affordable Care Act (if it still applies) since insurance firms cannot disqualify you for pre-existing conditions and you can avail of tax credits that reduce your premiums.
Since those credits are calculated according to your taxable income, you stand to gain by delaying any withdrawals from pre-tax accounts and instead using tax-free sources or taxable accounts to reduce your taxable income and, it follows, your insurance premiums.