Money Blog Life

As stated here on the Fidelity website,

The Jobs and Growth Tax Relief Reconciliation Act of 2003 introduced qualified dividends, a new category of dividend income, which are taxable at a 15% federal rate (or a 5% federal rate for taxpayers in the two lowest tax brackets).

The reason I started out this post with this opening paragraph from Fidelity is because of my desire to “start my purse to fattening”. (Stay tuned for a review coming here soon.)

First, a little background information…

At the moment, I am in the 15% federal income tax bracket (based on 2008 figures listed here). This will change in a few years as a result of both a higher paying job and an increase in my passive income streams.

I can’t complain, paying more in taxes means I am making more money. One must remember that tax laws can be changed any time. It is all politics. What is important is to know how the tax laws can work in your favor where you can grow even more money.

This year is the first time I took notice of my dividend income stream which started growing as a result of reinvesting the dividends from the shares of several stocks I have. The only reason why I just started noticing this trend is because I did not start tracking my income and expenses until two years ago.

Up until now, I just have been putting this knowledge in the back of my mind, to keep reinvesting my dividends on automatic pilot. With the recent surge of dividend investing blogs such as The Dividend Guy Blog, Living Off Dividends & Passive Income and Dividends4Life to name a few, I have been making a few investments lately with the goal of increasing my dividend income.

And now…

I am by no means a millionaire but I certainly am on my way. It all begins with investing my savings to earn a return on my investment without having to work for it. As you can see in the opening paragraph, qualified dividends are currently taxed at 15%. (There are specific restrictions on how this works, you can read more about it at the link provided.)

This means I pay Uncle Sam $1.50 for every $10 dollars I earn from my dividends. This beats paying $2.50 for every $10 I earn from my employer when I get bumped into the next tax bracket in the future.

I currently am using ING’s ShareBuilder program for my dividend investing purposes. There are several reasons for this which I will write more about in the future. Meanwhile, if you are interested in investing in stocks, I encourage you to click on the referral ad provided in my sidebar and learn more about their services.

While perusing ShareBuilder’s resources for investors, I came across their article, Behold the Power of Dividend Reinvestment! It is a bad analogy but it is true what they say here,

Take dividends, for instance. It’s easy to ignore the dividends that you might be receiving on stocks that you own. Dividend yields are pretty low on a historical basis, and after all, what’s a few cents? But just like a leaky faucet, those dividends can add up over the years - especially if you reinvest them in purchases of additional shares of stock.

I have held stock for at least 10 years and I can tell you that reinvesting dividends really grows your holding over time. There are some advantages and disadvantages to the process but in the end, it is all about your time horizon.

Twenty Years Later…

I have no idea where I will be in 20 years from now but I do know one thing. I want to have the peace of mind knowing one of my passive income streams is generating enough income to cover my basic necessities. I do have other investment vehicles to ensure I can live comfortably in retirement. I am talking about while I am still working because I still have at least 30 years to go before I reach “normal” retirement age.

Without trying to go into details and creating some harebrained formula, I am basically going to explain the steps I have to take regarding dividend income. Everything else will fall into place after I figure out a few things along the way.

1. Set A Goal. I need to determine how much dividend income I want to target for. By figuring out what my goal is, I will be able to research and find investments that meet my investment goals. By doing so, I will be able to take the next step.
2. Create A Plan. This is something I still need to figure out exactly what a dividend investing plan is. I know it composes of the basic principles, purchasing shares and reinvesting the dividends.
3. Execute The Plan. While it will take some time to come up with a plan, I recently started investing. Actually, if you count the stocks I received as a gift over 10 years ago then I already started.

If you are a dividend investor, how did you set your investment goals?