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How Dividend Reinvestment can 5X Your Returns [Must-See Strategies] - YouTube
Channel: Let's Talk Money! with Joseph Hogue, CFA
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What is dividend reinvestment and how can
you use it to grow your dough?
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In this video, I’ll explain dividend reinvestment
plans, how to set one up and two strategies
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to make your dividends grow faster.
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We’re talking reinvesting dividends today
on Let’s Talk Money!
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Beat debt.
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Make money.
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Make your money work for you.
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Creating the financial future you deserve.
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Let's Talk Money!
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Hey Bowtie Nation, Joseph Hogue with the Let’s
Talk Money channel.
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A special shout-out to all you in the nation,
thank you for spending a part of your day
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here.
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If you’re not part of the community yet,
just click that little red subscribe button.
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It’s free and you’ll never miss an episode.
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Those of you in the nation know, I LOVE dividend
stocks.
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Seeing those dividend checks hit your account,
it just feels like you’re doing everything
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right and reinvesting those dividends is the
best way to grow your portfolio.
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But there’s a lot more to dividend reinvestment
than just putting that money back to work.
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It’s not only finding the right dividend
reinvestment plan but understanding how taxes
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work on those cash payments and how to make
your dividends work harder.
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So I’m going to use this video as a complete
guide on dividend reinvestment.
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I’ll explain DRIPs or dividend reinvestment
plans and show you how to set these up even
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if a company doesn’t have a formal plan.
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I’ll show you the two ways dividends are
taxed and how to make sure you get the most
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from your money.
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I’m then going to reveal two dividend reinvesting
strategies, two strategies that go beyond
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simple reinvesting to make you as much money
as possible.
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I’ll be sharing those towards the end of
the video so make sure you stick around.
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There are two types of dividend reinvestment
we’ll talk about today.
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The first is a formal dividend reinvestment
plan, also called a DRIP.
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These are set up by a dividend-paying company
and allows investors to reinvest dividends
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directly back into the company to buy more
shares.
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I’m also going to show you how to create
a dividend reinvestment plan on your own,
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including how to set these up even if the
company doesn’t offer it.
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I’m going to show you how to set up a dividend
reinvestment plan but first, the question
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of whether you should even reinvest your dividends.
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I reinvest every penny I receive but there
might be instances where you don’t want
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to do that.
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For example, if you need the cash flow to
pay living expenses, dividends can be a great
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source so you don’t have to sell stocks.
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Depending on how much in dividends you receive,
you might be able to live on that alone.
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You also might not reinvest the dividends
if you’re unsure of where the stock market
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is heading.
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Maybe stocks are looking expensive so you
want to keep that money in cash or invest
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it in safer bonds.
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It’s kind of ironic that people complain
all the time about companies buying back shares
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when prices are high, basically using company
cash to reinvest in the shares, but those
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same investors think nothing of plowing their
own dividend money back into the shares.
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Normally, for most investors, I would say
definitely reinvest your dividends.
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This doesn’t mean you should reinvest the
cash into the same company and we’ll get
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to a few strategies you can use.
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But just generally reinvesting your money
is going to grow your portfolio faster from
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those compounding returns.
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We’ll get to setting up a reinvestment plan
and those dividend reinvesting strategies
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but first I want to get your feedback.
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Do you reinvest dividends and how do you decide
where to reinvest your money?
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Do you reinvest in the same company, across
your portfolio or how do you make that decision.
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So scroll down and let me know in the comments,
how you make the reinvestment decision.
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There are three ways you can reinvest your
dividends.
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I’m going to show you how to set each one
up as well as the pros and cons of each.
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The old school way to get into a dividend
reinvestment plan used to be directly through
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the company.
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So if you wanted to reinvest those sweet 3%
dividends from Coca-Cola, you would go to
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the website and look for its DRIP program.
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Here we see that Coca-Cola manages its direct
stock program through Computershares which
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happens to manage a lot of companies’ programs.
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You can scroll through the companies here
and click through to Coca-Cola to see plan
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details, fees and all this other information.
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So here, you’re investing directly into
shares of Coca-Cola through the company, Computershares
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just manages the program.
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And every time you get a dividend, it’s
going to be reinvested in more stock.
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Pros of these direct DRIP programs are that
some companies offer a discount on their shares,
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the fees are usually pretty low and you can
usually buy fractional shares.
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So if you receive a $5 dividend but shares
are $50, the program will reinvest your money
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into a partial share instead of making you
wait for a whole share.
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Of course the downside to these programs is
that you might have shares in ten different
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companies all on different websites and it
can be a pain to keep track of.
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The second way to reinvest dividends is going
to be through your online investing sites.
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Most of these are set up the same but I’ll
show you on my ETrade account.
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I’ll go to the dividend reinvestment page
here in the menu or I can do a search for
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dividend reinvestment in the search box.
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There’s a drop-down for each account, so
make sure you do this for each investment
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account you have on the site.
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I can enroll the entire account to reinvest
dividends or I can choose to only reinvest
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dividends from specific stocks.
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So down here it lists each dividend stock
I have in the account.
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This is my traditional IRA where I hold a
lot of my REITs.
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And I can see the dividend yield, amount as
well as the next ex-dividend date and payment
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date.
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Here if I click on a box next to one of these,
I can enroll that stock to reinvest the dividends
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automatically.
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I can do that for any stocks in each of my
accounts here, so you see I’ve got three
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accounts, a regular taxable account, a traditional
IRA and a self-employed IRA.
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The upside to this method is that it makes
keeping track of your dividends so much easier.
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You can keep all your investments in one place
and decide which stocks you want to enroll
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in dividend reinvestment.
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You get one 1099-DIV tax form each year from
the investment site instead of one from each
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company.
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The downside to this is that you can only
reinvest dividends from a company into the
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shares of that same company.
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To solve this problem, I’ve got a third
reinvestment method you should check out.
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I originally started investing on M1 Finance
for our 2019 Stock Market Challenge portfolio.
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This was when most platforms charged a commission
to buy stocks so I loved M1 for it’s no-fee
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model.
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Now that ETrade and most of the other sites
have switched to no-commissions, it’s not
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as much an advantage but I still love the
platform for one important feature.
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M1 Finance will allow you to automatically
reinvest your dividends and any cash across
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your entire portfolio.
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All you do is click on this auto-invest link
up here and it will give you three options
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for cash balance control.
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You can tell the platform that whenever your
account reaches $10 in uninvested cash, you
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want to automatically reinvest it across the
portfolio.
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You can toggle this second one here to tell
the platform when to reinvest or you can turn
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off the auto-invest feature.
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What this is going to do, instead of just
reinvesting your dividends directly in the
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same stock, it’s going to split your money
up and reinvest across all the stocks in your
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portfolio.
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So when you set up your account, you tell
M1 what percentage of your money you want
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in each stock and that’s what it’s going
to use to reinvest your cash.
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The advantage here is that you keep a more
diversified portfolio.
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You’re not just reinvesting in one stock
but spreading your money across all the stocks
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you own.
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M1 also allows that fractional share investing
so you get a portion of shares even if you’re
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not investing enough for a full share.
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The downside is that maybe you want to reinvest
your money back into that one stock, maybe
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you don’t want to reinvest across all the
stocks in your portfolio.
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Of course, this is pretty easy to do by just
turning off that auto-invest feature and doing
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the reinvesting yourself.
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Now I want to get to how dividend reinvestment
is taxed but I’ll leave a link to M1 Finance
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in the description below the video so you
can check it out.
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Taxes on the dividends you receive can be
confusing.
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First of all, you owe taxes on any dividends
you collect each year.
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This is whether you reinvest those dividends
or not.
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If you receive $50 in dividends and reinvest
them, you’ll just need to pay the taxes
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out of pocket come April.
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Now HOW dividends are taxed and the rate you
pay is the confusing part.
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Any dividends you receive are going to marked
as qualified or non-qualified on the tax form
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you receive from your broker.
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Qualified dividends are those you receive
on stocks you’ve held for more than 60 days
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during the 121-day period that begins 60-days
before the ex-dividend date.
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Now the numbers can be confusing but this
is important because it determines the tax
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rate you pay.
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Remember, the ex-dividend date is the first
day the stock trades without the dividend,
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so you have to own the shares before that
day to get the payment anyway.
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The IRS says that to get the preferred tax
rate on the dividends, you have to own the
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shares for at least 60 days around this day,
and it can be some before, some after, any
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60 days around the date.
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Any dividends you receive on a stock you don’t
own for at least that 60-day period are marked
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as non-qualified dividends or sometimes just
called ordinary dividends.
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This is important because qualified dividends
are taxed under your capital gains rate, which
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lower than your income tax rate.
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On the other hand, those ordinary or non-qualified
dividends are taxed as ordinary income.
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You see the difference here in the federal
tax brackets for single and joint filers.
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So those qualified dividends are taxed as
capital gains and if you make less than $39,375
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and file separately, you don’t pay any taxes
on these gains.
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This leaves a big question mark in your dividend
investing strategy because if you’re not
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a buy-and-hold investor and you’re selling
those dividend stocks in less than 60-days,
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you could be on the hook for a bigger tax
bill.
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Let’s just look at a couple of examples
here because I want you to understand this
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and what it means for your investments.
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Let’s say you file taxes with your spouse
and make $70,000 a year.
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So we’re looking at the second row under
2019 Joint Filer Tax Brackets.
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If you own a dividend stock for less than
60 days and collect that payment, you’re
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going to owe 12% in taxes.
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If you held the stock for that 60-day period
for it to be a qualified dividend, you owe
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nothing.
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One more example, if you file your taxes individually
and make $80,000 a year.
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If you own a dividend stock for less than
the 60-days and collect the dividend, you’ll
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pay a 22% tax rate on that payment.
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If you hold the shares long enough though,
your tax rate falls to 15% on those dividends.
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Important stuff here.
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Your online broker is going to send you a
1099-DIV form with how much in dividends you
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collected, both as qualified and non-qualified
dividends.
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That’s what you’ll report on your taxes
and the difference here could mean thousands
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of dollars.
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Now I want to get to those two strategies
for dividend reinvestment.
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We’ll talk about how much to reinvest and
how to determine where to put your money.
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Our first strategy is going to be following
the calendar dividend strategy and this is
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something we talked about in a previous video
but I like to sweeten it with something I
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call the calendar growth strategy.
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If you remember the dividend calendar strategy,
basically you’re looking online for stocks
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with an ex-dividend date coming up.
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As long as you buy the shares before that
ex-dividend date, you get the dividend.
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Why I call this the calendar growth strategy
is you can sell those shares anytime on or
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after the ex-dividend date and reinvest in
another stock.
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You take all the money from the sale of that
stock, plus the dividend you collected and
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reinvest it into another stock with a dividend
payment coming up.
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You keep doing this, reinvesting your profits
into the next stock, and watch your money
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grow!
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The next strategy is going to be looking for
companies that offer a discount on their dividend
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reinvestment plans.
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There’s currently only two of these; Aqua
America, ticker WTR and Franco-Nevada, ticker
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FNV.
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But these companies will give you a discount
on the share price to invest directly in the
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company and reinvest dividends.
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For example, you get a 5% discount on the
share price when you invest in Aqua America
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through it’s direct stock program and the
shares pay a 2.4% yield.
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Even if the share price goes nowhere for the
year, you’ve still made a 7.7% return on
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that discount and the dividend!
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Click on the video to the right for five dividend
stocks that will never let you down.
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Five stocks with proven cash flows in good
times and in bad that will guarantee you that
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dividend payment.
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Don’t forget to join the Let’s Talk Money
community by tapping the subscribe button
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and clicking the bell notification.
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