Income Portfolio: Fork In the Road

Fork In the Road

Mid-way through 2012, I began an income portfolio with the goal of replacing all of my family’s necessary expenses (financial independence — yay!). I was able to diligently save about $27,000 from that time to now. We were also fortunate enough to receive a windfall during that time allowing me to make a one-time addition of $25,000 to our income portfolio. After deposits and gains, we have a current balance of $55,669.17.

Creating an income portfolio using dividends to replace income for necessary expenses becomes much easier if you have no mortgage. So I figured that we should start aggressively attacking our mortgage simultaneously while building our income portfolio. Since July of 2012, we have been paying an additional $218 per month towards our mortgage in order to accelerate paying off the last remnant of our debt. We have also added additional payments here and there where possible (tax refunds, etc.). The single largest payment we made was from the same windfall I mentioned earlier, allowing us to make a one-time payment on our mortgage of $25,000.

This month, we made the decision that we really wanted to build upon the foundation we began as aggressively as possible. Before I get into the changes we have made, let me establish a baseline where we started. The original purchase price of our house was $298,000. After our down payment, the total mortgage was $248,000. In July of 2012, we refinanced to take advantage of lower interest rates. We refinanced with a balance of $233,250. At this time, the balance on our mortgage is $193,655 — not bad so far, but we can do better.

Now, we broke our new goals down over 2014 and 2015. At the end of 2014, we wanted to decrease our mortgage by 15% from where we are today which would put our balance at $164,000 at the end of the year. In terms of the income portfolio, our goal is to increase our savings in that account to $76,000 or 27%. We want to decrease our mortgage by another 15% or a final balance of $135,000 by 12/31/2015. For the income portfolio, we want to increase our savings by 14% to $100,000 in the same time frame. This plan, while aggressive, will really accelerate our financial progress and contribute to a lifestyle with reduced stress.

Now you may be wondering how we intend to pull this off. Let’s start with the mortgage. Our monthly mortgage payment is $1,447. As I mentioned before, we are already paying an additional $218 per month. We plan on adding $246 per month more for a grand total of $464 per month of additional principal. This of course has the snowball effect we are after by enabling each payment to “count more” as more goes towards principle and less to interest. In addition, we will be applying $20,000 from tax refunds, bonus payouts from our jobs and savings.

We will achieve our goal for the income portfolio in 2014 by continuing to save $453 per month into this account (we have done this for awhile now). We will add to that additional savings from tax refunds and bonus payouts from our jobs totaling $17,200.

If we can achieve our goals for 2014, things get much easier in 2015. Because we are paying less interest on the mortgage and receiving more dividend payments from the income portfolio, we will be able to reduce our monthly payment to the mortgage by $90.22 and reduce additional contributions to $17,200 and 15,800 to the mortgage and income portfolio respectively while still achieving our goals.

At this time, we will have another decision in front of us; Continue with this aggressive plan to continue accelerating our planning and debt reduction plans or scale back these efforts and enjoy a little more free cash flow.

The Numbers


By the End Of: 2014 2015
Mortgage Balance: $164,000 $135,000
Income Portfolio Balance: $76,000 $100,000


During: 2014 2015
Annual Mortgage Principle Payments: $9,598.50 $12,891.24
Annual Income Portfolio Payments: $4,983.00 $8,196.00
Additional Mortgage Payments: $19,828.40 $17,200.00
Additional Income Portfolio Payments: $13,242.60 $15,800.00

There is no secret here.  While my wife and I have been fortunate enough to find ourselves in lucrative jobs, we make less than $225,000 per year together everything considered.  While that does account for a significant portion of our ability to accomplish these goals, one could easily set slightly smaller goals and achieve success.  Most of what we accomplish is through discipline — we save every bonus payment, every tax refund and a significant portion of our take-home pay.  I welcome any suggestions/questions in the comments.  Thanks for reading!


Engaging in Dividend Capture for Profit

What is Dividend Capture?

Dividend capture is an investing strategy where investors can purchase a dividend-paying stock on a specific date, hold that stock for the minimum amount of time and immediately sell the equity to turn a profit by collecting the dividend and running.  What dividend capture is not, is an easy way to make a fast dollar consistently.

The Technical Information

To really understand the dividend capture technique, you need to understand a couple of core dates surrounding dividends and how they function. The first date we need to examine is the date of record. The date of record is the date when a company looks at its records and takes notes on who the shareholders of the company are (in other words, who owns their stock). Investors listed on this date, will receive the dividend payout.

That sounds great, so provide me a list of dividend stocks and their record dates right? Not so fast! The ex-dividend date is normally set two business days before the date of record. If you purchase the stock before the ex-dividend date and hold it past the record date, you will be eligible to receive the dividend payout. If you sell your stock before the ex-dividend date, you are not eligible for the dividend payout. So you cannot hold a stock for a single day and receive the dividend payout. You must purchase the stock on or before the ex-dividend date in order to qualify for the dividend.

Furthermore, under normal circumstances, the overall price of the stock drops by the same amount of the dividend just prior to the dividend payout. This creates a wash in most scenarios since the value of the stock drops by the same amount of the dividend during the same time period that are required to hold the stock to gain eligibility for the payout.

In What Cases Does Dividend Capture Payoff?

Well, for the most part, you need to ensure that you have a complete understanding of the critical dates tied to dividend stocks that we covered in this article. Secondly, you’ll want to find a stock with a reason to have a quick run-up in value around the days when the dividend is paid. That way you retain the invested capital in addition to the dividend payment. Another (and more likely) scenario, is buying the stock before the value increases by the dividend amount, waiting for the dividend to be paid and then selling your position. This is difficult since there is not definitive time period for this across companies or even within any single position. It is similar to timing the market in this way.

In Closing

My intent in writing this article is not to encourage investors to participate in dividend capture. Rather, it is the admission that people look to this technique in an attempt to turn a quick profit. While some investors can be successful in employing dividend capture to make money, the amount of effort that is needed to pull it off is rarely worth the potential profit that could be made. Hopefully, the information in this article has helped bring a little more understanding to yet another “get rich quick scheme”.


Dividend Aristocrats: Ex-Dividend Dates

Dividend Aristocrats

Please see below for the list of stocks that comprise the S&P 500 Aristocrats Index with their accompanying dividends and ex-dividend dates.

Symbol Name Dividend Ex-Dividend Date
MMM 3M $0.6350 08/21/2013
ABT Abbott Laboratories $0.2200 01/13/2014
ABBV AbbVue Inc $0.4000 10/10/2013
AFL AFLAC Inc $0.3500 08/19/2013
APD Air Products & Chemicals Inc $0.7100 09/27/2013
ADM Archer-Daniels-Midland Co $0.1900 08/20/2013
T AT&T $0.4500 10/08/2013
ADP Automatic Data Processing $0.4350 09/11/2013
BCR Bard C.R. Inc $0.2100 10/17/2013
BDX Becton Dickinson & Co $0.4950 09/05/2013
BMS Bemis Co Inc $0.2600 08/16/2013
BFB Brown-Forman Corp B $0.2550 09/03/2013
CAH Cardinal Health Inc $0.3025 09/27/2013
CVX Chevron Corp $1.0000 08/15/2013
CB Chubb Corp $0.4400 09/18/2013
CINF Cincinnati Financial Corp $0.4200 09/16/2013
CTAS Cintas Corp $0.7700 11/06/2013
CLX Clorox Co $0.7100 10/28/2013
KO Coca-Cola Co $0.2800 11/27/2013
CL Colgate-Palmolive Co $0.3400 10/18/2013
ED Consolidated Edison Inc $0.6150 11/08/2013
DOV Dover Corp $0.3750 08/28/2013
ECL Ecolab Inc $0.2300 09/13/2013
EMR Emerson Electric Co $0.4100 08/14/2013
XOM Exxon Mobil Corp $0.6300 08/09/2013
FDO Family Dollar Stores Inc $0.2600 09/11/2013
BEN Franklin Resources Inc. $0.1000 09/26/2013
GPC Genuine Parts Co $0.5375 09/04/2013
GWW Grainger W.W. Inc $0.9300 08/08/2013
HCP HCP Inc. $0.5250 10/31/2013
HRL Hormel Foods Corp $0.1700 10/17/2013
ITW Illinois Tool Works Inc $0.4200 09/26/2013
JNJ Johnson & Johnson $0.6600 11/22/2013
KMB Kimberly-Clark $0.8100 09/04/2013
LEG Leggett & Platt $0.3000 09/11/2013
LOW Lowe’s Cos Inc $0.1800 10/21/2013
MKC McCormick & Co. $0.3400 10/03/2013
MCD McDonald’s Corp $0.8100 11/27/2013
MHFI McGraw Hill Financial Inc. $0.2800 11/22/2013
MDT Medtronic Inc. $0.2800 10/02/2013
NUE Nucor Corp $0.3675 09/25/2013
PNR Pentaid Ltd. $0.2500 10/23/2013
PEP PepsiCo Inc $0.5675 09/04/2013
PPG PPG Industries Inc $0.6100 11/06/2013
PG Proctor & Gamble $0.6015 10/16/2013
SHW Sherwin-Williams Co. $0.5000 11/13/2013
SIAL Sigma-Aldrich Corp $0.2150 11/26/2013
SWK Stanley Black & Decker $0.5000 12/04/2013
SYY Sysco Corp $0.2800 10/02/2013
TROW T Rowe Price Group Inc $0.3800 12/12/2013
TGT Target Corp $0.4300 11/18/2013
VFC VF Corp $1.0500 12/06/2013
WMT Wal-Mart Stores $0.4700 12/04/2014
WAG Walgreen Co $0.3150 11/14/2013

High Income Portfolio: Dividend Stocks Versus Bonds

Seeking a higher yield

You’re telling me that you are seeking a decent yield in today’s market. You’ve looked at all of the traditional investment vehicles but even the best rates aren’t close to good enough. Here may be what you found online or going into the banks:

  • High-Yield Checking or Money Market Accounts: .2%
  • High-Yield Savings Accounts: .49%
  • Certificates of Deposit (CDs): .81% average one year deposit
  • US Treasury Bonds (5 year): 1.28%
  • Corporate-Grade Bonds: 3.12%

While it is true that you can find higher yields by investing in higher-risk bonds or bonds at longer terms, the prospect of locking up your money for over a decade or betting the house on junk bonds doesn’t sound very appealing. Enter dividend-paying stocks.

An opportunity

Dividend-paying stocks represent an opportunity for investors where they can take advantage of the returns of the stock market while still earning steady income all while experiencing lower than average volatility. Let me explain what I mean a little further by taking a look at how dividend-paying stocks perform in both bull and bear markets.

On average, capital invested in the S&P 500 appreciates at 12.40% (average over 50 years; credit: Wikipedia). That is fantastic return on your capital, however since we know more is always better, let’s add in the fact that with dividends, the S&P 500 returns 15.06% over the same time period. That’s a full 2.66% more return on your investment! To illustrate the point, let’s take a look at a chart that explains the return on a $1,000 initial investment over a 50 year period with these returns.

$1,000 Investment in Dividend-Paying Stocks

In contrast, when we purchase a bond, we end up with no capital appreciation and a comparable return in income.

Dividend-Paying Stocks Versus Bonds

In addition to capital appreciation and income-generation, dividend-paying stocks have another very large advantage — tax treatment. Qualified dividends are taxed at a maximum of 15% versus income tax which can be significantly larger. While I won’t cover tax treatments extensively in this article, we cover the tax consequences of dividend stocks elsewhere on the site.

Performance and relative safety

During a bear market (under-performing), dividends perform a positive return on investment while at the same time, return on capital appreciation alone may be almost nothing (or nothing at all). A bear market can also trigger dividend-paying companies to increase their dividends to retain current investors and entice new investors into the fold. This is one of the primary reasons that make dividend-paying stocks less volatile than there non-dividend-paying counterparts and can soften the impacts of a underperforming market. During a bull market (over-performing), dividends enhance the returns generated by price appreciation. You can see in the illustration below how dividends preserve capital during an underperforming market.

$1,000 over 5 years of underperformance

Volatility examined

When we speak of volatility, most people think of the stock market in particular, dramatic swings in the stock market as we saw in 2008. What most people don’t think about is the volatility associated to bonds. As interest rates rise, the price of bonds fall. This is something that anyone interested in bonds should be very aware of right now. With interest rates at historic lows, they have no alternative other than to eventually rise. When this happens, bonds will take an enormous hit to their value and investors will be left holding the bag.

Additionally, you have more to worry about when contending with inflation when looking at bonds. If inflation averages 3% a year, your purchasing power is greatly diminished over time. The performance of dividend-paying stocks on the other hand combat inflation through lower taxes and the likely fact that the income your dividend stocks pay will increase over time along with the appreciation of capital.

I’ve picked on bonds here today as they offer the greatest yield when looking at traditional income-generating investments. However, it is important to note, that in most other income-generating investments (e.g. CDs, savings and money market accounts), the return on investment would have been far worse.

In conclusion

When looking to build an income portfolio, you should certainly look to diversify your holdings. It is good to hold bonds, CDs and a variety of income-producing products. However, in my opinion, dividend-paying stocks should account for the lion’s share of any solid income portfolio.

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Tax Consequences of Dividend Stocks

Taxes are a fundamental part of every investment decision. As an investor we need to be prepared to reduce the effect taxes have on any capital return that we receive. That leads us into the main purpose of today’s article: Discovering the tax consequences of dividend stocks.

The Jobs and Growth Tax Relief Reconciliation Act (JGTRRA)

In 2003, the federal government passed the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA). Among other things, JGTRRA reduced the tax owed on dividend income significantly. Before JGTRRA, investors in the highest tax bracket would owe 38.6 percent of dividend payouts in taxes. Before JGTRRA was enacted, dividend income was taxed at your highest income tax rate. Today the highest tax rate investors pay on dividend income is 15 percent with the lowest being 5 percent.

The government, of course, had good reason to enact this new law. They had two primary objectives in doing so. The first intention was to stimulate the economy while the second was to pull investors back into the stock market.

To illustrate better the effect that JGTRRA has on your returns as a dividend investor, please refer to the table below:

Taxes on dividend income before and after JGTRRA
Dividend Income Assumption: $1,000

Old Tax Rate New Tax Rate Reduction in Tax Rate Tax Under Old Law Tax Under JGTRRA Increase in Retained Capital
10% 5% 50.00% $100.00 $50.00 5.56%
15% 5% 66.67% $150.00 $50.00 11.76%
27% 15% 44.44% $270.00 $150.00 16.44%
30% 15% 50.00% $300.00 $150.00 21.43%
35% 15% 57.14% $350.00 $150.00 30.77%
38.60% 15% 61.14% $386.00 $150.00 38.44%

Not All Dividends Qualify

Not all dividends qualify for the new tax rate. Dividend stocks held with U.S. companies and foreign companies whose stock are traded on established securities markets in the United States or a foreign company that benefits from an income tax treaty with the United States.

Dividends that do not qualify under JGTRRA are included as ordinary income on your annual tax return. So what circumstances cause a stock to not qualify for these tax benefits?

  • Stocks with tax preferences built in such as MLPs or REITs.
  • Dividends from a mutual fund attributable to interest or short-term gains.
  • Dividends from tax-exempt organizations.
  • Dividends paid on money market funds or insurance policies.
  • Dividends paid into tax-deferred retirement accounts.
  • Dividends from S-Corporations.
  • Dividends on preferred stocks that are treated as a debt instrument.

Required Holding Period

There are measures in place to ensure that investors cannot participate in dividend capture strategies or strategies meant to buy a stock just before its ex-dividend date and then sell immediately afterwards in an attempt to generate quick gains. In order for a stock to qualify for the preferred tax treatment, you must purchase the stock at least one day before the ex-dividend date and hold it for a total of 121 days. In other words, the holding period covers one entire quarter and extends from ex-dividend date to ex-dividend date. This promotes more of a buy and hold strategy for investors to invest capital in companies they believe will produce solid returns over a longer period of time.

In Closing

Dividend stocks are a great way to generate recurring income that does not require you to liquidate your holdings to receive capital. Due to the preferred tax rate that dividend income receives, it is an ideal choice for an income portfolio especially when compared with other investments (cash holdings, bonds, etc.) that do not receive this tax treatment. While most portfolios should be balanced between different investment types, I prefer keeping the lion’s share of my money in dividend-paying stocks for three main reasons:

  1. Reoccurring income
  2. Preservation and growth of capital
  3. Preferred Tax Treatment

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Definition of Ex-Dividend Date

The ex-dividend date is the day where all shares (portions of the company that you have bought in the form of stocks) that are bought or sold on or after that particular date do not receive the most recently declared dividend (usually money from the company’s cash reserves). If the stock was purchased before the ex dividend date, then the investor will be eligible for the dividend. This date allows for all pending transactions of the stock to be completed before the record date. The dividend may be in the form of cash or more stock of said company, depending on how the company has chosen to pay out its dividends. The cash that is paid out in the dividends may either be withdrawn by the investor or reinvested into more stock, causing the next dividend payout to be potentially larger. The ex dividend date is also called the “ex date” or the “reinvestment date”.

There are four dates that are used in dividend payouts. They are the declaration date, the ex dividend date, the record date and the payable date. The declaration date is where the company’s board of directors announce to the public their intention to pay a dividend. At this time they will also announce a record date and a payment date. The ex-dividend date is the is the date where all shares, bought by an investor, will not be eligible to receive the dividend. The record date is the particular date set by the company where the people who receive the dividend are determined. They use a list of current shareholders. In order to receive the dividend, you need to be on the list. If you have purchased the stock after the ex-dividend date, then the dividend will go to the seller, the person who previously owned the stock. Lastly the Payable date is the date that the company will release the dividend to the shareholders. If you are building an income portfolio the dates you will need to be aware of are the last three dates, or the payout date, record date and ex dividend date.

The ex dividend date is generally two business days before the record date. The stock will need to be purchased before this set date to be able to receive the dividend. If it was purchased on the ex date or after, the dividend will go to the previous stock owner. It goes to the seller of the stock because it will be their name that shows up on the list of shareholders on record day, not yours. Business days are defined as the days where the major stock exchanges and the banks in New York are both open. Therefore days like Columbus Day or Veterans Day will not count in the calculation of the ex dividend date from a given record date. Those days where the Stock exchanges are open but the banks are not are solely trading days, not business days, in regards to stocks. If the record date is not a business date then the counting begins from the most recent business date. For example, the record date is set on a Sunday, which is not a business day as the banks are closed, then the ex dividend date is the preceding Wednesday, not Thursday.

In conclusion, a stock can be owned for one day and you can be eligible to receive the dividend from a company as long as you pay attention to the ex-dividend dates and you have purchased accordingly. These are the general rules for dividend producing stocks. There are of course varying rules for special dividends over 25%.

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Using Ex-Dividend Dates to Build a Steady Income Portfolio

It is obvious to most people why they would want to create an investment portfolio that provides them with a steady stream of income. To many, it means that they can quit their day job or at least down-size their time investment into a day job. This allows them to focus on other areas of their life and worry less about how they will make ends meet. A less obvious point in building a income portfolio is paying attention to a stock’s ex dividend date. You will want a steady income and the ex dividend date can be crucial in building a regularly paying income portfolio.

Now, let’s look a little closer at this issue so you can concentrate on building the right dividend-producing portfolio for you. We’ll start with some basic information on how ex-dividend dates work. If you purchase a stock on or after the ex-dividend date, you will not receive the dividend payment for that payout period. If you purchase a stock prior to its ex-dividend date, you will receive the dividend payment for that payout period.

Simply put, the ex-dividend date is the date when the stock trades without it’s dividend. We’ll provide a simple example for the purposes of this article. Let’s imagine that you buy a single share of General Electric stock (ticker symbol: GE), one month prior to its ex-dividend date. Let’s also assume that the stock was worth its current value when you purchased it ($24.35) and the dividend payment per share was $0.19. On the dividend payment date, the stock price would open $.19 per share less than the previous day’s closing. If the stock closed the previous day at $24.35, then it would open on the ex-dividend date at $24.16. You receive your dividend payment on the declared payment date, making the each share of GE that you own still worth $24.35 to you.

Now let’s create a sample portfolio that would ensure you receive income every month thus creating steady income. In the table below you can see that we added a stock whose ex-dividend date fell in a different month for each row of the table (January – December).

Company Symbol Yield Payout Months
General Electric GE 2.6% Jan, Apr, Jul, Oct
Aqua America WTR 2.6% Feb, Jun, Sep, Dec
McDonalds MCD 3.2% Mar, Jun, Sep, Dec
Automatic Data Processing ADP 2.9% Apr, Jan, Jul, Oct
Verizon VZ 5.4% May, Feb, Aug, Nov
M&T Bank MTB 3.1% Jun, Mar, Sep, Dec
Kimberly Clark KMB 4.3% Jul, Jan, Apr, Oct
Colgate-Palmolive CL 2.7% Aug, Feb, May, Nov
American Electric Power AEP 5.1% Sep, Mar, Jun, Dec
Sysco SYY 3.7% Oct, Jan, Apr, Jul
Realty Income O 5.0% Nov (all months)
Conoco Phillips COP 3.7% Dec, Mar, Jun, Sep

If we create the portfolio above we should receive dividend income from our portfolio at least once a month. To be more specific, we would receive the following number of payments by month:

  • January: 5 payments
  • February: 4 payments
  • March: 5 payments
  • April: 5 payments
  • May: 3 payments
  • June: 6 payments
  • July: 5 payments
  • August: 3 payments
  • September: 6 payments
  • October: 5 payments
  • November: 3 payments
  • December: 6 payments

Number of Dividend Payments by Month (Ex-Dividend Date)

In closing, building an income portfolio using dividend-producing stocks can be an extremely effective way to earn long-term income passively. However, company’s can change their dividend yield at any time which can have a significant impact on your income. For this reason, I strongly recommend reviewing your portfolio holdings at least quarterly. When creating a dividend income portfolio, it may help to screen stocks by the ex-dividend date and then refine your screens by month to ensure that you are choosing stocks that not only make you money, but make you money every single month so you can worry about other priorities – like enjoying your life!

*NOTE: I am long General Electric, McDonalds, Verizon, Realty Income. I receive no compensation for writing this article other than advertisement revenue from this site.

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