When your dividend income is high enough to cover your living expenses, you have reached your dividend crossover point.

What is the dividend crossover point?

Dividend crossover point is when your dividend income exceeds your expenses. How quickly you reach your dividend crossover point depends on two factors – your expenses and your savings rate (how much you invest in dividend stocks every year).

Factors affecting dividend crossover point

Living expenses

You will reach your dividend crossover point faster if your living expenses are low. Lower expenses are easier to replace than higher expenses.

Savings rate

If your savings rate is high, and you invest in dividend stocks every year, you will be able to reach the dividend crossover point quicker.

Yield and dividend growth rate

If your dividend stocks generate high income, you can reach your dividend crossover point quickly. Higher dividend income can come from investing in stocks with high dividends or by investing in stocks that grow the dividend over time.

Dividend re-investment

If you reinvest your dividends – either in the same stock or in a different stock – you will reach your dividend crossover point quickly. Many brokerages allow you automatically reinvest dividends.

Time Horizon

Dividends grow over time. The longer your time horizon, the lower you can invest every year to meet your goals.

An example to illustrate the math behind dividend income

Let’s take a look at an example. Let’s make the following assumptions.

• Every year you invest $10,000 in dividend stocks
• The stock pays a 2% dividend every year. The company increases dividend by 7% every year
• Investment horizon is 20 years.
• Total investment during 20 years: $200,000 ($10,000 per year)

Take a look at the column for year 1. You invest $10,000 in a stock that has a 2% dividend.  This investment gives you a $200 per year dividend income in the first year. In year 2, the $200 will grow to $214. In year 3, your income will be $229, etc. After 20 years, your $10,000 investment will generate $723.

If you invest 10,000 per year, you can see that your dividend income after 20 years is $8,319.

Sensitivities – Varying starting dividend and dividend growth rate

Let’s run some sensitivities. The table below shows the income after 2o years for different starting dividend rates and their growth rates. As you can see, the higher the starting dividend and the higher the growth rate, the more your income in 20 years.

The table above shows income for $10,000 annual investment for 20 years. If you can invest $20,000 every year, simply multiply the values in the table by two.

Note that the analysis above ignores tax considerations. The analysis also excludes dividend reinvestment. You should include taxes if you are investing in a taxable account. If you are investing in a Roth IRA, you don’t have to worry about taxes because withdrawals are tax-free. But Roth IRAs have a limit on how much you can contribute every year.

Your Guide To 2022 Tax Rate On Dividends

What Are Dividends

Dividends are a share of the profit that companies distribute to their shareholders.  Most companies distribute dividends quarterly.

Dividends can be qualified or nonqualified dividends.  Non-qualified dividends are sometimes called ordinary dividends.

Tax Treatment of Dividends

Tax treatment of dividends varies based on whether the dividend is qualified or nonqualified.  Qualified dividends get preferential treatment when it comes to taxes. For nonqualified dividends, you will pay regular income tax.

Qualified dividends

According to the IRS, a dividend is considered a qualified dividend if you held the stock for at least 60 days during the 121-day period that extends 60 days before and after the ex-dividend date.  If you don’t meet the holding period requirements, the dividends will be considered nonqualified dividends and will be taxed at a higher rate.

A stock’s ex-dividend date is the date it starts trading without the value of the next dividend.

At the end of the year, your stockbroker will break down dividends into qualified and nonqualified dividends on Form 1099. But it is up to you to meet the holding period requirements to make the dividends qualified, which will lower your taxes.

Dividend Tax Brackets

The following tables show the tax brackets for single and joint tax filers.  These are taxable income limits.  This means that you need to take your gross income and subtract your deductions before using this table.

Here is an example.  Let’s say that you are married and are filing jointly.  You have an annual income of $109,250 for 2022, all of them in dividends. You can subtract your standard deduction of $25,900 and you will end up with a taxable income of $83,350. From the table below, you will see that your tax rate is zero.

That’s quite remarkable that you can make $109,250 in dividend income if you are married and file jointly,  and not pay a dime in taxes.  If you are single, you can have $54,625 in dividend income and pay 0% tax. This shows how tax-efficient dividend investing can be.

2022 Dividend Tax Brackets

2023 Dividend Tax Brackets

Net Investment Income Tax (NIIT)

If you are a single filer and your modified adjusted gross income is over $200,000 or if you are a joint filer and your modified adjusted gross income is over $250,000, NIIT tax rate of 3.8% is applied on income from dividend income, interest income, short and longterm capital gains, taxable income from annuities, REITs, and Master Limited Partnerships.

The threshold amounts are not indexed for inflation but Congress could change that in the future.  NIIT is a flat tax that you need to pay on top of your other taxes.

Bottom Line

Dividend investing is a great way to earn passive income.  Plan to hold your dividend investments long enough for them to be qualified dividends. Dividend investing can also be very tax efficient. A married couple making $109,250 in dividend income (and assuming no income from other sources) will not pay any taxes.  If you are a high earner, you may need to pay Net Investment Income Tax (NIIT).

The information contained in this article is not tax or legal advice.  Tax laws change frequently.  So please consult with an accountant or an attorney.

You postpone your vacations or at least be mindful of spending too much on leisure activities.

Your friends are losing their jobs or struggling to make their house and loan payments.

Everyone hates recessions, and for good reason.  Are there any positives about a recession?

Stock Buying Opportunities

Great wealth is generated coming out of a recession. Recessions can be a perfect opportunity to buy stocks.

Major market indexes go down 20% or more during a recession.  These are great opportunities to purchase stocks at a discount. Good companies get sold just like bad ones, and if you can buy stocks in a recession and hold them for the long term, you are going to make a ton of money.

Similarly, if you invest every month and dollar cost average into stocks or mutual funds, you will be able to buy more shares for the same amount.  This will be true if you are reinvesting dividends.

Market timing is difficult, but as long as you plan to hold stocks for the long term, recessions are a good time to buy stocks.  I usually wait for a very bad year, and then buy blue-chip companies that have been around for a long time.  I can pick up a 6% dividend yield on a good company easily during recessions.

Great Deals

Businesses struggle during recessions.  So airlines, hotels, and other businesses provide great deals to attract customers.

If you have been wanting to go on your dream vacation for a while, you may be able to do that at a discount.

Buy A Home or Refinance Mortgage

The Federal reserve decreases the Fed funds rate during recessions, which causes mortgage rates to drop.  So recessions are a good time to buy a house.

If you already own a home and have a mortgage, it’s a good time to refinance your mortgage at a lower rate. Refinancing will reduce your mortgage payments and put extra money in your pocket.

Use Government Stimulus To Your Advantage

The government typically implements policies in a recession to get the economy working again.  These can include tax cuts, income tax credits and incentives to increase consumer spending.

This puts more money in your pocket.  Use the money wisely to invest in your future.

Trim your budget

When times are good, we sign up for things we don’t need.  Recessions are a good time to review your budget and get rid of services and subscriptions you don’t need.

Could you mow your lawn instead of hiring a landscaping company?  Do you still need a subscription to a magazine you haven’t read in 6 months?

Recessions are good for the economy in the long run

Companies get bloated during good times.  Recessions help companies watch their finances closely, and get back in shape.

Excesses in certain sectors of the economy get corrected during recessions.  While it may be unpleasant at the time, these adjustments are good for the economy in the long run.

Bottom Line

Recessions can be frightening.  It’s a time of uncertainty for most people.  But recessions are also opportunities to build great wealth.  During recessions, stocks are on sale, and distressed companies offer great deals on products and services.  It’s a great time to buy or refinance a home, too.

In the long run, recessions are good for the economy and good for you. Use these times of volatility to build wealth in the long term.

Decades ago, the news was meant to inform readers.  These days, however, the news is dominated by clickbait headlines and a huge appetite for sensationalism.

With the rise of social media, this problem has actually gotten worse.  People prefer to get news from their favorite outlet even if that news is biased and wrong.

Then, there is an overload of information as people are connected through their devices for most of the day.  People consume more information than ever before but are not necessarily using them to make good financial decisions.

Headlines don’t matter in the long run

Whether it’s the 2000 dot com but or the 2008 financial crisis, long term investors know that these events were just a blip on a long time frame.  People were scared at the time of the crash, but long term investors who stayed the course made huge returns.

Acting on headlines will get you whipsawed out of your position

If you read too much into the day-to-day headlines, you will get whipsawed out of your stock positions.  Great wealth is built by holding stocks long term through the ups and downs of the market.

Media gets it wrong often

During market crashes or recession, magazines such as Barrons and Newsweek run covers predicting doom and gloom.  But history shows that most of those covers are poorly timed.

Many savvy investors use these “Magazine Cover Indicators” to time their purchase.  If you buy stocks when the media is predicting doom and gloom, you are likely to make money in the long run.

Take a look at the stocks that Warren Buffet bought during the 2008 financial crisis and see for yourself how they performed in the next 10 years.  The stocks bought during the depths of the crisis delivered huge returns. Buy stocks when there is blood on the street, goes an old Wall Street saying

Market timing is hard

Market timing is hard.  Profitable buying and selling stocks based on news of the day or week is even harder.  Staying the course, and not tweaking your portfolio based on the news is the best course of action for most investors.

So what does an average investor do?  Do they simply not read the news?

Be informed, but don’t act on every news headline

As an investor, you must stay informed.  But don’t overdo it, and don’t make adjustments to your portfolio based on the news.  Periodic re-balancing or changes to asset allocation is fine, but don’t buy or sell stocks in your portfolio because you read some article predicting a fed cut or an epidemic in Africa or a recession.

Dollar-cost average and re-invest dividends

Volatile markets are good times to dollar cost average into stocks. It’s also great if you consistently reinvest dividends.  Your average cost basis will be lower as you will be buying more stocks for the same amount when the market goes down.

Bottom Line

Be informed but don’t act on the sensational headlines. Acting on day-to-day news will not make you a good investor.  Sticking with a diversified portfolio of stocks for the long haul is the best way to build wealth. Long term investors can benefit from news-related volatility by dollar-cost averaging and reinvesting dividends.

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