If you’re like most of us, it has been far too long since you’ve seen a decent raise. In 2012, wages and salaries increased 1.7 percent on average, barely keeping up with inflation. Behind that slow wage growth is the unfortunate fact that unemployment remains stubbornly high — and has been stuck there for years. With so many people looking for the available jobs, competition for work is high, keeping wages down.
But even with high unemployment and stagnant wages, companies are still making money — and that money has to go somewhere.
In many cases, where it goes is straight into the hands of shareholders, in the form of dividends.
Go Where Raises Are Plentiful
While salaries have been stagnating, dividends have not.
According to SP Dow Jones Indices, dividends increased by 18 percent in 2012. That’s a whopping 10 times the rate of salary increases — and it is some incredible money, if you can get it.
Fortunately, you can get your hands on some of that money — and the potential raises that come with it. All you need to do is transform yourself from an employee into an owner by becoming a shareholder of a company that pays, has raised, and has the potential to continue raising its dividends.
Invest in Future Raises
In today’s era of ultra-cheap commissions and brokers with low minimum starting balances, it’s incredibly easy to buy shares in companies that pay out dividends.
Better yet, once you’ve made yourself a shareholder of a company that pays dividends, you don’t have to do a thing to get those raises. It’s all the rewards of ownership. And for most people, these dividend payouts also come with the added benefit of lower taxes, as well.
As unearned income, dividends are not subject to Social Security tax, and unless you’re making enough to get caught by the new Medicare surtax, they’re not generally subject to Medicare taxes, either. Plus, in most cases, dividends are taxed at lower regular tax rates than earned income, as well.
Put it all together and, in a nutshell, it means that you can get faster raises and lower taxes with virtually no effort at all on your part, other than what it takes to save up enough to buy some stock.
That’s what makes dividend increases the best raises you’ll never earn — you can get them without having to earn them.
What’s the Catch?
Of course, like everything else in investing, there are risks attached.
Dividends are not guaranteed, and companies that fall on hard times can slash their payments. Even General Electric (GE), one of the largest companies around, was forced to cut its dividend in 2009 due to the financial meltdown and its own part in the subprime mortgage mess.
In fact, if a company stumbles badly enough, not only can it cut its dividend, but its stock could fall all the way to $0 in a bankruptcy. Just ask shareholders in the old General Motors (GM), who saw their shares become absolutely worthless during that company’s bankruptcy proceedings.
As a result, if you are going to invest with an eye toward finding companies that could reward you with increasing dividends, you absolutely must diversify. If you sprinkle your purchases across industries, you can better protect your overall portfolio — and dividend income stream — from the failure of any one company or even industry.
Fortunately for those looking to invest this way, as the table below shows, companies that pay and increase their dividends operate across all sorts of industries, making diversification possible:
Source: SP Capital IQ, as of Feb. 22, 2013.
With double-digit dividend growth, they’ve certainly been rewarding their owners well. And with payout ratios below half of their earnings, they’ve still got room to grow. With reasonable debt-to-equity ratios, they don’t appear to be in imminent danger of financial collapse. And of course, since they come from diverse industries, there’s little chance that a company or even industrywide failure will take them all down.
What’s Keeping You From Investing?
If you’d like to see the kind of raises that investors are seeing, then it’s time to make the move from worker to owner and start picking up your dividend checks. It could give you the best raise you’ll never earn.
Motley Fool contributor Chuck Saletta owns shares of General Electric, Microsoft, and Union Pacific. The Motley Fool recommends Costco Wholesale, General Motors, Home Depot, and UnitedHealth Group. The Motley Fool owns shares of Costco Wholesale, General Electric, and Microsoft.
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