Let Uncle Sam Guarantee Your Dividends

Believe it or not, there is a formula to getting wealthy in the stock market.  The formula is easy to follow and most investors already understand the concept.  However, following this formula is far from sexy and many consider it downright boring.  This is why it is often ignored by the majority of fast money seeking stock market players.

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  • However, the few that actually implement their knowledge of this wealth formula often end up far richer than their non-patient investing brethren.

    If you have not guessed it yet, I am talking about the power of dividend reinvestment.  In and of itself, dividend reinvestment is an extremely effective and proven wealth building formula.

    When you add in the dividend guarantee of the U.S. government, it becomes a nearly unbeatable investment combination.

    First, let’s have a refresher on the wealth building formula of dividend reinvestment.

    Dividends are one secret to building wealth in the stock market.  Many investors forget this fact in their search for profits. Buying income stocks fall in and out of popularity.  However, the truth remains that investing in long term dividend stocks is the key for serious stock market wealth.

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  • It’s hard to believe, but history has proven that over 40% of all advances in the stock market in the last 50 years are due to dividends. Imagine the major indexes being 40% lower than they are today.  That would be the case if dividends did not exist.

    The trick is not just finding stocks that pay dividends.  The secret to success in long-term dividend investing is to find stocks that have been steadily increasing their dividends over time.

    Icing on the cake is having these dividends guaranteed by the U.S. government.  More on this later!

    You see, a high dividend alone doesn’t guarantee they will continue. For sure, steadily increasing dividends offer no such guarantee either.  However, it does dramatically increase the odds that the dividend increases will continue over time.

    Now that you have built a portfolio of dividend paying stocks, what’s next?

    The key to wealth building is dividend reinvestment.  Dividend reinvestment means using the proceeds from the dividends to purchase new shares.

    This technique is effective due to the incredible power of compounding.  Put simply compounding is interest earning interest on interest.  This means the faster and more often you earn and reinvest your dividends, the more wealth you will earn over time.

    Here are four keys to wealth building via dividend reinvestment

    1. Start Early

    The sooner you start your investment plan, the sooner you will reach your goals.  Time is your friend when it comes to dividends.

    1. Don’t Waiver

    Sticking to the plan is crucial.  Resist the temptation to buy that sports car or go on vacation with the money earned.  Let the money grow undisturbed

    1. Exercise Patient

    . Patience is the key for success.  It will seem like a long drawn out process at times, but if you stick it out, it will be well worth it.

    1. Have your dividend payments backed by the U.S. government

    Barring a complete financial and economic disaster, payments backed by the U.S. government are as close to a guarantee that is possible.

    I bet you are wondering how to take advantage of these government backed dividends!

    Let’s take a closer look.

    The U.S. government is America’s largest tenant.  Most people erroneously believe that the Feds own all their facilities.  While the Federal Government does own close to 10,000 building, it also rents numerous others.  This renting has resulted in a landslide of consistent profits for the lucky landlords who rent to the most solvent and powerful entity on the planet.

    The normal issues of landlords such as bounced rent checks and tenant turnover are non-existent for buildings rented to the U.S. Government.  The Fed never bounces checks and usually stays in the same location for many years.

    I bet you are wondering what this has to do with stock investors.

    It has everything to do with dividend reinvestment due to an investment entity known as a REIT.  The Government Properties Trust REIT (NYSE:GOV) owns real estate leased to the Federal Government and is currently throwing off a 10% annual dividend yield!

    GOV leases office buildings to well-funded government agencies such as the Department of Defense, the Social Security Administration, the Internal Revenue Service, the Department of Justice, the Department of Energy, the Department of Homeland Security, the Food and Drug Administration (FDA), and the Centers for Disease Control (CDC).

    REITs are powerful dividend machines in and of themselves due to IRS regulations.

    As a are real estate companies modeled after mutual funds.  Created by Congress back in 1960, REITs were given the duty of allowing everyone the opportunity to invest in income producing real estate in the same manner as investing in the stock market.  You see REITs trade on the stock market in a similar way as regular stocks.

    REITs can be invested in via 401k’s and other retirement plans.  Believe it or not, over 50 million Americans already own REITs via their company 401k plan.

    REITs can invest directly into income producing properties or mortgages tied to the properties.

    These are the two primary forms of REITs, mortgage REITs and equity REITs.

    In order to qualify as a REIT, a real estate investment company needs to meet the following criteria.

    1. Have at least 50% of the shares owned by more than 5 individuals
    2. Be managed by a board of directors or trustees
    3. Have at least 100 shareholders
    4. Be taxable as a corporation
    5. Invest at least 75% of its assets in real estate
    6. Obtain at least 75% of its gross income from real estate or mortgages.
    7. Pay a minimum of 90% of its taxable income to investors in the form of dividends. This means that REITs usually do not retain their earnings.

    This distribution of earnings back to the shareholders as dividends is the key to REITs high payouts.

    Some of you are likely thinking that the potential shrinking of government under the likely republican administration will adversely affect the GOV ETF.

    Truth is, history indicates that government shrinking is unlikely regardless of the current administration.  However, stabilization of the government’s office requirements is likely to occur over the next decade.

    This likely scenario should have little to no effect on the ETF’s profits. You see, GOV leases approximately 5% of the Fed’s 5000 leased facilities.  This means that there is plenty of room to grow as GOV continues to acquire existing government buildings to lease.

    Remember, the leases are already guaranteed by the Federal Government.  This means that GOV can borrow money against the lease and assets due to the locked in, guaranteed rent payments.  This borrowed money will be at the optimal rate since the payments are guaranteed, further boosting GOV’s stability.

    It is important to note, however, that investors should not expect the dividend to keep climbing higher.  This is because the ETF continually raises cash via secondary offerings which increase the share count.

    With this said, GOV makes a fantastic, stable addition to any income producing portfolio.  Add in the fact of the government guaranteed rent payments and it’s a nearly perfect REIT for every investor.

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