Do dividends count towards ROTH contributions?

[cbird01]

I am a DRIP (Income) investor that focuses on high yield dividend stocks. I have them in a taxable account but want to start buying them in my ROTH. Are the dividends that I receive considered contributions? I can forsee a time when my dividends exceed my yearly contribution. What would happen then? What if I want to fund my ROTH for the year in one contribution, and then I receive dividends in the account before April 15th of the next year?

[sweeps]

No, dividends are earnings, not contributions.

[LuxLiving]

Originally Posted by cbird01

I am a DRIP (Income) investor that focuses on high yield dividend stocks. I have them in a taxable account but want to start buying them in my ROTH. Are the dividends that I receive considered contributions? I can forsee a time when my dividends exceed my yearly contribution. What would happen then? What if I want to fund my ROTH for the year in one contribution, and then I receive dividends in the account before April 15th of the next year?

Then you would count your blessings that the high yield dividend stocks you've chosen are doing well.


Nope, earnings don't count as contributions!

[cbird01]

Originally Posted by LuxLiving

Then you would count your blessings that the high yield dividend stocks you've chosen are doing well.

Oh I will get there. My stocks are currently yielding just under 5%. Capital appreciation was 15% over the last year. I have reinvested all my dividends. Props to Motley Fool Income Investor!

Now for those that do not invest in individual dividend stocks, I did a little spread sheet to show the impact of these dividends. You could do similar with high yield mutual funds or other dividend paying investments.

Considering a more conservative 10% cap appreciation and my 5% dividend yield:

-At year 10 account balance will be $ 94,804 + $ 4,940 yearly cash flow
-At year 25 account balance will be $990,298 + $49,714 yearly cash flow

With no dividends but a 10% cap appreciation

-At year 10 account balance will be $ 71,539 + $ 0 yearly cash flow
-At year 25 account balance will be $ 438,636 + $ 0 yearly cash flow

So at retirement, not only will the nest egg be 2.25 times larger, I will also have an INCOME of $49,714 while driving around the golf course, just from my ROTH dividends ALONE! (guys, is their a distribution limit?)

A few caveats:

- I assumed I would continue contributing $4,000/year now that my friends on this board let me know that dividends are earnings not contributions.
- The no dividends case assumes you have no earnings/dividends in the alternative scenario.
- Attached to your mutual funds? Invest 50/50! At least you will have a better cash flow when you retire. Or buy mutual funds in your 401K.

I guess my goal here is to inform people that they should consider investing in individual stocks that pay dividends, and the perfect vehicle is the ROTH IRA so your cash flow is tax free (tax guru's - correct me if I am wrong).

Contrary to what many stuffy financial advisors will tell you, you do not have to have like $100-$200K just to start investing in individual stocks. [ "You can't be diversified enough!"] You can make small purchases at a discount broker and spread your portfolio over many sectors. (I started with 8 stocks and $5,000 a year ago)

Don't want to research? Then utilize a quality newsletter that does the research for you and fork out the $150/year. I think you will make it back

[Broken Arrow]

I guess my goal here is to inform people that they should consider investing in individual stocks that pay dividends

Well, there's nothing wrong with investing in dividend stocks, but the form of investment one considers should reflect your financial goals... and it should be done as part of a diversified portfolio. For that matter, bonds, growth stocks, and mutual funds have their places as well.

For example, dividend stocks generally lack kind of rockstar climbing power that growth stocks possess. That's why... they pay dividends. But because of that, I contend that you may NOT make your money grow as much as it can be growth stocks. It just really depends, but I wouldn't go so far as to claim one form is better than the other....

Sorry if I sound critical. But yes, I whole-heartedly agree that you don't need a lot of money before you start investing. If anything, the less we have invested, the harder we should work to invest. Then, later on, we can let our money work hard for us.

[cbird01]

Originally Posted by Broken Arrow

Well, there's nothing wrong with investing in dividend stocks, but the form of investment one considers should reflect your financial goals... and it should be done as part of a diversified portfolio. For that matter, bonds, growth stocks, and mutual funds have their places as well.

Not critical at all Arrow..I wholeheartedly agree. This should be a portion of your portfolio. I have a seperate IRA with mutual funds and plan to subscribe to a growth newsletter to jump in the mix. I just beleive it is foolish to ignore and you should search for quality high yield (4%+) companies. This can boost a very important part of your finances - Cash Flow

By the way let's not forget my first love - Real Estate. It's flat now but it will never go away! Where else can you put 5% down and earn appreciation on 100% of value? With cash flow to boot.

[disneysteve]

Don't forget that stock mutual funds can also pay dividends. In fact, there are funds that focus on dividend-paying stocks. So you can get the benefit of owning dividend-paying stocks within the structure of a mutual fund and let a professional do the stock picking.

[cbird01]

Originally Posted by disneysteve

Don't forget that stock mutual funds can also pay dividends. In fact, there are funds that focus on dividend-paying stocks. So you can get the benefit of owning dividend-paying stocks within the structure of a mutual fund and let a professional do the stock picking.

Have not looked into these Steve. You know any with 5+ yields that still have high returns?

If you have good resources you can pick em as well as the "professionals". Well I guess when I think about it, I am just picking from a list that was picked by the professional, probably couldn't do it myself...lol

[disneysteve]

Originally Posted by cbird01

Have not looked into these Steve. You know any with 5+ yields that still have high returns?

Actually, Money magazine just had an article on them: http://money.cnn.com/magazines/money...5184/index.htm

The two they recommend are T. Rowe Price Equity Income (PRFDX) and iShares Dow Jones Select Dividend (DVY), an ETF.

PRFDX had a total return of 16.45% for 2006.
DVY was up 16.95% YTD as of 11/30/06.