There is a great new article in this month's edition of Fortune called Dividends for the Long Run.  It points out that this past year has proven to be the worst for income investors for more than three generations and that dividend payouts are set to fall by the worst percentage decline since 1938 because companies want to maintain their cash levels just to be safe in case the recession proves longer or more unpleasant than it has already shown itself to be.

The central position of the piece, however, is one that I've been telling you for almost ten years - companies that pay large dividends have consistently outperformed their counterparts for all of recorded history.  Dividend paying stocks also display lower volatility, making the emotional journey of holding them less stressful.  The author quotes Ned Davis Research, which said companies that increase or begin paying dividends have returned 9.5% a year compared to 6.8% for the total S&P 500 since 1972.  That difference of 2.7% may not seem small, but over the 37 years the study covered, the result for someone investing $10,000 a year would be an extra $1,232,982 in wealth due to the power of compounding!  (The S&P investor in the research ended up with $1,423,507 whereas the dividend investor had $2,656,489, or nearly 87% more money.)  The results are even more shocking when you look at investors that only bought non-dividend paying stocks.  After investing $10,000 per year for 36 years, they would have lost money after factoring in inflation!

You can read a lot more about how to profit from dividends in these great resources, articles, and guides:

Why Boring Is Always More Profitable: How the Research of Dr. Jeremy Siegel Proves that Nearly 99% Of After-Inflation Gains Comes from Reinvested Dividends

All About Dividends: Your Complete Guide to Understanding Everything About Dividends and How They Work

Income Investing for Beginners - a 10 Part Guide to Living Off Your Money

Why Dividend Paying Stocks Tend to Fall Less During Bear Markets: The Reasons Stocks with Dividends Are Often More Stable Than Non-Dividend Paying Stocks

The #1 Way to Recover from Big Stock Market Losses: How You Can Combine Cash Dividends with Dollar Cost Averaging to Make Up Losses

Watch Out for the Dividend Trap: When High Dividend Yields Spell Trouble

How to Use Dividend Changes to Generate Big Capital Gains: A Nice Trading Strategy for New Investors

One Trick to Tell If Stocks Are Undervalued: Comparing Dividend Yields to Treasury Bond Yields

Don't Join the Capital Gains Cult: Focusing on Dividends Over Capital Gains Can Lead To Much Bigger Gains in Wealth

For the past few days, I've been speaking with some friends about tax policy.  With health care, the economy, and government deficits exploding, many of my friends who are in the middle class argue that the burden should be carried by the rich.  The problem with the argument, as they present it, is that it doesn't factor in human nature.  There's no better way to understand this than to look at the case of Texas, Florida, and Nevada vs. the Nation.

Several years ago, the people of Texas modified their constitution to severely limit their representatives from passing or using any form of an income tax.  Far from spelling disaster, Texas has been one of the few bright spots as the economy collapsed.  Frankly, it's not hard to see why.  Imagine you had a family that years ago put their savings into a limited partnership.  Over time, that partnership has invested in stocks, bonds, real estate, hotels, restaurants, and private businesses.  Now, imagine that today, that partnership earns $1,000,000 per year in pre-tax profit.  Each Christmas, the members of the family gather around the fireplace and decide how much of their money to reinvest and how much to take in dividends.

Now, imagine that this family lives in St. Louis, Missouri.  For the privilege of living in Missouri, they effectively pay $60,000 in state income tax (this is a gross oversimplification but I'm trying to illustrate the concept).  If, instead, they moved to Houston or Dallas, they would pay $0 in state income tax.  So, the question becomes, "As a family, are we willing to pay a $5,000 monthly fee to continue living in Missouri?"  If the family does, in fact, relocate, then the state of Missouri is going to lose all of the sales tax they generated when they bought new clothes at Nordstrom or Brooks Brothers, furniture for their homes, school supplies for the kids, sports equipment for football practice, etc.  They are also going to lose the property tax they would pay by buying assets and moving them into the state, such as nicer cars.  They are going to lose any jobs that would have been created by new investments near the family's homes, which will now likely be in Texas.

The human condition means that people will do what is most rational for their family.  This is why I think we'd be much better off as a nation abolishing the income tax entirely and passing a flat national sales tax of between 15% and 25% that is constitutionally limited with a provision that the budget must be balanced.  In that case, the government isn't punishing saving, and even drug dealers will be paying taxes when they spend their cash on goods and services.  Otherwise, we're going to continue seeing highly educated and high net worth citizens flee from states like New York and move to places like Las Vegas, Miami, Houston, or Dallas.  They can enjoy most of the same shopping, dining, and business community contacts but keep millions of dollars in their pockets simply because they sleep somewhere else.

As part of this week's series of articles on household income and wealth in the United States, we are taking an in-depth look at the richest 0.9% of Americans, how they got that way given that 90%+ didn't inherit any of their wealth, and how you can use those same traits to increase your own net worth.  Put in an easy step-by-step format, you'll definitely want to print each step and read it on your lunch break or the next chance you have to take a moment for yourself.

Imagine you own a stock that hasn't increased in value in several years; it's a terrible investment, right?  The reality is not so simple.  Research has shown that more than 99% of real, inflation-adjusted wealth is the result of reinvested dividends in boring, profitable companies.  That means that when you look at a stock chart, you are literally seeing a meaningless squiggly line on a piece of graph paper.  The result is that new investors (and sometimes even experienced investors) draw wrong conclusions and bypass great potential investments because they are looking at the wrong data.  To understand why this is the case, and more importantly why it should matter to you, read Don't Join the Capital Gains Cult - Why You Should Focus on Dividends and Total Return - Not Capital Gains.