Archive for month: June, 2011

Some investors, when picking stocks, like dividend paying stocks. This is because a company that pays a dividend generally had certain characteristics. These characteristics can make a company a good investment – beyond the virtues that the dividends have for income investing. Here are some of the things you can infer about a company from its dividend:

Financial Strength

One of the most important things you can learn about a company from its dividend is its strength. A company can’t pay a dividend if it doesn’t have cash. The payment of a dividend is usually an indicator that it has some cash to spare. (You do have to be careful, though; in some cases a very attractive dividend is an indication of the opposite, with a management desperate to find investors to shore up the company finances.) A regular dividend that remains stable, or increases every year (like what you see with dividend aristocrats), is usually an indication that the company knows what it’s doing financially.

Stability

A regular dividend can also indicate that the company is stable. A reasonable yield of between 3% and 6% usually means that there is a degree of stability in the company. This is especially true if the payouts have remained the same, or risen, over time. If dividends are being slashed, or if there is an erratic history of payouts, it can be an indication of instability.

Concern for Shareholders

The payment of a dividend can also signal that the company cares for the wellbeing of shareholders. This is important if you want to a company that has your financial interests at heart. Consider: There are a number of things that the company can do with that cash. Instead of putting it into some other venture, or boosting executive pay, the company is choosing to share it with shareholders. This can be a good sign – especially if you want to be a shareholder.

Picking Dividend Stocks

As you can see, even if you aren’t choosing a stock for its dividend, looking at the dividend, and the dividend history, can help you get an overall feel for the company’s likely performance. A company that pays a dividend usually has strong fundamentals, and if the dividend has remained mostly intact through market corrections and setbacks, that is an even stronger indication that your choice is likely to offer solid returns over time. Carefully consider your options, you might find that a dividend stock makes a great investment on its own – on top of providing you with regular income.

In many cases, your investing strategy will depend on your time frame. The same is true of dividend investing. When investing in dividend stocks, you will need to consider your goals, and what you hope to accomplish with your dividend stocks. While dividend paying stocks can be good for a long term portfolio, as well as for a short term portfolio, the way you invest to get the best benefit will be different.

Long Term Dividend Investing

When it comes to long term investing, you don’t need a large amount of capital to start; dollar cost averaging works well. The important thing is to be consistent, regularly investing money. For long term dividend investing, it is also a good idea to take advantage of DRIPs. These plans will automatically reinvest your dividends so that you buy more shares of the stock. You essentially get these shares for free. These can grow your portfolio, helping you when it comes time to sell later on, for retirement or college or some other goal. You will have more shares, presumably at higher values.

If you want to use the investments for retirement, you can hold them in a tax-advantaged retirement account. That way you can avoid paying taxes on your dividend earnings until you withdraw from the account.

Short Term Dividend Investing

If you want to use the money in the short term, such as building up an income stream from dividend payments, you need to take a little different approach. If you want immediate income, you will need have a large chunk of cash to start. A large amount of capital is required to generate the payments that can result in immediate income.

However, if you have time to build up to an income stream, you can create a plan to build up your dividend portfolio. If you are looking to be able to have a good income stream in seven to 10 years, you can use a strategy similar to dollar cost averaging to build your portfolio over time. You will see your income stream from dividends grow. You can use DRIPs at the beginning to get more shares faster. As you get closer to when you expect to take advantage of your dividend income stream, you can stop using the DRIP strategy, and enjoy the advantages of having more shares – and larger dividend payments.

Dividend stocks can offer a number of opportunities for diverse time frames. Consider your goals, and carefully plan a strategy that can help you take best advantage of dividend stocks.

One of the best things you can do before you start investing – in dividend stocks or anything else – is to get some solid background. Before you begin dividend investing, you should read The Ultimate Dividend Playbook by Josh Peters, CFA. Peters is the editor of Morningstar DividendInvestor, so you know that he knows what he’s talking about. If you are interested in using dividends as part of your investing plan, you can get a handle on the process with the help of the Playbook.

Peters makes use the fictional Sally to illustrate many of his points, and help you learn how dividend investing can help you. Playbook is organized logically to help you learn concepts related to dividend investing. Peters starts out by introducing the idea of using stocks to make money, providing you with a regular income stream beyond just waiting for stock prices to increase over time. Then he takes a look at value and returns, as well as helpful hints on how to choose dividend stocks. You move through the book easily, with the next concept building on what you just learned.

Playbook provides useful information on different dividend models to help you evaluate stocks, and analyzes how to use them. Peters’ preferred model, the dividend drill, is an interesting way to consider your options. However, even Peters warns about some of the drawbacks associated with this model. Sometimes the analysis can get a little dry, but most of the time the information provided is educational and practical. If you can power through some of the less entertaining parts of the book, you will come away with solid information, and a better understanding. You might even be ready to develop your own dividend investing plan.

As you continuing reading through Playbook, you will learn about managing your portfolio, as well as receive Peters’ thoughts on the future of dividends. To further break topics down into easy to understand tutorials, there are seven appendices included with the book. You can get a more focused look at dividend payments, as well as the tax issues associated with dividend investing. Then, Peters shares targeted strategies for different types of dividend stocks: banks, utilities, REITs, energy partnerships, and other dividend opportunities are explored in turn.

If you are look for an overview of dividend investing, along with actionable information that you can use to improve your financial future and build an income producing

Looking for some great investing tools? Look no further than some of the blog posts written during the last week. The offerings from some of the great investment blogs offer insights into how to choose better investments, as well as tools that can be used to analyze your next move:

1. SumZero is the Best Way To See Your Competition: The Dividend Pig takes a look at SumZero, a site aimed at providing actionable investment ideas. You have to pay a fee to get access to the site’s best stuff, but you can get an in-depth, actionable article for free once a week.
2. Dividend Yield or Growth or both?: The Passive Income Earner provides some insight into the age-old dividend investing dilemma of yield vs. growth. You also get some solid ideas for using both when deciding what to do about an investment.
3. The Safety of Short Term Bonds: Dividend Ninja knows that bond funds are out of favor. However, if you want to add a little bond safety to your portfolio, you can employ a short term bond strategy. An interesting post.
4. Playing With Ex-Dividend Date: The Dividend Guy offers you a tutorial on making money by playing with the ex-dividend date of your investment choice. It’s a great primer on an interesting tool that can be used to your advantage.
5. Creating a Single Portfolio with Multiple Accounts: Oblivious Investor offers a technique that can help you simplify your investment portfolio. Even if you have multiple account, you can still manage one portfolio.
6. Picking an index tracker out of the investing swamp: Monevator provides some helpful insight into choosing an index tracker. You can take this seemingly complex process, and make it work for you. A helpful way to find the right index tracker for you.
7. How To Invest In International Stocks: Buy Like Buffett offers some practical advice for someone who wants diversify into foreign investments. An overview of your international stock choices.