Archive for year: 2011

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.

One of the ways that you can screen for a good dividend stock pick is to make use of the dividend growth model. You can calculate what the value of the stock should be, based on its dividend, to provide you with the return that you need to make it worth the purchase.

Calculating Stock Valuation Based on Dividend Growth

This stock valuation model takes a look at divided growth and uses it to help you decide whether or not the investment is a good buy. The formula use is based on three factors:

1. Current dividend (per-share – full year dividend pay out)
2. Growth of the dividend (per year – the five year dividend growth can give you a good idea)
3. Required rate of return: What you “need” the investment to return in order for you to think it worth it to purchase the stock.

Once you know that information, you can plug it into the following formula:

(current dividend x (1 + dividend growth)) / (required return – dividend growth)

Dividend Stocks Online has handy lists that show you current dividend yield, and other information about yield growth. So, for our example, we’ll use Verizon (VZ). According to The Motley Fool, VZ is on track for a full year pay out of $1.95 per share. DSO puts the five-year annual dividend growth at 3.51%. Now, let’s say that I would need 10% for a required rate of return. As of Friday, May 27, 2011, VZ has closed at $36.67.

It’s time to plug in some numbers, and hope that I can still do junior high school math with a calculator:

1. Current dividend = 1.95
2. Growth of dividend = 0.0351
3. Required rate of return = 0.1

(1.95 + (1 + 0.0351))/(0.1 – 0.0351) = 1.9851/0.0649 = $30.59

Basically, this model means that this stock should be at $30.59 in order for me to get a 10% annual return, based on its dividend growth.  It is also worth noting that this model could also be interpreted as an indication that VZ is currently overvalued, since it seems to indicate that VZ has a price higher than its valuation.

Problems with the Dividend Growth Model

There are weaknesses in almost any model, and this one is no different. Dividends do not always remain the same; they can be cut. Dividend growth is not going to remain constant, and this model assumes constant growth in perpetuity. In addition to looking at the dividend growth model of stock valuation, consider a few other factors when making a decision:

• History of regularly dividend increases (dividend aristocrats are those that have raised dividends every year for 25 years)
• Business model of the company
• A dividend adequately covered by earnings

There is no way to completely predict what any investment will do. However, you can do a little research, and choose stocks that show good promise going forward.