It’s true that an income portfolio can be a good way to provide yourself with a stream of passive income that can support you in the future. However, it is important to be careful. If you rely too much on dividend income, you might wind up in a difficult situation.

Main Issue with Dividends

The main issue with dividends is that they can be cut – or even eliminated – at any time. Companies are not obligated to keep paying dividends. They can get rid of them suddenly, or cut them during tough economic times when cash gets scarce. As a result, if you are relying too heavily on dividends, you could find yourself facing a significant decrease in your income if the investments in your portfolio suddenly cut their dividends.

At this juncture, especially if you are retired, or don’t have other sources of income, you might be forced to sell some of your stocks. In some cases, this can be a very inconvenient time because the stock price might have dropped as well. So, you will be forced to sell your holdings in order to get the cash you need, but you won’t perhaps, get as good a return as you would have liked.

Protecting Your Income from Dividend Cuts

As a result of this possibility, it is important to protect yourself from dividend cuts. Many people think that you have to be either a total return person, or a dividend person. The truth, though, is that you can be both. You can create an investing plan that allows you to create a portfolio that allows you to build up, on the one hand, investments that you know you will likely sell at some point, as well as create a dividend portfolio that provides an income stream.

You can also protect yourself to some degree by choosing your dividend stocks carefully. Some investors like the dividend aristocrats because the companies involved have raised dividends every year for at least 25 years in a row. With dividend aristocrats, there is a smaller chance that the dividend will be cut, much less disappear altogether. Of course, the possibility of a dividend cut or elimination is always there, but it is smaller.

Diversify Your Portfolio

It is also possible to diversify your dividend portfolio so that you have different types of stocks involved. That way, if cuts are more sector-based, you will still have other investments that will hold up, and possibly help make up for a dividend cut.

And, of course, you can prepare your finances by building up an emergency fund of some sort. That way, if you end up the victim of dividend cuts, you can draw on your emergency fund while you wait for your dividend stream to recover, or wait for the markets to improve so you can sell some of your investments later. You can also start a side business, or cultivate some other source of income to help provide you with a stream if dividends are cut.

Being prepared with different options can help you avoid the problems related to dividend cuts, and better prepare you for a successful financial future.

When you are looking for stable performance, and regular dividend increases, one place to start is the list of dividend aristocrats. Stocks can’t be considered dividend aristocrats unless they have increased their dividend payouts at least once a year for the past 25 years. If a stock misses a year, it is off the list – and it takes another 25 years to get back on. These safe dividend stocks are often considered the cream of the crop by investors who want regular returns, and a reasonable expectation of income increases.

Considering the Company

One of the reasons dividend aristocrats can be so attractive is because it says something about the company. A company that can consistently afford to pay cash back to stockholders – and increase the amount given to shareholders each year – is usually in pretty good financial shape. Think about it: Because of what it takes to become a dividend aristocrat, it means that these companies continued to increase their dividend payouts even during recessions and stock market troubles.

If you are looking to invest in a company that is likely to survive economic downturns and market volatility, a dividend aristocrat might be just the thing. Not only are you likely to see increases in dividend income, but you are likely to, over time, see an increase in stock price, resulting in gains when you finally do sell.

Things to Keep in Mind

Of course, it is important to remember that dividend aristocrats might not always remain so. Companies can decide not to increase dividends – or even cut them – at any time. This means that a dividend aristocrat may end up off the list. When this happens, it is vital that you consider the situation surrounding the fact that a company is off the list. What has changed? Is the management changing? Are profits falling? Removal from the list can be an indication of trouble in some cases.

Also, be aware that investing in dividend aristocrats may not provide you with a huge income – especially immediately. It takes time to build up a dividend portfolio. Realize, too, that some dividend aristocrats have relatively small yields. Remember: These are stocks that raised payouts each year. However, they might not have started with a very high payout, and they need only increase the payout by one cent in an entire year to make the cut of being a dividend aristocrat. You can’t expect a huge income immediately from a portfolio heavily favoring dividend aristocrats.

Bottom Line

Even though there is no guarantee that a dividend aristocrat will always remain so, it is important to note that you can increase your chances of stability when you invest in a dividend aristocrat. Consider your options, and consider how dividend aristocrats might help your situation.

It’s been an interesting and tumultuous few years. But, through it all, companies with the ability to manage their finances well have managed to do all right. While even the best stock in the world fall when the rest of the market is in a rout, the best companies see their stocks recover – or at least out-perform the other stocks on an index. For buy and hold investors, now is a great time, since it’s possible to find some great deals. But what’s going on with companies?

Because of the economy, many companies have been hoarding cash. It’s a vicious cycle: Companies hoard cash because they want to shore up. They won’t spend the money in hiring until the economy improves, but the economy won’t improve until there are more workers with disposable income. So, in the meantime, companies look for things to do with their cash, since they’d rather put it to work investing in the company than sitting in Treasury bonds at really low rates. Generally, in these situations, the options are:

1. Mergers and acquisitions
2. Stock buybacks
3. Dividend payments/increases

With M&A, the company might get a new division, or strengthen its position by merging with a bigger company. In any case, such situations don’t do much for investors, unless they happen to be the ones holding the stock that increases in value as a result of the M&A activity.

Companies like stock buybacks, though, since it puts their cash to work, and CEOs and other company bigwigs can get a good deal. The interest in stock buybacks right now is an indication that many companies think that their shares are a great value. For the investor with an eye for a bargain, this can be telling. And, if you already own shares, the result of the buyback is often that your shares – as they remain – can become more valuable.

What’s really encouraging, though, is that many companies are considering dividends. Lexmark just announced that it will begin paying a dividend. And with cash reserves at highs not seen in decades, there are a number of companies that some analysts think should start paying dividends. Interestingly, companies that offer dividends often outperform companies that don’t (at least on the S&P 500). Whether it’s because the promise of dividends attracts more investors, or whether it’s because companies know they have to husband their resources better to pay a dividend (or both), companies do well.

And, for dividend investors, now might be a great time to buy. Valuation is lower than it has been in a long time. It’s possible to find good deals, and build your income portfolio. Consider your options, and your goals for the future. Then see if anything appeals to you. Until companies start using their cash to hire workers, and until the economy starts to recover, your best bet is likely to look for solid, cash-rich companies

One of the great things about being a dividend investor is that you have a wide variety of options available to you when it comes to earning income from your investments. A reasonable amount of diversity in your dividend portfolio is desirable if you want to improve your overall performance – and see some safety in your portfolio. One way to add a little diversity is to include real estate, with the help of dividend REITs.

REITs: Real Estate Investments – without Owning the Real Estate

Many investors want to include real estate in their portfolios. However, it can be difficult to scrape together the capital it takes to purchase real estate. On top of that, once you purchase some sort of real estate, you are stuck with this huge, somewhat illiquid asset. This is where REITs can help. Real Estate Investment Trusts invest in different types of real estate, and you can get a piece by investing in REITs. The up front capital requirements are much easier to meet, you have a more liquid investment, and you can earn an income through dividends.

REITs are required by law to pay out 90% of their earnings to shareholders. This is often done through dividends, and that means that the savvy dividend investor can benefit.

Why REITs are Attractive

One of the reasons that REITs are attractive is due to their yields. With an average yield of right around 3.7%, REITs fit quite well into many investors’ yield targets. Plus, even though some REITs were hard hit just after the financial crisis, many are showing some improvement. After all, any small change in the real estate market can benefit a REIT.

Plus, it is possible to find REITs that are more “defensive.” Even though single-family housing suffered a huge blow during the recession, multi-family dwellings didn’t do as badly. Indeed, REITs that include apartments can do reasonably well during tough economic times since more people are moving out of homes and into apartments – and people are likely to keep paying rent, even if they skip their credit card payments.

On top of offering reasonable yields, REITs also have performance on their side. Even though the last three years have been kind of tough for REITs, over the last 10 years, they have seen an annualized return of 10% (according to the measure of the FTSE NAREIT All Equity REIT index). Compare that to the 2.7% return offered by the S&P 500 (although the dividend stocks did rather better than the index as a whole). And, of course, if there is some recovery in the economy and in the real estate market, REITs have the potential to see some solid growth in the coming years.

Bottom Line

If you are looking for a little more diversity in your income portfolio, and you haven’t begun investing in REITs, it might be time to consider it. You can invest in individual REITs, or you can invest in an index fund or ETF that associates itself with REITs. Either way, you can receive dividends that can boost your income efforts.

The unique tax advantages offered by REITs can translate into superior yields for investors seeking higher returns with relative stability. When preparing your taxes this year, take advantage of this free tax prep program to ensure accuracy while maximizing your returns.

It’s been another interesting week of trading on the stock market (although stocks are much higher now), and dividend stocks continue to get a lot of attention from investors looking for the possibility of gains, but with a little lower risk — and maybe some income in the bargain.

One of the trends has been an interest in dividend ETFs. Exchange traded funds have been gaining in popularity recently due to how easy they are to trade, as well as their low costs, and instant diversity. Companies offering dividend ETFs can make big money, and Schwab wants in on that. Schwab just rolled out its high-dividend ETF, the Schwab US Dividend Equity ETF (SCHD). And it’s priced to undercut other high-dividend ETFs from Vanguard.

SCHD will use information from the Dow Jones U.S. Dividend 100 Index to populate its ETF with companies with consistency in dividend payouts, and good financial ratios.

Other Dividend News

There are plenty of dividend rumors right now. Rumors are that BP will pay a dividend for the first time since 2009. Also, there is an expectation that GlaxoSmithKline will boost its dividend to 17 pence a share, with represents a 6.3% increase for GSK shareholders. Additionally, there is also a chance that Spanish insurer Mapfre SA will boost its payout to 7.5 euro cents.

Additionally, LyondellBassell has announced a debt buyback, as well as a special dividend. LYB is hoping to boost its credit rating, and improve its financial footing. LYB is just one of many companies buying back debt right now. The hope is that the debt can then be sold at the record-low rates that are present right now.

Cantel Medical Corp. raised its semi-annual dividend to $0.07 a share from $0.06 per share for stockholders of record on January 17, 2012. For CMN shareholders, this represents a 16.7% increase. The dividend boost brings CMN up to a 0.6% yield.