Saturday, October 26, 2013

Earn passive income from dividend investing

by Shawn Manaher
There are two ways to make money from equity investing capital gains and dividends. Dividends can be paid at regular or irregular intervals and are usually a way for companies to spend a surplus of cash on hand when they do not have profitable projects available.
This article assumes you already have a brokerage account set up, you have some capital to invest (even as low as 1000, just something).
Firstly, there are two main profit tactics you should be looking at if you plan to put your portfolio, or at least some of your portfolio, into auto pilot. The first is simple periodic cash return into your account. The second is a DRIP (Dividend Re-Investment Plan). In this case, you will firstly have to ensure your brokerage company will allow you to set up a DRIP. This is a very simple way of steadily increasing the stock in your account, while avoiding associated commissions.
Although dividend investing for passive income is a niche trading strategy, it is still prudent to remember that as with all investing strategies, the most important factor is research. There are certain metrics which are more important to dividend investing than in other cases, but a full understanding of the metrics and a full understanding of your sources of research is a major factor in determining your performance. "Chance favors the prepared mind." Louis Pasteur
There are a number of stock metrics which are important for dividend investing.
PE Multiple
The most widely known of stock metrics is the PE multiple, or the PE ratio, which is simply calculated as the stock price divided by the earnings per share. This is a great first way of finding out if the price is good value compared to other stocks in the same industry. It is important to remember here that if a stock is selling at a relative discount, maybe there is a reason for the discount. Tread carefully.
Earnings Growth rate
Dividends come from earnings, so to know if dividends are going to be on the rise, you need to look at forecast earnings potential.
Debt to Equity ratios
This is a great metric to use to check how solid a company is. It is also a good measure of the prudence of management. This figure shows how much debt a company is holding relative to their equity. This will be a significant factor in economic downturns when cost of capital sorts the men from the boys.
Earning passive income can be a fantastic way to make some relatively low risk plays in the market. Find companies with healthy backgrounds, solid earnings, a positive future and a good management team who believe in a steady growth in dividends and you will see fantastic returns for doing nothing.
The author has spent a lot of time learning about passive income and other related topics. Read more about dividend investing.
original publication 

Tuesday, October 22, 2013

Dividend Investing - Do It ASAP

Why You Need to Be Investing in the Best Dividend Stocks Right Now

Why You Need to Be Investing in the Best Dividend Stocks Right Now
By Matt Bush

If you aren't looking for the best dividend stocks, you are missing out on a huge investment opportunity. The whole purpose of stocks was initially to pay dividends to its owners, and this principle still rings true today.
Interest in these stocks has gone up and down over the years. Since 2002, there has been a renewed interest though it still is not as popular as it should be. This should key you in that this is a good time to be investing in them.

Dividend stocks give you both growth as well as income. Here are a few strong reasons as to why you should consider it:

1) They give out a good return

2) The dividends are lightly taxed. We are talking only 15% here. Compared to other options, that's pretty significant.

3) You don't have to do anything to get your dividend, they just send it to you. I like having to do less work.

4) You have a lot more control over them, the funds aren't "trapped" like many other investments. This gives you a lot more flexibility over your investment.

5) Dividends can increase over time (unlike bonds). This can increase your earnings significantly.

6) Dividend yields can also increase over time. Again, this can compound your earnings significantly.

As you can see, the best dividend stocks have some unique features that other investments tend not to have. Fortunately they are fairly easy to acquire as well. Like everything else, you do need to use common sense and not just purchase the first stock you find. Personally, I have found this type of investing to be very exciting.

The Doubling Stock Robot is said to be the most sophisticated stock analyzing computer in existence, and has made it's members a literal fortune. Is the Doubling Stock Robot [] for real or a scam? Learn more here [].

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About Dividend Investing: Think Things Differently

Why Dividend Investors View Stocks Differently

Why Dividend Investors View Stocks Differently
By David Van Knapp

Intuitively, you would think that everyone cares about the price of stocks that they own. After all, no one like to lose money, right? Who likes to see the market go down?

Well, one category of investors cares a lot less when their stocks go down: Dividend investors.

Dividend investors focus on the dividend--and especially its growth--far more than they do on the stock's price.

Investors in strong dividend-paying stocks are doing just fine in 2008. Hundreds of millions of dollars have been distributed to dividend stockholders this year, and they will continue to be paid every month and every quarter.

But this cash reward from dividend stocks is ignored by most of Wall Street and the financial media. There is no "Dividend Index" reported minute-by-minute the way the Dow, NASDAQ, and S&P 500 are reported.

But those are all price indexes. They reflect price changes only and therefore give an incomplete picture of "how stocks are doing." After all, total returns (the ultimate goal of every investor) are made up of price returns plus dividends. Price indexes such as the Dow do not reflect dividends.

Dividends are stocks' secret weapon. They operate in the background. They are not sexy enough to get much attention. They don't involve IPOs, takeovers, "the next big thing," or making millions in a couple of weeks.

But dividends are extremely important to total returns. They should not be ignored. According to Morningstar, S&P 500 companies have grown their dividends at a 16% annual clip for the past three years, 12% in the past 12 months. If there were a Dividend Index based on the S&P's 500 stocks, it would be up 9 to 10% this year.

So dividend investors focus on increasing dividends as much or more than the stock's price. Two main metrics for dividend investors thus become: (1) initial yield at time of purchase, and (2) dividend growth rate.

As to initial yield, according to Morningstar, the dividend yield on the S&P 500 right now is 2.6%, which is higher than it has been in a few years. (That yield has been inflated by the general drop in stock prices this year.) Many stocks, of course, yield much more than 2.6%. Reasonable minds can differ as to what an acceptable minimum initial yield should be for a dividend stock. I set a floor of 2.5% (or 1.9% for stocks with an uninterrupted 25-year history of dividend growth). Others may set other floors, such as 4%, to stay even with or ahead of inflation right from the moment of purchase. The point is, each investor can set his or her own minimum acceptable dividend yield as part of the stock selection process.

As to dividend growth, the key number is the rate of increase in the annual money-per-share paid to stockholders. The best dividend companies increase their dividends every year like clockwork. Many have done so for decades, without a freeze or a cut. My personal minimum growth requirement is 5% (as demonstrated by the average of the last three years). I'm sure that many dividend investors demand a higher minimum. Again, the important point is that you can set your own standard, and then look for stocks that meet or beat it.

My Easy-Rate(TM) point system for evaluating dividend stocks awards higher scores for both greater initial yields and faster rates of growth than my minimums. So I would never buy a dividend stock with both an initial yield and historical dividend growth rate right at my two minimums. Either one or the other would have to be higher for me to consider purchasing the stock.

The two measures--initial yield and rate of growth--are essential to a good dividend-stock selection process, along with your normal fundamental checks for company soundness.

There are plenty of solid dividend-paying candidates. Here are just a few examples (all figures from Morningstar as of 9/2/2008):

--Abbott Laboratories (ABT): initial yield 2.4%, 3-year growth rate 7.4%
--Coca-Cola (KO): 2.8% and 10.8%
--GlaxoSmithKline (GSK): 4.7% and 5.4%
--Kinder Morgan Energy Partners (KMP): 6.5% and 6.5%
--Sunoco Logistics (SXL): 7.3% and 12.7%

As stated earlier, the best dividend companies increase their payouts every year or nearly every year. Dividend increases mean that the yield on your original investment goes up over time. (That is, the "current yield" stated in the newspaper or online does not apply to you any more, just to new purchasers.) At an average annual increase of:

--6%, your dividend doubles about every 12 years
--10%, every seven years
--12%, every six years
--15%, every five years

Now it is certainly true that many dividend-paying companies have not escaped the bear market. Indeed, some of them-the financials-have been especially hard-hit. Dividend-paying stocks are not immune from market risk.

But the really committed dividend investor does not care as much about this--which is the exact point of this article. The committed dividend investor becomes accustomed to varying principal, and cares little more about it than a bondholder cares that his or her bond trades on the open market at varying prices. The investor is focused instead on the cash the investment is bringing in. In fact, if the dividend investor is not using that cash as current income, but is instead accumulating assets to fund a future goal such as retirement, he or she sees price drops as an opportunity to purchase more shares at better prices and yields than before.

That does not mean that dividend investors never sell. But they are probably less likely to sell than investors focused on capital appreciation alone, because dividend "disappointments" are pretty rare in well-selected dividend stocks. Dividend investors' reasons for selling may include a cut in the dividend; a slowing in its growth rate; or a chance to swap for a higher-yielding stock or one with a faster-growing dividend.

Dividends and dividend-paying companies have lots of positive attributes. Here are my top six:

1. Dividends are cash in your pocket. You can re-invest that money in the company, or in another company, or nowhere. You can spend it.

2. You do not have to sell a share of stock to get it. They credit it to you each month or quarter.

3. Most dividend programs are persistent. Companies with well-established programs rarely cut or eliminate their dividends. Many have uninterrupted, decades-long histories of paying and raising dividends. It is their ability to do this that separates them from "fixed income" investments like bank accounts and bonds.

4. Studies show that over long periods, dividend-paying stocks have had the highest total returns of all. According to Ned Davis Research, from 1972 to 2006 (a period that includes the tech bubble, when dividends contributed little), non-dividend-paying stocks gained an annual average return of 4.1%. But dividend-paying stocks returned 10.1%, an enormous 6%-per-year difference. Wharton Professor Dr. Jeremy Siegel's research showed that 97% of the stock market's return from 1871 to 2003 can be traced to re-invested dividends.

5. Dividends are closely watched and reported, so information about them is easy to obtain. Over time, companies establish dividend patterns that are consistent. Significant changes in the pattern are reported instantly.

6. If you build a strong portfolio of dividend-paying stocks that regularly increase their dividends, you can arrive at retirement with a significant income stream paying an enormous yield on your original investment. You may be able to make a transition from a salary paycheck to a "dividend paycheck" seamlessly.

Dave Van Knapp is the author of two books on stock investing.

The first is "Sensible Stock Investing: How to Pick, Value, and Manage Stocks." Click on this link to go directly to the book's page on

The second is "The Top 40 Dividend Stocks for 2008: How (and Why) to Build a Cash Machine of Dividend Stocks." Over time, studies show that dividend stocks have the best total returns. To see a complete description of this exciting e-book, or to learn more about Dave's Web site devoted to the success of the individual investor, please visit:

Thank you, and best of luck in your investing.

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Monday, October 21, 2013

Tips for Sucess in Dividend Investing

Investing Online: How to Be Successful in a High Payout Investment for Dividend Stocks

Investing Online: How to Be Successful in a High Payout Investment for Dividend Stocks
By Efraim Lezama

A high payout investment is an investment that can give you high dividends at a given point of time at regular intervals such as quarterly or monthly. High payout investment options may attract higher risks unlike low payout investments.

However, high returns at low risk are a catch to investors. Payouts can be paid as cash, property, interim or stock dividends. Stocks that offer high dividend payouts can provide you passive income for the rest of your life.

Factors to Consider for a High payout Investment Strategy

1. Dividend yield: represents the annualized return a stock pays in terms of dividends. You can compare the relative attractiveness of high dividend paying stocks to know what to expect from the stock.

2. Company size: you can determine a company size from firms that provide company profiles and information. The number of employees, sales revenue, type of ownership, sources of finance, management structure and market share are important when considering the size.

3. Payout ratio: you can calculate the dividend payout ratio to know the earnings per share. A company's annual report may avail this information. A high payout ratio can be considered good for investors that can receive a large portion of dividends per share.

4. Long-term performance: high dividend paying firms are mature companies. Firms that do better and exceed a certain benchmark can offer high dividends. The company may do better than average thus it may have a high return.

5. Dividend growth rate: a stock that increases its dividend rate can provide you a rising stream of income every year. Growth may last and over time pays off. A one-off huge payout may not last, instead it may diminish gradually.

6. Ability to generate cash: a company with no record of good cash flow may not have enough cash to pay dividends. If it were to pay dividends, it may do so by selling stock or debt. These two options are not viable.

7. Consistent dividend payouts: a company should consistently payout its dividends. This gives management a bit of discipline since the board has to ensure profitability to always pay out dividends to investors.

Keep in mind:

  1. Not all stocks pay dividends instead the company may decide to reinvest the dividends, acquire another firm or pay down debt.

  2. Picking high dividend stocks only is counterintuitive. You may need to consider a few things before settling for some stocks. A company with attractive stocks could have underlying problems. Learn to spot dividend traps and avoid them completely.

  3. Dividends are a privilege because they are not guaranteed. The board of directors of a company you invested in may choose to pay or not to pay dividends.

Efraim Lezama is an entrepreneur that is making his fortune investing online. If you would like to find free ways to make money online and learn how to invest a few hundred dollars, compund your capital and multiply your money with little risk over a short period of time, visit [] and kick start your online money making endeavours.

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Why Invest In Dividend Stocks?

3 Arguments For Investing in Dividend Paying Securities Instead of Fixed Income Securities

3 Arguments For Investing in Dividend Paying Securities Instead of Fixed Income Securities
By Chris Blanchet

There are multiple ways for people to invest in low risk securities that pay dividends. Possibly one of the most popular ways is through dividend investment funds. And while the prospect of getting into the market during periods where there a lot of market uncertainty as well as economic uncertainty, there are some clear benefits to investing in dividend-paying securities today rather than waiting for the economic recovery to get under way. Here are three reasons why you should begin investing in dividend-paying securities.

1. Growth. Unlike bonds which will experience price pressure once rates start climbing, securities will actually enjoy price appreciation. Look at General Electric's stock, for example. When the economy kept this company for reporting profit growth for nine straight quarters, the stock price dropped by a staggering 83% from its highs. Some of this drop could be attributed to the company cutting its dividend (temporarily) but when GE reported 48% profit growth, it not only raised its now-restored dividend by 20% (meaning one's income would increase) but its stock price also rose. As economic forces push interests up, bonds may suffer but the companies that benefit from stronger economies gain in terms of profitability as well as stock price.

2. Better Diversification. Unlike bonds that are excessively expensive to purchase, a lot of dividend-paying securities are not. This allows for greater diversification for folks who would prefer to hold individual shares (instead of investment funds); a $100,000 portfolio can hold more actual shares if it is invested in securities than a portfolio of actual bonds. Diversification is known to be instrumental in reducing risk associated with fluctuations that result from individual company activities (such as bankruptcy, insolvency or other management activities).

3. Alternative Investment Options. Although almost all bonds will have a margin value to allow for leveraging, using derivatives to enhance income from bonds is a little more difficult than using margin and derivatives on stocks. And there derivative trading is more transparent and available to stock holders who like to manager their investments on their own, investing in dividend paying securities instead of bonds in order to take advantage of derivative strategies to enhance income makes the most sense.

The three arguments above for investing in dividend paying stocks instead of interest paying bonds are really just three points that range from very common (growth and diversification) reasons to very complicated reasons (such as enhancing returns through derivative investments). There are many other compelling reasons during periods of economic recessions and those early recovery stages to invest in dividend paying equities instead of interest paying fixed income securities.

--> Considered one of the top Dividend Funds as an alternative to picking your own dividend paying securities. Find out more at the Mutual Fund

Chris has more than 17 years of financial services experience. He currently manages a Debt Blog [] at

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Sunday, October 20, 2013

Cash Flow and Wealth with Dividend Investing?

Dividends and Investing - The 5 Step Formula for Building Wealth and Cash Flow With Dividends

Dividends and Investing - The 5 Step Formula for Building Wealth and Cash Flow With Dividends
By Brad Castro

Many individuals consider investing in individual companies in the stock market to be too risky and dangerous to do on their own. So they rely instead on "safer" professional alternatives such as financial advisors and the mutual fund industry.

Unfortunately, the track record of most professional money managers and advisors is none too great owing to a number of factors that include: over trading, having too much money to efficiently or effectively manage, over diversification, and too much reliance upon conventional wisdom regarding asset allocation.

The good news for motivated self-directed investors is that real investing, specifically via high quality dividend paying companies, is both straightforward and rewarding. Here then is a 5 step formula for successfully building wealth and cash flow with dividends.

#1 - Choosing High Quality Dividend Paying Companies

The best dividend investments are rarely those with the highest yields or biggest payouts. The number one rule of dividend investing is to not be seduced by high yield. Dividends represent your portion of a company's earnings returned to you in the form of cash. As such, dividends must be based on reality and sustainability, and not on deteriorating fundamentals.

The most important criteria when considering an investment is the quality of the underlying business itself. This is such a simple concept, but most people have either forgotten it or never even considered it in the first place so that it now seems either radical or naive.

You should approach stock selection with the same seriousness and rigor as if you were actually buying a business because, interestingly enough, that is precisely what you are doing. So why would you ever invest in anything less than the highest quality companies that you can identify?

#2 - The Power of Dividend Growth

Few individuals really grasp the profound power of dividend growth investing. As a dividend-paying company and its earnings grow over time, those dividend payouts regularly increase as well. This is called, naturally enough, dividend growth.

There are many examples of companies increasing their dividends consecutively for the last 10 years, 20 years, 30 years, and even longer.

The power of dividend growth isn't that a single increase in a quarterly dividend will make you rich, but rather the cumulative impact of increasing dividends over time has a powerful compounding effect.

An example: Say you bought $100,000 worth of shares in a high quality, dividend paying company with a current 3% dividend yield, meaning that you would receive $3000 a year in dividends. And let's also say that the company continues to raise its dividend by 10% each year.

After 2 years, you would receive $3300 in dividends; after 3 years, you would receive $3630; after 4 years, you would $3993; and after 5 years you would receive $4392.30.

But here's where the compounding effect takes place. In Year 2, the company increased its dividend distribution by 10% and you received an additional $300, which also represented a 10% increase. But by Year 5, the company's 10% annual increase from the previous year is an additional $399.30, which for you actually represents a 13% increase based on your initial investment.

And that's only after 5 years - this number and the compounding effect will only increase over time.

#3 - Reinvesting Dividends

If you reinvest the dividends you receive by using those dividends to purchase additional shares of the stock, you further accelerate the compounding effect.

Many companies offer commission free dividend reinvestment plans (called DRIPs) directly to investors and most online brokers offer comparable commission free reinvestment services as well, so this is a realistic and accessible strategy to pretty much everyone.

When you reinvest your dividends, those dividends purchase additional shares that, in the next quarter increases the total amount of dividends you receive which in turn purchases additional shares that in the next quarter again increases the total amount of dividends your receive which in turn... you get the idea.

Again, stock selection is paramount. Reinvest in a low quality, high dividend stock and you could still wind up with nothing.

#4 - Leveraged Investing

The first 3 steps represent a proven investing method that builds both wealth and cash flow over time and in any market. All it takes is time and patience.

I have found, however, that by adopting certain conservative and customized option trading strategies (which I've termed, "Leveraged Investing") that this proven investing approach can be accelerated. This allows the investor to reap the proven benefits of dividend investing more quickly and to a larger degree.

The goal of, and rationale for, Leveraged Investing is to use options intelligently to generate a continual reduction in the cost basis of one's long term holdings (rebates, if you will) which provides yet another source of funds that can be reinvested back into the acquisition of additional shares.

#5 - Patience

The final element in successfully using dividends to build real wealth and a powerful cash flow is to be patient. The best investments tend to be boring investments. Certainly you need to monitor your investments, but if you've done your homework and really chosen consistently profitable and durable businesses, your best strategy will most likely be to simply sit back and wait.

In that regard, Leveraged Investing has an additional benefit for those who find it difficult to keep their hands off their own portfolios, namely that it gives them a little something extra to do and look forward to. Though not particularly difficult or time consuming, using options conservatively and intelligently to provide your portfolio with an additional investment edge can be as stimulating as it is rewarding.

If you find the idea of dividend investing appealing, please visit the Great Option Trading Strategies Dividend Stock Investing page for more resources and information.

About The Author:

Brad Castro is a practitioner and promoter of Leveraged Investing, or option trading techniques and strategies designed to simulate successful value investing. Leveraged Investing has two objectives: to acquire stock in quality companies as cheaply as possible and then to squeeze more returns from those stocks once they've been acquired.

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How You Can Get Rich Off Dividends?

How you can get rich off dividends…

The has an excellent post about the power of compounding dividends:
“Anne Scheiber, who turned a $5,000 investment in 1944 into $22 million by the time of her death at the age of 101 in 1995. Anne Scheiber worked as an IRS auditor for 23 years, never earning more than $3150/year. The one important lesson she learned auditing tax returns was that the surest way to become rich in America is by accumulating stocks. She accumulated stocks in brand name companies she understood and then reinvested dividends for decades. She never sold, in order to avoid paying taxes and commissions. She also never sold even during the 1972-1974 bear market as well as the 1987 market crash because she had high conviction in her stocks picks. She also held a diversified portfolio of almost 100 individual securities in brand names such as Coca-Cola (KO), PepsiCo (PEP), Bristol-Myers (BMY), Schering Plough (acquired by Pfizer in 2009). She read annual reports with the same inquisitive mind she audited tax returns during her tenure at the IRS and also attended annual shareholders meetings. Anne Scheiber did her own research on stocks, and was focusing her attention on strong franchises which have the opportunity to increase earnings and pay higher dividends over time.”

…another example is:
“Grace Groner, who turned a small $180 investment in 1935 into $7 million by the time of her death in 2010. Ms Groner, who worked as a secretary at Abbott Laboratories for 43 years invested $180 in 3 shares of Abbott Laboratories (ABT) in 1935. She then simply reinvested the dividends for the next 75 years. She never sold, but just held on to her shares.
She was frugal, having grown up in the depression era, and was the classical millionaire next door type of person who was not interested in keeping up with the Joneses. Grace Groner left her entire fortune to her Alma Mater. Her $7 million donation is generating approximately $250,000 in annual dividend income.”
Start now folks!

Why Are Dividends Important?

Why Dividends Matter
 "The only thing that gives me pleasure is to see my dividend coming in." --John D. Rockefeller.
 One of the simplest ways for companies to communicate financial well-being and shareholder value is to say "the dividend check is in the mail." Dividends, those cash distributions that many companies pay out regularly to shareholders from earnings, send a clear, powerful message about future prospects and performance. A company's willingness and ability to pay steady dividends over time - and its power to increase them - provide good clues about its fundamentals

Dividends Signal Fundamentals 
Before corporations were required by law to disclose financial information in the 1930s, a company's ability to pay dividends was one of the few signs of its financial health. Despite the Securities and Exchange Act of 1934 and the increased transparency it brought to the industry, dividends still remain a worthwhile yardstick of a company's prospects.
Typically, mature, profitable companies pay dividends. However, companies that do not pay dividends are not necessarily without profits. If a company thinks that its own growth opportunities are better than investment opportunities available to shareholders elsewhere, the company should keep the profits and reinvest them into the business. For these reasons, few "growth" companies pay dividends. But even mature companies, while much of their profits may be distributed as dividends, still need to retain enough cash to fund business activity and handle contingencies.
The progression of Microsoft through its life cycle demonstrates the relationship between dividends and growth. When Bill Gates' brainchild was a high-flying growth company, it paid no dividends, but reinvested all earnings to fuel further growth. Eventually, this 800-pound software "gorilla" reached a point where it could no longer grow at the unprecedented rate it had maintained for so long. So, instead of rewarding shareholders through capital appreciation, the company began to use dividends and share buybacks as a way of keeping investors interested. The plan was announced in July 2004, nearly 18 years after the company's IPO. The cash distribution plan put nearly $75 billion worth of value into the pockets of investors through a new 8 cent quarterly dividend, a special $3 one-time dividend, and a $30 billion share buyback program spanning four years. In 2010, the company is still paying dividends of 1.8%.

The Dividend Yield
Many investors like to watch the dividend yield, which is calculated as the annual dividend income per share divided by the current share price. The dividend yield measures the amount of income received in proportion to the share price. If a company has a low dividend yield compared to other companies in its sector, it can mean two things: (1) the share price is high because the market reckons the company has impressive prospects and isn't overly worried about the company's dividend payments, or (2) the company is in trouble and cannot afford to pay reasonable dividends. At the same time, however, a high dividend yield can signal a sick company with a depressed share price. 
Dividend yield is of little importance for growth companies because, as we discussed above, retained earnings will be reinvested in expansion opportunities, giving shareholders profits in the form of capital gains (think Microsoft).

Dividend Coverage Ratio
When you evaluate a company's dividend-paying practices, ask yourself if the company can afford to pay the dividend. The ratio between a company's earnings and net dividend paid to shareholders - known as dividend coverage - remains a well-used tool for measuring whether earnings are sufficient to cover dividend obligations. The ratio is calculated as earnings per share divided by the dividend per share. When coverage is getting thin, odds are good that there will be a dividend cut, which can have a dire impact on valuation. Investors can feel safe with a coverage ratio of 2 or 3. In practice, however, the coverage ratio becomes a pressing indicator when coverage slips below about 1.5, at which point prospects start to look risky. If the ratio is under 1, the company is using its retained earnings from last year to pay this year's dividend. 
At the same time, if the payout gets very high, say above 5, investors should ask whether management is withholding excess earnings, not paying enough cash to shareholders. Managers who raise their dividends are telling investors that the course of business over the coming 12 months or more will be stable.

The Dreaded Dividend Cut
If a company with a history of consistently rising dividend payments suddenly cuts its payments, investors should treat this as a signal that trouble is looming.
While a history of steady or increasing dividends is certainly reassuring, investors need to be wary of companies that rely on borrowings to finance those payments. Again, take the utilities industry, which once attracted investors with reliable earnings and fat dividends. As some of those companies were diverting cash into expansion opportunities while trying to maintain dividend levels, they had to take on greater debt levels. Watch out for companies with debt-to-equity ratios greater than 60%. Higher debt levels often lead to pressure from Wall Street as well as debt-rating agencies. That, in turn, can hamper a company's ability to pay its dividend.

Great Disciplinarian
Dividends bring more discipline to management's investment decision-making. Holding onto profits might lead to excessive executive compensation, sloppy management, and unproductive use of assets. Studies show that the more cash a company keeps, the more likely it is that it will overpay for acquisitions and, in turn, damage shareholder value. In fact, companies that pay dividends tend to be more efficient in their use of capital than similar companies that do not pay dividends. Furthermore, companies that pay dividends are less likely to be cooking the books. Let's face it, managers can be awfully creative when it comes to making earnings look good. But with dividend obligations to meet twice a year, manipulation becomes that much more challenging.
Finally, dividends are public promises. Breaking them is both embarrassing to management and damaging to share prices. To tarry over raising dividends, never mind suspending them, is seen as a confession of failure.

A Way to Calculate Value
Dividends can give investors a sense of what a company is really worth. The dividend discount model is a classic formula that explains the underlying value of a share, and it is a staple of the capital asset pricing model which, in turn, is the basis of corporate finance theory. According to the model, a share is worth the sum of all its prospective dividend payments, 'discounted back' to their net present value. As dividends are a form of cash flow to the investor, they are an important reflection of a company's value.
It is important to note also that stocks with dividends are less likely to reach unsustainable values. Investors have long known that dividends put a ceiling on market declines.

The bottom line is that dividends matter. Evidence of profitability in the form of a dividend check can help investors sleep easily. Profits on paper say one thing about a company's prospects; profits that produce cash dividends say another thing entirely.

What to Consider When Dividend Investing

Dividend Stock Investing - 7 Essential Concepts

Dividend Stock Investing - 7 Essential Concepts
By Brad Castro

Dividend Stock Investing is simply investing in dividend paying companies. But in order to determine if this style of investing is right for you, you need to know the essential terms and concepts of dividend investing. Here are 7 essential dividend investing concepts:

What is a dividend?

A dividend is a cash payment made by a company to its shareholders. It's essentially a portion of the company's profits returned to the company's owners (i.e. the shareholders).

How often are they paid?

For the vast majority of companies that pay dividends, distributions are quarterly. A company's Board of Directors sets the company's dividend policy (i.e. the dividend amounts and the payout dates).

When are they paid?

Each company will set its own dividend calendar, but there are certain important dates to be aware of: Dividend Declaration (when the company formerly announces its dividend policy for the next distribution cycle), Dividend Record (in order to be eligible to receive the dividend payout, you must be the shareholder of record on this date), Ex-Dividend (since it takes two business days for a stock transaction to "settle," ex-dividend date allows you to easily determine dividend eligibility - if you purchase shares on or after the ex-dividend date, you WILL NOT receive those quarterly dividends), and Dividend Payout (when a the shareholders of record actually receive their distribution).

How is a dividend yield calculated?

There are a couple of different important equations related to yields.

To determine the current yield of a stock, you simply take the annual dividend of a company and divide it by the current share price. For example, a company with a $0.25/share quarterly dividend equates to a $1.00/share annual dividend. If the stock is currently trading at $25/share, the current yield is 4.0% ($1 divided by $25).

Another important metric is known as effective yield or yield on cost. Since profitable and growing companies tend to raise their dividend payouts over time, this metric tracks what your personal dividend yield is based on your original investment rather than the current yield.

For example, if the company in the example above raised their quarterly payout from $0.25/share to $0.30, the annual dividend would increase from $1.00/share to $1.20/share. Assuming you initially purchased shares at the $25/share level when the stock was yielding 4.0%, once the dividend was raised your effective yield or yield on cost would increase to 4.8% ($1.20 divided by $25). Note: The current share price is irrelevant - your calculation is based on the original purchase price.

What is dividend growth investing?

Dividend growth investing is a long term investing approach that seeks to capitalize on the powerful effect that rising dividends can have on a portfolio. Many companies have a history of raising their dividends annually going back decades. If you invest in a company that increases its dividends by 10% a year, your own effective yield or yield on cost will double in about 7 years.

How and why do companies increase their distributions?

Simple - companies that raise their dividends do so because their earnings are increasing. If they were not increasingly profitable, they could not afford to do so. In fact, many investors take comfort in dividend increases, interpreting such announcements as a vote of confidence by the company.

One important metric related to this issue is the dividend payout ratio which is calculated by taking the distribution amount divided by the company's earnings. An excessively high ratio is most likely unsustainable and a red flag. It's also a good idea to compare the payout ratio of a company over time to identify any trends.

What is dividend reinvesting?

Dividend reinvesting is the act of using the income received from dividends to purchase more shares of the stock that paid the dividends in the first place. This can be a very powerful form of compounding your returns. The good news is that reinvestment is typically commission free, either directly through a company-sponsored DRIP (Dividend ReInvesting Program) or through an investor-friendly online brokerage.


Provided that an investor selects high quality companies, and doesn't overpay, dividend stock investing, coupled with dividend growth and dividend reinvestment, is a tried and true formula for long term investing success.

If you find this style of investing appealing, please visit the Great-Option-Trading-Strategies Dividend Stock Investing resource page for more information.

About The Author:

Brad Castro is a practitioner and promoter of Leveraged Investing, or option trading techniques and strategies designed to simulate successful value investing. Leveraged Investing has two objectives: to acquire stock in quality companies as cheaply as possible and then to squeeze more returns from those stocks once they've been acquired. Please visit for more information.

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Friday, October 18, 2013

Dividend Investments Attractive?

What Makes Dividend Investments So Attractive Right Now

What Makes Dividend Investments So Attractive Right Now
By Christopher Fitch

Generating income as part of one's investment portfolio is nothing new. While many investors have always recommended "getting paid" for investing while they wait for the growth to happen, the concept has become a lot more popular recently as investors struggle with historically low interest rates on traditional income producing investments likes bonds and term deposits. The natural solution has therefore been to seek income in the form of dividend payments from common equities.

There are several different reasons why investing dividend paying common equities is a very wise decision at this point in history. Notwithstanding the latest market correction that saw the broader market reach levels last seen in 2002, several indicators point to there being tremendous opportunities in common equities, especially dividend paying common equities. Here are the most important at this time:

1. Dividend paying corporations are actually increasing their dividends. What better time to invest in a security that pays dividends than now as these corporations are deciding to give their shareholders a raise? Some noteworthy securities with recent dividend increases are Microsoft with a dividend increase of 23% (when was the last time you saw a pay increase of this magnitude?), General Electric and Cisco recently committed to targeting a 1% to 2% dividend yield on their shares. Not bad...

2. Business activity has been accelerating domestically, as reported by Bloomberg. This is great news for the largest segment of the market, which benefits from business spending. This sign signals to investors that companies are optimistic enough about the economy to start investing in growth once again. With this kind of activity on the rise, it becomes more likely that dividend payments will continue to be made on a regular basis, reducing the risk to the investor.

3. With low rates expected to go higher and the dividend yield at or above the 30 year government bond rate on more than 60 different securities that are part of the S&P 500, what a great time for investors to get the same rate of interest they would get from a bond but with the added potential for capital growth and appreciation? Of course, as rates on bonds increase (and their market value decreases) the theory is that securities prices will increase and the yield on the security investment will decrease. That makes for a small window of opportunity for investors looking to get in while prices are still attractive.

These are just three basic reasons why now is a great time to look at buying dividend securities as a way to enjoy steady dividend income as well as participate in some of the capital appreciation that economic growth is known to produce for equity investments.

--> Find out what makes Dividend Funds so appealing at the Mutual Fund Site.

With more than 17 years of financial services experience, Chris has recently contributed an article about Vanguard Wellesley Income Fund to the

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Dividend Paychecks for Financial Freedom?

Income Equals Freedom - The Philosophy of a Monthly Check

Income Equals Freedom - The Philosophy of a Monthly Check
By Howard Feigenbaum

What is economic freedom? It's the ability to do what you want without worrying about where you will get the money to pay your bills each month. There is no higher or better purpose for investing your money than to gain economic freedom.

Using your money for a monthly income is probably the last thing people think about when considering an investment. Usually the focus of attention is on rate of return and safety. While these are important issues, the conversion of assets into monthly income is sometimes a difficult transition. Do you sell the asset to get cash? Do you put money in a certificate of deposit and hope that the interest rate will be adequate for your needs? Is the payment stream reliable? How do you finally get the income you need?

In planning for your monthly check amount, start at the end and work backwards. What is the amount of the monthly check you want? When do you want it? Then consider how much capital you will need to give yourself the monthly payment. What is an average rate of return from various types of investments? How long do you have to gather the assets required? What are the mechanics of actually getting the money from the investment into your checking account each month?

For example, you may decide you would like a $5,000 per month income. If you are able to obtain a 6% annual return on investment, you would need $1,000,000 in capital. Six percent annual return would allow you to receive monthly income while maintaining your asset. The number of years you have available for accumulating the asset is an important consideration. What is a reasonable rate of return for the investment risk you are willing to take?

In the end, your job is no different than that of the actuary hired by a company to set up a pension plan. Your assumptions must be realistic. You may benefit from using historic experience about average rates of return in various financial markets over time. If your assumptions are too liberal, you may fall short in reaching your goal; if your assumptions are too conservative, you may experience undue difficulty in gathering the assets. Your objective is to use reason, past experience and acceptable assumption of risk to produce a result that will carry you to the goal: economic freedom.

Two of the most important characteristics of people who reach the goal of monthly income: patience and tolerance. Accumulating assets over time requires the patience one needs to stay the course in following a plan. Investing in any asset class requires tolerance in accepting risk of some type. Actuaries know that in the long run past experience is a good basis for a reasonable assumption; however, actuaries also know that on any given day there is a chance of being wrong. And one of the greatest risks of all is doing nothing.

Howard Feigenbaum is Registered Principal and Owner of Sharemaster, a broker/dealer firm that specializes in monthly dividend income funds.

"Do you know the only thing that gives me pleasure? It's to see my dividends coming in."
John D. Rockefeller

This article is a general discussion of the subject and is not intended as a solicitation or specific investment advice.

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Thursday, October 17, 2013

Investing With Dividends

Tips For Investing With Dividends

Tips For Investing With Dividends
By Howard Feigenbaum

Dividends are a valuable tool for building income. There is a freedom you enjoy in knowing that you have a source of income. Your investments that yield dividends can provide cash payments.

Here are some important tips for investing with dividends:

1. Assume the right attitude about a dividend-yielding portfolio. Stocks that pay dividends are sharing company profits with investors. Many people focus on how much the price of shares increases or decreases because they are hoping to benefit from a rise in share value rather than from receiving payment of a dividend. The main reason to invest for dividends is to receive the income; a rise in share value is icing on the cake, not a primary objective for a dividend investor.

2. Try to keep market volatility from affecting your long-term goal. If your goal is to build a stream of income, let the stock's dividend payment history be a stronger consideration than the share price history. When you focus on the dividend payment stream rather than on the share price, you are more likely to stay with the investment during market downturns.

3. Look for higher quality companies as the basis for your portfolio. Often riskier companies must pay higher dividend yields to attract investors. If you are willing to take a greater risk with a portion of your portfolio, then add some higher-dividend paying stocks. But the higher-quality stocks usually provide a more stable income stream. The reliability of a company's ability to pay the dividend is a component of investment risk.

4. Diversify your portfolio. There is greater safety in numbers. If a particular company falters economically and is forced to reduce or cease dividend payments, you have other companies which will continue. The old adage about not having all your eggs in one basket may bring you more comfort. If you choose to put all your eggs in one basket, then watch that basket very closely.

5. Check how often a stock pays dividends. Quarterly dividends are very common; so are semi-annual and annual payments. The frequency of payments becomes an important issue when you need the money. You may have to arrange your budget to accommodate the timing of dividend payments.

6. Reinvest dividends and capital gains when possible. Some stocks, like utility companies, sometimes have automatic reinvestment plans for shareholders. Many companies do not have such plans. You then have to make additional purchases on your own. The dividend reinvestment is an excellent way to continue building share ownership. The investment itself is providing additional money for share purchases.

7. Expect that dividend payment amounts will change. The fortunes of companies change. Sometimes profits go up and sometimes down. This fluctuation may affect your dividend payments. Like Boy Scouts, be prepared.

8. Monitor the financial health of the companies in your portfolio. If you see signs of deterioration in the economic direction of one of your holdings, you may want to sell the shares and then purchase shares of a healthier alternative.

9. Smile when you pay tax on dividend income. There is no way around it--taxes on dividends occur each year that you receive them, just like interest received from a certificate of deposit. Overall it is better to have the income than not. When you are planning the amount of income you need, factor in the taxes you will pay and set your investment goal to yield your desired payment net of taxes.

10. Consider using the professional management of a mutual fund to assume the dividend investing burdens for you. Perhaps you are the type of person who would like the benefits of dividend income but you are not likely to do the work required in building and maintaining an individual portfolio, then a mutual fund is advisable.

Howard Feigenbaum is Registered Principal and owner of Sharemaster, a broker/dealer firm that specializes in monthly dividend income funds.

"Do you know the only thing that gives me pleasure? It's to see my dividends coming in." - John D. Rockefeller

This article is a general discussion of the subject and is not intended as a solicitation or specific investment advice.

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Build Wealth

Start the Habit of Building Wealth - With $50 Per Month

Start the Habit of Building Wealth - With $50 Per Month
By Howard Feigenbaum

Fifty dollars a month is not a lot of money in today's world. A cable television subscription is substantially more expensive. There are discretionary items for which you unthinkingly spend money that do not increase your net worth. In fact, they reduce your net worth. That is not to say that one should live a Spartan life. Entertainment, travel, hobbies, and sports add to the quality of your life. However, discretionary spending will not help you create wealth.

The dictionary defines the word "habit" as a pattern of behavior that is acquired through frequent repetition. Random attempts at any endeavor rarely result in success. So it is with wealth-building. People who are successful in building their net worth have a pattern of behavior that helps achieve the desired result.

"The longest journey begins with a single step," a profound sentiment attributed to Lao-tzu, the founder of Taoism, focuses on two important concepts: (1) beginning the effort and (2) reaching the goal. Patience and determination are essential qualities for building wealth. But nothing happens without the first step.

It isn't necessary for the first step to be a large one; a small first step works very well.

A mutual fund that has an Automatic Investment Plan will allow you to start the investment habit. Why should you start investing with a small sum like fifty dollars? Because you can afford fifty dollars. If you are new to investing or if you are hesitant to take investment risk, beginning with a smaller sum will add to your comfort level. You can always increase the amount later or you can stop. Your initial amount risked is small.

The Automatic Investment Plan creates the repetition necessary for the formation of a habit. Once the habit has begun, it becomes easier to continue. Each month an investment deposit will transfer from your bank account to your mutual fund account. If you ever wish to change the amount, merely call the mutual fund company or your broker.

Staying with your wealth-building habit depends on your tolerance for risk. At the onset of the process, there should be an honest evaluation of your goals and how much risk you are willing to take. If your investment is outside your comfort zone, you will not have the patience to endure market changes. The road is not always easy. Most people have a low tolerance for volatility. The steep downturns of a volatile investment are especially discouraging. Having a conservative investment at the core of your portfolio will add stability and will keep your anxiety level lower.

Once the fifty dollar a month habit has begun, your learning and experience will contribute to a calm assessment of your progress. In the fullness of time, you will look back with a new perspective that allows you to recognize how far you have traveled on your wealth-building journey. The "first step" in Lao-tsu's famous adage will seem like a distant speck on the horizon. The most difficult part of the journey is summoning the initiative to begin.

Howard Feigenbaum is Registered Principal and Owner of Sharemaster, a Broker-Dealer firm that specializes in monthly dividend income funds.

"Do you know the only thing that gives me pleasure? It's to see my dividends coming in." - John D. Rockefeller

This article is a general discussion of the subject and is not intended as a solicitation or specific investment advice.

Copyright 2011

Article Source:$50-Per-Month&id=6475975

Wednesday, October 16, 2013

Dividend Investing Pros and Cons

Dividend Investing - Pros and Cons of Dividend Investing

Dividend Investing - Pros and Cons of Dividend Investing
By Howard Feigenbaum

Investing for dividends is an excellent way to participate in the stock market. Dividends represent the sharing of a company's profits with those who hold stock.
There are two kinds of stock: common and preferred. Common stock pays no or low dividends; preferred stock customarily pays a dividend on a regular basis. The investment return on common stock is from a hoped-for increase in the company's share price over time. The investment return on preferred stock is a combination of current payment of dividends as well possible long-term increase in share price.
An investor may purchase individually owned shares of companies which pay dividends. Or, an investor may purchase shares of a mutual fund which has the objective of owning dividend-paying stocks. The latter is generally considered a more conservative approach since your investment risk is spread out among the larger number of companies in the portfolio.
Pros of Dividend Investing:
1. Dividends create a source of cash for re-investment. There is a continuing stream of cash created by dividends. Re-investment of the cash in the purchase of additional shares is a great way to grow your portfolio.
2. Dividends create a source of cash for monthly income needs. At some point in your life, you will need income from something other than work. Having a flow of dividend income is a wonderful way of planning for your economic freedom.
3 Dividend investing benefits from dollar-cost-averaging. Constant re-investment of dividends over time creates an average cost basis. The theory is, that through continuous purchasing of shares, the average cost will be lower than the current price.
4. Dividends offer a source of earnings in a down market. Investor frustration and fears rise during a market decline. Dividend investors can take solace from the fact that there will be profits from their portfolio during the downturns.
5. Dividends pay you profit now. For many people, receiving money right now as profit on their investment is more comforting than waiting for the share price to rise. "A bird in the hand is worth two in the bush," is an adage you can apply to dividend investing.
Cons of Dividend Investing:
1. Dividend income is subject to ordinary income tax. Every year investors must pay income tax on dividends from stocks held less than one year. For stocks held longer than one year, the capital gains rate applies, fifteen percent for those people in the upper tax brackets.
2. Dividends are not a guaranteed payment. Dividend payments are subject to change. If the business of a company is not as profitable as it once was, the company may choose to lower or suspend dividend payments. The risk that any one company may have poor results may be lessened by diversification.
3. Dividend investors may not make as much profit on share price increases as common stock investors. Since dividends are a recognition and payment of profits, dividends are part of the company share value. With a common stock, most--if not all--of the share value comes from a rise in market price. Some investors believe that there is a greater potential return from common stocks. However, there may also be a greater market risk.
4. Dividend-paying stock prices may go down when yields rise in the market place. Companies that pay dividends compete with other investment choices. The dividend yield can be an attraction. However, when yields generally rise and investors can get higher yields elsewhere, the yield of a lower-than-market dividend may be offset by a lowering of share price to make up the difference.
As with any investment, you would do well to remain vigilant in assessing factors which affect the value of your portfolio. Take an interest in how your investments work. You will be more at ease in knowing what to expect.
Howard Feigenbaum is Registered Principal and Owner of Sharemaster, a Broker-Dealer firm that specializes in monthly dividend income funds.
"Do you know the only thing that gives me pleasure? It's to see my dividends coming in." - John D. Rockefeller
This article is a general discussion of the subject and is not intended as a solicitation or specific investment advice.
Copyright 2011
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Invest in Dividend Equities, Get Paid

Why Building A Dividend Income Stream Should Be Your Highest Priority

Why Building A Dividend Income Stream Should Be Your Highest Priority
By Howard Feigenbaum

Net worth is one way--but not the only way--to measure your economic success. The net worth formula asks you to take your assets and subtract your liabilities or debts. The remainder is your net worth. The value of your assets is determined by how many dollars those assets would bring if sold in the marketplace. As you are aware, market value can go up or down.

Income flow is another way to measure economic success. Income requires the presence of a productive resource that creates cash payments. Not all assets produce income.

Every month when you go to the grocery store or when you pay the electric bill, you need a source of income so that you can write the check. If assets produce no income, you will have to sell some of the assets to meet your income needs. As you sell assets over time, you will have less of the assets left. You might do better to have a class of financial resources that produce a stream of income.

If an asset produces income, you do not have to sell the asset to meet your cash needs. In fact, you might be able to estimate how much of the income-producing asset you will need to create the monthly income you want.

There is a formula that you can use to figure out how much of an asset you should own to provide income. If you have shares of a mutual fund that pay a monthly dividend, and you want $1000 cash payment each month, you can use the annual dividend yield to help determine the approximate amount of the fund you should own.

For example, a mutual fund has an annual dividend yield of six percent, and you would like to know how much money you would need invested in the fund to produce $12,000 per year or $1,000 per month income. If you divide $12,000 by.06, you see that $200,000 is the answer. If you wanted $2,000 per month or $24,000 per year, you would need $400,000 invested. Of course, the dividend yield is subject to change. But you have a useful guesstimate.

For most people, work is the engine that provides monthly income. However, there may come a time when you prefer not to work or you cannot work. You must plan ahead to have an alternative source of income. Dividends are an excellent source of income. While dividends are subject to change, any single company may increase, decrease or suspend dividend payments based on business conditions. Nonetheless, there is a reasonable expectation of continuous income flow from a large diversified portfolio of dividend-paying stocks in a mutual fund. If you are able to accumulate shares over time, you can work toward the goal of building enough shares to satisfy your income needs.

In the hierarchy of economic necessity, having sufficient monthly income to pay expenses ranks at the top. Knowing that there will be a dividend check paid to you each month can be very reassuring.

As always, investigate any investment possibility using your due diligence and available information.

Howard Feigenbaum is Registered Principal and Owner of Sharemaster, a Broker-Dealer firm that specializes in monthly dividend income funds.

"Do you know the only thing that gives me pleasure? It's to see my dividends coming in." - John D. Rockefeller

This article is a general discussion of the subject and is not intended as a solicitation or specific investment advice.

Copyright 2011 Sharemaster

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Tuesday, October 15, 2013

Dividend Growth Investing

from Dividend Growth Investing  

Time to Take Control of Your Finances
In the early 1980’s, many large firms started offering a 401k rather than a pension program. This transition left the burden of you and your family’s financial future squarely on your shoulders. To make matters worse, investment possibilities have proliferated—there are over 9,000 mutual funds today compared with less than 1,000 in 1975, and over 20,000 investable domestic stocks compared with 6,000 just 20 years ago. So has the media which hope to attract the investing dollars by spending billions in advertising that push those new products. In recent years the press, radio, TV, the internet, brokers, and mutual fund companies have simply flooded the public with information about business and investing.  
We’re Drowning in Information
There is so much information floating about how is an investor expected to know where to invest? Whom to believe? What to believe? Where’s the best place to put your money? The question comes up again and again: What to do? What to do? Is there a simple strategy that makes sense and works? The short answer is yes. That is the goal of this page.
This is our time. For we now have the ability to purchase stocks online through a discount broker. A trade that would have cost $50 a trade can cost as low as $7. This means while the rich will continue to get richer, the playing field has changed to allow the ordinary person a chance to create lasting wealth for multiple generations.  
The Vehicle is Important, but so is the Driver
A Morningstar study showing that five-year returns for the period ending December 31, 1995, were 12%, but the average investor returns were only 2.5%. Most investors, apparently, were buying at the tops and selling at the lows. They were buying when the market was doing great and selling when the market was in decline. Investors are plagued by doubts and uncertainties, even when things are going well (Should I sell now or wait for even more gains?).  
The Goal: a Simple and Straightforward way to Earn Solid Returns with the Least Possible Risk
Your portfolio will go up and down; this can never be avoided if you hope to have reasonably good long-term gains. No investor can hope to succeed without having the ability to stick to a plan. You can’t let your convictions be shaken, or you’ll jump from pillar to post the moment times become difficult, and, in the end, have little to show for it. Yet only if you’re comfortable with what you’re doing will you be able to stick to your plan.
There are, certainly, a few kinds of investment such as troubled companies, options and futures, or outright scams, where you can lose your money with no hope of ever getting it back. But in most cases, in most reasonable investments, we might say, the notion of risk is really more precisely a notion of volatility.
If you feel so insecure about an investment that you’d be tempted to sell on a 10% or 20% decline, you need a better and more understandable investment. If you don’t have faith that an investment will rise, tough times may prompt you to sell. The right long-term investment will be, ironically enough, one that becomes more attractive to you as it declines.
The return you earn is a “payment” for accepting the “bouncing principal,” and it is also a payment for accepting the fact that you might need the money at a time of downward fluctuations.  
Inflation is Killing the Purchasing Power of the Investor’s Dollar
Since World War II the average annual inflation rate for the past sixty years has been 4.10%. And inflation compounds. As prices rise each year, the value of your original investment dollar declines. Inflation marches on, quietly, rarely making headlines, and static dollars fall further and further behind losing purchasing power.
Put simply, if prices of commodity double, the value of your investment must double merely to stay the same in terms of purchasing power. The goal isn't to match inflation; the goal is to beat inflation to growth wealth. At 4% inflation, prices double every 18.1 years.
Except for short-term parking of funds and to preserve fixed amounts that you may need in five years or less, all investors, whether they are retirees or corporate pension plans or churches or foundations, must say “goodbye to bonds,” to T-bills, to bank C.D.s, to GIC’s, to money market funds. For fixed-income investments are also fixed-principal investments, and the real value of our principal—as well as the real value of your “fixed” income— will diminish over time.  
Bonds Aren’t Investments, They Are Savings
The important point here is that investors all too frequently buy bonds because they are “afraid” of the “market.” This would be fine if bonds gave back a return that at least exceeded inflation, but not only do bonds underperform stocks; the chances are high that in any given period bonds will not beat inflation.
Further, most people are still living in a sentimental past when it comes to understanding bonds and their market characteristics. You must bear in mind that until 1978, the Federal Reserve Bank tightly controlled interest rates nationwide. In 1978 however, the Fed decided to let interest rates float freely. Commencing from the date of “freedom,” bonds became almost as volatile as stocks. Yet most people still think of bonds as in the old days, with low volatility. Yes, they’re still less volatile, but just a pinch less so. Hardly enough to make up for the radical haircut you take when it comes to returns.  
Create a Compounding Machine
It’s really about creating a kind of compounding machine that sits quietly off in the corner working for you while you go about your business. It’s about harnessing the true power of time and growth, the incredible accumulation of modest gains into enormous ones which is the essence of compounding. The gains are like bricks: you slowly and carefully place one atop the other. By and by—though not instantly—the shape of a building emerges. Once you’ve got a strong structure, the building can last many lifetimes.  
The Operator is Just as Important as the Machine
Many people can’t wait. They want to throw up plywood pre-fab in a weekend. But that’s like a shelter in a fable; in a strong wind there’ll be nothing left save a pile of rubble. However, the bricks of this compounding building aren’t like the bricks you know. These bricks have the ability to generate new bricks, like a living thing. And these bricks can grow larger, like a living thing. And the bricks that they generate can grow larger, too.
Compounding is the money that money makes, added to the money that money has already made. And each time money makes money, it becomes capable of making even more money than it could before! This is called a virtuous circle, and it’s what we want to get working for us. Reinvestment brings you more and more shares, each of which earns dividends and is subject to the effects of dividend growth.  
Compounding Magic
The effect of compounding is not great over short time periods, but it really starts to add up as the horizon grows. To take an extreme case, suppose one of your frugal ancestors had invested $5 for you at [only] 6% interest 200 years ago. How much would you have today? The future value factor is a substantial (1.06)200 = 115,125.91, so you would have $5 x 115,125.91 = $575,629.53 today. Notice that the simple interest is just $5 x .06 = $.30 per year. After 200 years this amounts to $60. The rest is from reinvesting. Such is the power of compound interest. Time is all you need. The effects of compounding increase markedly over time. Each year your gains accrue to the principal amount that has increased in previous years, not just to the principal you started out with. Compounding is really one of the great processes on earth, and it’s given free to all who care to participate in it. Unfortunately, few do.
Compounding has nearly turned staid men into chirping poets: Baron Rothschild said “I don’t know what the seven wonders of the world are, but I know the eighth, compound interest.” Albert Einstein found in compounding the same kind of almost mysterious universal energy that he had sought in relativity physics, calling it, “the greatest mathematical discovery of all time.”  
Time, Patience, and the Right Kind of Stock 
Think of anything you’ve done over a long period of time, whether it’s a skill or a relationship or a hobby or even just living. You’re probably a lot better at it and you probably know a lot more than you did when you started. This is the effect of compounding. This is the cumulative return.
It’s not very different in investing. The real difference is that you must learn to be passive. That is, after all, the definition of an investor: a passive part owner of a business, a shareholder. The trick is simple: find a business with reliable growth that will share that growth with its owners, be patient and watch it grow. Fast growth is not the goal, for fast growth is not reliable growth and isn’t worthy of your patience. Reliable growth, no matter how modest, is what will reward you in the end. Long-term, the business in which you have invested will experience a compound growth of its own, and you will be a part of it.
Dividend Growth Is the Hidden Key that Drives the Compounding Machine 
Dividend growth is the critical piece in the puzzle for creating a portfolio that will serve you over the years. Pay attention. This is a simple idea, but it is also the single most important idea for long-term investors. The reason it is so important is that dividend growth drives the compounding principle for individual stocks in a way that is certain and inevitable. "It is an authoritative force that compels higher returns regardless of the other factors affecting the stock market."
Let’s say you have two stocks with everything else being equal. Stock A pays you $100 per year and Stock B pays you $200 per year. Which stock will have a higher price? Of course, Stock B will sell for twice the price of Stock A, at which point they will both offer the same percent yield.
The important point is that an instrument that produces income is valued based on the amount of income it produces. And if it produces more income, it is worth more. The same would be true for, say, an apartment building—the more income it produces, the higher the market value. Or a hardware store—again, the more income, the more an owner could get for the store if he wanted to sell the business. What makes rising income that comes from a growing dividend so attractive in a yield stock? You not only receive greater income as the years go by, you also get a rising stock price—because the instrument producing the income (the stock) is worth more as the income it produces increases. In effect, you get a “double dip” when you invest in high-yield stocks that have rising dividends. You get the income that increases to meet or surpass inflation, and you get the effect of that rising income on the stock price, which is to force the stock price higher.
If I could get words to jump off the page and pull on your sleeves or tweak your nose, I would. But I’m stuck with words, so the least I can do is suggest that you read the last paragraph again, and remember it, and remember it well. And I can repeat, and repeat, so you don’t forget: you get rising income, and the increasing income makes the stock that’s producing that income increasingly valuable.
Dividend Growth is the True Signal of a Prospering Company
Dividends and dividend growth are the real-life signal that a company has the wherewithal to pay you dividends, that it has your interests at heart in the fact that it pays you dividends, and that it is experiencing real growth as proven by the real growth in its real dividends. Bear in mind that we’re not dealing here with some financial trick or some ponzi scheme run by unscrupulous corporations’ intent on boosting the price of their stock. On the contrary, the very attention we place on rising dividends puts us squarely in the position of “owners” of a company, of true investors who understand that a satisfying and reasonable return from a stock investment isn’t a gift of the market or luck or the consequence of listening to some market maven, but it is the logical and inevitable result of investing in a company that is actually doing well enough, in the real world, to both pay dividends and to increase them on a regular basis.
Dividends are paid from earnings. When a company has reached a certain level of maturity and stability, it begins paying dividends, not unlike the way in which an individual begins saving once she’s reached a level of income that satisfies her basic needs. But many companies perceive an earnings report as an opportunity for “creative accounting.” Sales can be booked early or late. Liabilities are written off right away or amortized. Contracts might be recorded as immediate income or only as and when paid. Capital asset sales are sometimes deemed ordinary income. There are a million ways for companies to “look good” at earnings time, in hopes of supporting their stock prices. Don’t forget, a huge share of corporate executives’ compensation, and often their very jobs, are dependent on either meeting their earnings objectives or increasing the stock price, or both. So companies have a big incentive to “put their best foot forward.” That’s why dividends are a kind of acid test or litmus paper that reveals the true state of a company’s finances.
As Geraldine Weiss so aptly observed, “dividends don’t lie.” In order for a company to pay a dividend, it must have the money to pay it with. Earnings can’t be some accounting sleight-of-hand. They must actually be there, in cash. Thus, while we as passive investors can never know as much about the companies we invest in as we’d like, we can know one thing: if a company pays a dividend it has the cash with which to pay that dividend.
Further, a company that raises its dividend is truly signaling the state of its business to investors.
Picture a boardroom, and the classic board of directors’ table filled with wizened business people, people who know that there are fads and fashions and cycles, and things can go up and down, and even go bump in the night. These directors know just how well their company is doing or how poorly. They know how much will be needed to fund capital expansion or research and development, or the next takeover. They know the whole financial picture, and they also know that dividend reductions are death to stock prices. The one thing a board never wants to do is decrease the dividend, so increasing a dividend is a clear statement that the company’s fortunes are positive—or at least positive enough to keep paying and to raise the dividend.
In other words, a company can tell you about its earnings, but there is always certain “flexibility.” There is no flexibility when it comes to paying and increasing dividends. The company must have the cash to pay to you. What you see is what you get. Through the dividend, a company can show you how well it’s doing.
So dividends are real, like the income from an apartment building or a liquor store or a bank CD. And dividend growth is real. Neither dividends nor dividend growth are some propaganda from the company, nor some hype from a brokerage firm or newsletter writer, nor some error in judgment by a finance magazine. This is a good thing, for we wouldn’t want to build our compounding machine on a foundation of chimera and public relations ploys. We want our parts to be real, working, brand-name, durable.
In these days of aggressive CEOs and accounting at many firms, consideration of dividend growth as a kind of litmus test of previously reported earnings is not a trivial feature. Take your pick: a signal about future prospects or a verification of past reports—in either case its bottom-line valuable information available nowhere else about your investment.
Now back to dividend growth as the driver, the energizing force, of the compounding machine. Let’s look first at just the income side of the ledger, and what consistent dividend increases do to your position as an investor.  
Time Is on Your Side
Some portfolios that are stuffed with General Electric or Exxon or Merck purchased in the fifties and sixties. And the current income from these positions is often 100% or more of the original investment cost. Often these investors don’t want to sell for fear of paying taxes. Basically, if you’d like to have an annual income equal to your investment capital, all you have to do is buy the right stocks and sit on them. Compounding dividends will do the rest. In a hurry? We might be able to speed up the process a bit through buying stocks especially selected to play an active part in the compounding machine. In any case, if you want the end result you’ve got to give it time. Can you be satisfied with a 20% annual return that rises even higher every year, a return you can actually put in your pocket without spending principal? You can get there in less than two decades . . . if you stick to the program.
Dividend Growth Pushes up the Price of a Stock
After year one or year two or year three, it’s hard to say exactly when the pressure of a higher yield alone begins to force the stock price upward. One would presume that the stock would be treated well in the marketplace because it was at least doing well enough to raise its dividend, and that’s usually the case, though there’s no guarantee, of course. Sooner or later, assuming roughly “normal” price/earnings multiples and interest rates, and roughly “normal” oscillations in investor preferences for different kinds of stocks, the value of the increased income of your stock must push up the price of the stock that produces the income. For stocks compete not only with each other for investors’ dollars, they also compete with interest rate instruments. Sooner or later, even if the market hates this particular company—which is highly unlikely if it sports a record of both earnings growth and dividend growth—it will rise as it becomes more attractive than other kinds of income-producing instruments such as bonds.
In fact, all things being equal, a perfect-world result is simple to divine: the stock will rise as much as its dividend income rises. If the income doubles, the stock should double, roughly speaking. If the income goes up 50%, the stock price should follow. In other words, that stock whose income return on original investment rose fourfold to 18% in fourteen years would also rise fourfold in price—pushed up by the value of its rising stream of income.
One may argue that this is all very theoretical, but the real-world concurrence with the principle involved is simply uncanny. In most cases, stocks rise at least in tandem with the rise in their income, sometimes much higher than that (when the market decides the stock has been “undervalued” and investors don’t require such a high yield in order to buy it, or when the consistency of growth becomes so attractive that investors are willing to pay more for it). We’ll look at many examples later on. We’ve seen that compounding in stocks has an amazing effect when given some time to work. But compounding with reinvested dividends has an astronomical effect over time. It turns out, according to Ibbotson and a number of subsequent studies which have followed in his footsteps, that dividends are the single most important factor in long-term compounded returns (remember, they are always positive, each and every quarter).
According to the Stocks, Bonds, Bills, and Inflation 1997 Yearbook published by Ibbotson Associates: “One dollar invested in large company stocks at year-end 1925, with dividends reinvested, grew to $1,828.33 by year-end 1996: this represents a compound annual growth rate of 11%. Capital appreciation alone caused $1.00 to grow to $58.07 over the 72-year period, a compound annual growth rate of 6.2%. Annual returns ranged from a high of 54% in 1993 to a low of -43.3% in 1931. The average annual dividend yield was 4.6%.”
It would appear that Ibbotson attributes over 97% of the long-term total return from stocks to dividends and their reinvestment in more shares (price change alone was 97% of the total with dividends reinvested). The difference in return between stocks without dividends and stocks with dividends is as vast as the difference between the total returns of stocks and bonds. Ask any financial professional how much of total returns from stocks is attributable to dividends, and they’ll tell you “about half.” Which isn’t so far from right, since as we saw above, the average dividend yield was a bit less than half of the annual total return of 11%. But they forget that the dividend gets reinvested in more shares, which themselves are increased by total return, and which themselves yield dividends to be invested in yet more shares. Soon you have two shares for every one that you started with, then three, then four.
Finding the Dividend Growth Companies 
As much as I would like, I cannot give you specific companies because of the environment. The criteria stay the same but companies can sometimes jump in and out of the criteria. For example, if I recommend Walmart because it has a current 2.8% dividend yield, which is higher than our 2.5% yield requirement, if Walmart’s stock price increased enough to decrease their dividend yield to fewer than 2.5%, they would no longer meet this requirement. I’m force to just give you the criteria that the current stock must fall under. It is like I’m teaching you how to fish rather than just giving you a fish.  Here are the dividend growth criteria:
Years of Dividend Increases > 25 yrs
Current Dividend Yield > 2.5%
5 year dividend growth rate > 7%
Dividend Payout Ratio < 70%
P/E ratio < 20
Criteria in Further Detail
A company that has been able to increase its dividends for over 25 years proves its sustainability even in troubled markets. You will find most stocks that fit these criteria to be stocks that do not need a strong economy to grow (called non-cyclical). Products such as food, medication, cleaning products and cigarettes are used no matter state the economy is in. The current dividend yield is important, because this will determine the total return. A dividend growth rate of 7% will double every 10 years, while a dividend growth rate of 14% will double nearly every 5 years. For example, if you have a dividend yield of 3% and dividend growth rate of 14%, in roughly 5 years, you’d be getting roughly 6%, in another roughly 5 years; you’d be getting around 12% in dividend returns. The dividend growth rate is important to calculate long term returns.
The dividend payout ratio is like a thermometer for the stock. It represents the amount of dividends is paid from earnings. The higher the number, the closer it becomes to having to cut its dividends. A company cannot consistently keep increasing its dividends if it is paying out too much in dividends. Finally, the P/E ratio is determined by the Earnings per Share (EPS) multiplied by its expected earnings growth. So when you buy a stock, you are not only buying its current earnings, but its future growth. A stock with a high P/E ratio (over 20) is expected to grow at a fast pace. At any time, if the stock starts to slow, which eventually every stocks will, the multiple declines, which result in a drop in P/E.
For example, if you were to chose between two different stocks in which Stock A was to grow by 15% but only grew 10% while Stock B was expected to grow by only 1% but grew by 3%. As you can see, you would choose Stock B even though Stock A is growing at a faster rate. The return for investors is determined not by the rate of growth but the rate of expected growth compared to actual growth.  
Compiling a List of Dividend Aristocrats
I recommend searching Google to find the stocks that meet these criteria. Try to find a second website to make sure the numbers are correct. A company that has been able to increase its dividends for over 25 years joins an exclusive club called the Dividend Aristocrats. While companies who have increased their dividends for at least 10 years are called Dividend Challengers. Since they have not reached the 25 year mark yet, they are considered to be somewhat speculative. The best part of the strategy is, there are only around 100 stocks that meet the criteria of Dividend Aristocrat. While the list of Dividend Aristocrats and Dividend Challengers are around 200 (considering there are over 20,000 stocks to choose from).
Other Financial Numbers
Recommended Financial Websites 
 Recommended Financial Books
The Single Best Investment” by Lowell Miller
The Future for Investors” by Jeremy Siegel