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.