Dividend Stocks For Dummies

The Dogs of the Dow strategy uses dividends to find out-of-favor stocks that can beat the market. Instead of looking at the broad market or even the 500-stock universe of the S&P 500, this strategy focuses on just the 30 stocks that constitute the Dow Jones Industrial Average (DJIA), specifically the ten most beaten-down stocks of the Dow (the Dogs of the Dow).

Why invest in dividend stocks? Dividend stocks are stocks that pay dividends — payments in cash (usually) or shares (sometimes) to stockholders. Through dividend payments, a company distributes a portion of its profits to its shareholders every quarter and pumps the remaining profits back into the company to fuel its continued growth.

Investing in dividend stocks carries some risk — the same as with any other type of stock investment. With dividend stocks, you can lose money in any of the following ways: Share prices can drop. This situation is possible regardless of whether the company pays dividends. Worst-case scenario is that the company goes belly up before you have the chance to sell your shares.

Banks have always paid dividends, but for most of the 1990s they posted yields below 3 percent. Then, in the first decade of the new century, banks became great stocks for dividend investors by offering a great package of total return with fast earnings growth and rising payout ratios. Then in the fiscal crisis of 2008, the entire banking industry blew up.

Discount brokers are best for the do-it-yourself stock investor. If you like to do your own investing and stock market research, understand how to trade stocks, and don’t want investment products pushed on you, you’d probably prefer a discount broker. The difference between discount brokers and full-service brokers is the same as the difference between a cashier and a top-notch salesperson.

A full-service broker does everything a discount broker does and then some. She can help you develop an investment strategy that’s suitable for your situation and goals, suggest particular stocks, issue the necessary buy and sell orders on your behalf, and help you make the necessary adjustments to your portfolio as your situation and goals change.

The best investors focus on businesses they know and understand, or they carefully research an industry prior to evaluating specific companies in that industry. Before buying stock, savvy investors get to know the company’s business model and how it stacks up to other companies in the same business. They develop an understanding of the company’s opportunities, challenges, and the resources it has in place to overcome any challenges and maximize its opportunities.

In the world of investing and the stock market, you can never completely eliminate risk, but you can reduce it by making more good decisions and fewer bad ones as you buy stocks. Buying a stock solely on a hot tip A hot tip is just that — a tip, an idea to follow up on. You still need to do your research — pull up the company’s quarterly statements over the past year or so, crunch the numbers, see whether any insiders are buying shares, and perhaps even speak with one of the company’s representatives (or at least your broker) to check on the company’s prospects moving forward.

The price-to-earnings ratio or P/E (sometimes referred to as a multiple) indicates how much investors are willing to pay for each dollar of profit they stand to earn per year. For example, if an investor buys a stock with a P/E of 15, he’s willing to pay $15 for each dollar of profit, or 15 times the earnings for one share of stock.

At one time, real estate investment trusts, or REITs, held the majority of high yielding stocks, but the bursting of the housing bubble ended that run. For income investors, MLPs are the new REITs. Not all companies can claim MLP status. To qualify, a company must receive at least 90 percent of its income from interest, dividends, real estate rents, gain from the sale or disposition of real property, income and gain from commodities or commodity futures, and income and gain from activities related to minerals or natural resources.

Real estate investment trusts, or REITs, provide a way for investors to receive capital appreciation and income from real estate without having to actually purchase and maintain property. It’s like being an owner/landlord without all the hassles and responsibilities that typically accompany those roles. True to their name, REITs are trusts, not corporations.

When you're buying stocks and investing your money, how you perceive risks and respond to losses is purely subjective. However, you can gauge your risk tolerance to gain a clearer understanding of the types of investments you feel comfortable with. You can also stretch your comfort zone by adjusting your perspective.

In the stock market, risk is ever present, but it’s always variable and unpredictable. A host of factors can increase risk, some of which are within your control and others of which aren’t. Although you can’t eliminate risk, you can often reduce your exposure to it by becoming more aware of the factors that influence it.

You can’t always control what happens around you, and this is true of investing in the stock market. Inflation can soar, the Federal Reserve can raise or lower interest rates, bubbles can burst, and entire economies can crumble. However, by becoming more aware of these risks, you can develop strategies for dealing with them effectively.

Consumer goods companies are a sometimes-overlooked option for purchasing dividend stocks. Any company that manufactures or distributes products that people use falls into the consumer goods sector of the economy, but this category includes two subcategories: consumer cyclicals and consumer staples. Consumer cyclicals Consumer cyclicals owe their name to the fact that demand for these products waxes and wanes, typically in lock step with the economy.

Dividend stock investing may seem daunting, but with a little knowledge of how to find and pick promising dividend-paying stocks, you can invest in these stocks and reap dividends like a pro. Your portfolio will thank you.Researching your dividend stock picks with important formulasAs with all stocks, you should research the dividend stocks you’re considering before you buy them to ensure they’re good investments.

Dividends typically signify good corporate management. To pay out a dividend, a company must have cash on hand. Management can’t fake it. It can (and sometimes does) fake paper profits by padding its sales and profits on reports, but it can’t fake paying cash dividends to shareholders. Paying dividends over a long period of time makes a positive statement about the company’s financial health.

The key to value investing is to follow a less biased and less emotional approach in estimating the true value of a stock. There are two schools of thought that attempt to do just that: Efficient Market Theory and Fundamental Analysis. Efficient Market Theory According to Efficient Market Theory, the stock market is an efficient marketplace where a stock’s price reflects its true value at all times.

Because Real Estate Investment Trusts (REITs) aren’t your average, everyday dividend stocks, using the criteria from other investments to evaluate them makes little sense. Determining the value of real estate assets requires a unique set of criteria. When shopping for REITs, examine the following factors: Geography: A property’s value and rent-generating potential are both closely linked to the property’s location.

Simply put, the payout ratio tells you how much of the company’s profits come back to you as a dividend. You become an investor for the profits, and a dividend investor specifically because you want to pocket some of those profits now. The payout ratio shows you exactly how much of those profits actually land in your pocket.

Dividend companies generally are considered more stable because they typically provide for the necessities of life: food, water, electricity, gas, a place to live, and the all-important personal hygiene. As a result, the classic industries for dividends include: Utilities Real estate Energy Finance Telecommunications Consumer staples, such as food and clothing Because people always purchase these products and services, even when times are tough, the industries that provide them are generally more stable.

How can you know which utilities are good investments? Following is a list of characteristics to examine when evaluating a utility company for your dividend portfolio: Dividend performance: In most cases, you don’t realize big returns from share price appreciation, so make sure the utility has been increasing its dividend payouts regularly over the last four to five years.

Investment vehicle is a fancy term used to describe an investment product other than basic stocks or bonds. Sometimes the term "investment vehicle" refers to a product, such as a fund, which holds many different stocks or bonds. Other times, it refers to a way to purchase stocks or bonds other than a straightforward purchase.

People measure the health of the stock market with various indexes, which are like thermometers for the stock market. When business is good, the index tends to rise. When business is bad, it falls. Thousands of indexes measure industrial sectors and business performance in the United States and every other country in the world.

One of the biggest challenges to creating a diverse portfolio is coming up with enough money to purchase a wide variety of stocks. In addition, paying sales commissions on all those transactions, tracking so many different stocks, and handling the bookkeeping related to them can cost additional time and money and make your head spin.

Return on equity (ROE), quick ratio, debt covering ratio, debt-to-equity ratio and price-to-book ratio (PBR) are all ratios that can be calculated to provide clues about a company’s finances. Evaluate management with the return on equity ROE measures the return on your investment in the company by showing how well the company invested its investors’ money and the company’s accumulated profits.

Income investing encourages you to buy investments, such as stocks or bonds, that promise a steady stream of income; among stock investors, income and dividend investing are one and the same. For most of history, investing was income investing. Whether investing in stocks or bonds, in small or large businesses, investors needed income from their investments to cover their daily expenses.

Mutual funds abound, and many of them focus more on capital appreciation than on dividends and income, so you have to be selective. For information that’s more focused on mutual funds, check out the following resources: Morningstar: This company’s main focus is the evaluation and rating of mutual funds. The Morningstar Web site (www.

One beautiful thing about dividends is that they aren’t limited to the U.S. You can go global with dividends, investing in both mature, developed economies and emerging, fast-growing economies. In the global economy, opportunities abound, but wherever you find opportunity, risk is right around the corner. In terms of market capitalization, only 40 percent of the world’s companies reside in the U.

To raise capital, companies can issue two types of stocks: common and preferred. Both common stocks and preferred stocks offer different rights, benefits, and restrictions. Common stock When people talk about stocks, they typically mean common stock, the most popular and widely-held type of equity. Holders of common stock share in the company’s profits through increasing dividends and a rising share price.

Be prepared before you invest your money in dividend stocks.. As a careful dividend stock investor, follow this process to minimize your risk and maximize your return: Assess your risk tolerance, choose your approach, gather some cash, and maybe even team up with an experienced partner or advisor. Gauge your risk tolerance Every investor has a different comfort zone.

One of the best ways to determine how much money you need to invest toward reaching your goal is to play what-if with a financial calculator. You can find financial calculators all over the Web. Using a simple investment goal calculator, you can play with the following numbers to determine how much you need to invest per month to achieve your goal: Investment goal: The total amount of money you need Number of years to accumulate: Your time frame Amount of initial investment: The initial amount you plan on investing, if any Periodic contribution: The amount you plan on contributing on a regular basis Investment frequency: How often you plan on making a periodic contribution; for example, monthly or quarterly Rate of return on investment: The percentage return you realistically expect from your investments per year Expected inflation rate: The average inflation rate over the time frame in which you plan on investing Interest is compounded: Whether the returns on your investment are compounded, and if so, how frequently (monthly, quarterly, or annually) Tax rates: Federal and state tax rates on your dividends and any capital gains Even more common on the Web are short-term investment calculators.

A balance sheet presents a financial snapshot of what the company owns and owes at a single point in time, typically at the end of each quarter. It’s essentially a net worth statement for a company. The left or top side of the balance sheet lists everything the company owns: its assets, also known as debits. The right or lower side lists the claims against the company, called liabilities or credits, and shareholder equity.

If you want to purchase stock in the consumer goods sector of the economy, look for a company with management that’s successful at maintaining or lowering the costs of goods sold while increasing sales and revenue. A key sign of growth at a consumer staple is an operating margin that continues to rise. The operating margin measures the efficiency of a company’s pricing strategy by seeing the profits before interest and taxes are paid.

Although Wall Street considers an investor any person or business that buys an asset with the expectation of reaping a financial reward, investors can display the attributes of three different styles of market participants: savers, speculators, and investors. The first step on the road to becoming a successful dividend investor consists of becoming a money saver.

Don’t confuse growth with share price appreciation. Growth is a measure of a company’s earnings and revenue increases relative to similar companies. Share price merely reflects what investors are willing to pay for the stock, which may have nothing to do with the company’s actual performance. Seeking potential in the young and small Small things tend to grow at a faster rate than big things.

As a dividend investor, you shouldn’t expect a mutual fund’s return from capital appreciation to beat an index that holds growth stocks. However, you do want to see less volatility in the net asset value (NAV) and that the fund’s total return with dividend income comes close to the index. Now that you know now to evaluate mutual funds, look for funds that meet or exceed the following criteria: No load: The amount of money you lose to loads can significantly decrease your portfolio and its potential for capital gains.

Yield (also known as dividend yield) is your dividend’s rate of return, and one of the most important numbers to consider. It enables you to compare stocks side-by-side, ensure that a particular stock meets the minimum return requirement for your portfolio, and avoid stocks that have comparatively high dividends (in dollars) but low returns (in percentage).

When you buy and sell dividend stocks, dates determine who gets the dividend and who doesn’t. To determine the rightful recipient of dividend payments, companies keep track of several dates in the life of a dividend share, including the date of declaration, trade date, settlement date, date of record, ex-dividend date, and the actual payment date.

The income statement (also known as the profit-and-loss or P&L statement) details all of the company’s revenues and expenses — how much the company receives in sales and how much the company spends to make those sales. After all the additions and subtractions, the final tally tells you whether the company earned a profit or suffered a loss and how much.

When you start shopping for dividend stocks and evaluating candidates, consider targeting a specific dividend category to narrow the field. After identifying a few prospects that meet your minimum dividend requirements, you can then dig deeper into each company by using valuation, growth, liquidity, and solvency ratios.

The cash flow statement is like the company’s checkbook register. It records the actual movement of all the cash in the company, showing which activities generated the money coming in and what was actually paid for in that quarter. The cash flow statement measures the movement of money from three different activities — operations, investments, and financing.

According to the dividend connection approach, you buy blue-chip stocks that have dropped in price and attained a historically high yield. You sell when the price is high and the yield is low. Identifying blue-chip stocks The first order of business in this strategy is to identify blue-chip stocks, which must meet or exceed all of the following six criteria: The dividend increased at least five times over the past 12 years.

To determine whether a stock is underpriced or expensive, the relative dividend yield (RDY) strategy compares a stock’s yield to the dividend yield of the broader market. RDY isn’t a good strategy for those seeking instant gratification. It’s a long-term strategy of three to five years that doesn’t rely on past earnings, forecasted earnings, or P/E ratios to determine valuations.

Although investing in energy company stocks offers some attractive advantages, nothing is ever a one-way street. Buying stock in energy companies has some significant negatives you need to consider; these pitfalls seem to affect the entire industry, so no one company should be hurt by them more than another: Extreme volatility: Oil in particular, and commodities in general, are volatile investments.

Two types of energy stocks produce dividends: Major integrated oil and gas companies and the energy master limited partnerships, better known as MLPs. Though major oil companies may be an attractive option, MLPs can be a gold mine for dividend investors, offering some the highest yields with not much more risk than companies offering yields half the size.

Despite the competition, the telecom industry is experiencing huge growth as more people use more of its services. Consider buying some stock from telecommunications companies because they currently offer great dividends. Companies can create steady revenue streams by locking in subscribers to one- or two-year contracts.

Several industrial sectors are filled with dividend-paying companies, and some sectors provide better bets than others for your dividend stock investment portfolio. The following sectors offer the top options for dividend stock investing; when you’re fishing for good dividend stocks, you can improve your chances of hooking some keepers by dropping your line in these holes: Utilities: Electricity, water, and natural gas (suppliers, not producers) Energy: Oil, natural gas (producers, not suppliers), and master limited partnerships (MLPs) Telecommunications: Carriers (U.

For dividend stock investors who are looking to build wealth over the long haul, few (if any) investment programs can compete with the many advantages dividend reinvestment plans (DRIPs) offer. A DRIP is one type of direct investment plan (DIP). Instead of buying shares on the stock market, you purchase shares directly from the company on a regular basis.

Before investing in any dividend stock, you must perform due diligence to ensure it’s a suitable stock for your dividend investing needs. The following checklist helps you ask the right due diligence questions to sift through your stock possibilities: Examine the company’s most recent quarterly statements, including the balance sheet, income statement, and cash flow statement.

When people think of income-producing stocks, the industry group that typically comes to mind first is utilities — electricity, gas, and water, to name a few. For dividend investors, utilities are attractive because many offer stability and premium yields — the holy grail of dividends. Utilities are a category of companies that provide the services and power necessary to run buildings and make modern life possible.

As with most things in the world of investing, dividend reinvestment plans (DRIPs) have some potential negatives — or at least some points you should consider that counterbalance the many things that make them good investments. Before breaking up with your broker, consider the potential drawbacks. Buying on the company’s schedule regardless of price When you reinvest dividends, you get a bargain because you buy the new shares right after prices drop due to the dividend payout, giving you more stock for your dividend dollars.

Tools, data, and analysis previously accessible only to investment professionals are now readily available on the Web 24/7 and are better and faster than ever. Many Web sites even provide free stock screeners that enable you to search for stocks by price, dividend yield, price -to-earnings ratio (P/E), earnings per share (EPS), and more.

As with all stocks, you should research the dividend stocks you’re considering before you buy them to ensure they’re good investments. These formulas help you determine whether a stock’s dividend and other markers are sufficient to meet your needs. Check out the company’s balance sheet, income statement, and cash flow statements for the figures you need to crunch the numbers using the following formulas.

Currency issues in foreign shares arise because, well, they trade on foreign markets in foreign currencies. If you're buying foreign stocks with U.S. dollars, every buy and sell transaction or dividend payment needs to be converted from dollars to the local currency. If you’ve ever traveled to a foreign country, you know that exchanging currencies is not only a hassle but also often costly and confusing.

Dividend stock companies often give you signs that their outlooks are promising. Although you shouldn’t bank entirely on a stock’s promise, these signs can help you weed out bad-news dividend stocks that don’t belong in your investment portfolio. Rising dividend payments: A long history of rising dividend payments, in good times and bad, generally indicates a stable company.

Increasingly, information about the stock market is migrating to digital venues, including the Web, but don’t overlook traditional media, including newspapers and magazines. Most of the up-to-the-minute and big business news still comes out of the two main daily business papers — the Wall Street Journal and the Financial Times, and their Web sites.

To make a well-informed decision of whether dividend stocks are right for you, evaluate their pros and cons. The following are the advantages of dividend-paying stocks — stocks that not only change in value but also pay a portion of the company’s profits to the shareholder — assuming, of course, the company is profitable.

Although dividend stocks are generally less risky than non-dividend stocks, they do carry some risk and may not hold sufficient promise of rewards for some investors. To make a well-informed decision of whether dividend stocks are right for you, consider not just their pros, but their cons as well. Whenever you sign on the dotted line with a broker, mutual fund manager, or other intermediary, he usually presents you with a long disclaimer that basically boils down to a single statement: “Past results are no guarantee of future performance.

A Real Estate Investment Trusts (REIT) that pays a sizeable dividend and has a solid cash flow isn’t a sure thing, but it’s certainly worthy of consideration when you're looking to buy new stocks. When you buy a REIT, you’re becoming more of a real estate investor than a dividend stock investor, and such a move carries both advantages and disadvantages.

Everyone knows you can buy and sell shares of stock on the stock market. Some investors, however, don’t realize the nuances of the different buy and sell orders — market orders, time orders, limit orders, stop-loss orders, and so on. By understanding these different types of orders and using them correctly, you can maximize your dividend profits and minimize your potential losses.

Exchange-traded funds, better known as ETFs, are the mutual funds for the 21st century. They’re investment companies similar to mutual funds but have some significant differences and advantages. The easiest way to think about ETFs is as mutual funds that trade on an exchange like stocks. They’re a fairly new concept made possible by the wonders of modern technology: computers.

Some people are better at bargain hunting than others. What usually separates the clueless from the pros is that the pros know what something is worth. The same is true for finding bargains on Wall Street. You need to know what a stock is worth, and low price isn’t always a bargain.Value investors hunt for bargains, but they buy only after performing some careful research and crunching the numbers.

In terms of investing and buying stocks, diversification is just a fancy way of saying “Don’t put all your eggs in one basket.” It’s one of the best ways to protect your investment portfolio from the many forms of risk. Diversifying your stock portfolio demands that you hold many different asset classes to spread the risk.

Most of the companies that pay out dividends are what you’d probably call “mature.” They’re settled in. They may have slowed down a bit in terms of growth, but they’re rock-steady and highly dependable. Companies proceed through various stages of life, just like people: Infancy: Startup companies typically have great prospects but require more money and attention to get up and running.