Cheat Sheet

Investing in Dividends For Dummies Cheat Sheet

From Investing In Dividends For Dummies

By Lawrence Carrel

Dividend investing is nothing new. However, following a dividend-investment strategy is new to many modern investors who’ve been focused solely on growth investing. If you count yourself among this crowd or are just starting out and plan on investing in dividend stocks, you need to know how to develop your strategy, find and evaluate potentially good dividend stocks, manage your portfolio, and avoid the most common and critical mistakes.

Should You Hire a Financial Advisor When Investing in Dividends?

If you’re buying and selling individual dividend stocks on your own, consulting a financial advisor can be beneficial, especially when you’re first starting out. If you’re simply buying shares in a mutual fund, hiring a financial advisor may only add another expense. If you’ve done your homework and chosen a mutual fund with a good manager, then you already have a financial guru on your side.

Financial advisors who give advice on how to steer through the financial waters work under many titles. They can be called stockbrokers, certified financial planners (CFP), or registered investment advisors (RIA). Each one has different characteristics.

The best choice is usually a CFP or RIA who takes a percentage of your assets to run your portfolio for you. Much like the fund manager who takes a percentage of the fund’s assets, this arrangement aligns the investment advisor’s interest to yours. When you make money, he makes money, so it gives him incentive to perform well for you.

Saving for Nest Eggs and Rainy Days

When you’re focused on the strategies involved in dividend investing, you might forgot about some of your basic financial needs. Everybody should have a little bit of saver in them so that they have some cash on hand to deal with necessities and emergencies. Try the following saving investment strategy:

  • Establish a six-month savings buffer — enough money to cover monthly expenses for six months in the event you lose your job. This buffer can help cover emergency bills, too; for example, if your house is damaged in a storm, you can pay for repairs immediately while waiting for the insurance company to process your claim.

  • Don’t invest money needed for short-term goals in long-term investments. Stocks and bonds are liquid — you can sell them on any business day and receive your money in three days. However, when you need the money may not coincide with the most opportune time to sell. You need to think of stocks as long-term investments; if you need to send a child to college or pay for a wedding in the next two years, don’t put that money in the stock market.

    If your stocks lose 40 to 50 percent of their value and you have to sell to pay for previously scheduled expenses, you not only won’t be able to recoup your losses but also may not have enough to cover the expenses. Remember, that six-month savings buffer could turn into a short-term need as well. The time many people lose their jobs and need cash occurs during or just after the stock market has posted serious declines. If your buffer is in the stock market, you may need to sell a lot more than you expect to cover the six months.

  • Invest the majority of your excess savings (anything above and beyond your six-month buffer) to maximize capital appreciation. Interest earned in safe investment vehicles, such as savings accounts, rarely keeps pace with inflation. To grow your money, you must invest it in something that holds a promise of higher returns.

  • Gradually move toward safer investments over time. As you age, your time frame shrinks, so capital appreciation begins to take a higher priority in your overall investment strategy.