Darn! The year was off to such a great start for us investors! But then worries about Greece and the Euro spoiled the party. If you were following conventional wisdom and investing in Index Funds, then you’ve basically lost about 6% in May (following the S&P 500).
Don’t worry – I’m not trying to bum you out. But it is times like this that you need to ask yourself “What am I doing to hedge myself? If buying stocks is offense, what am I doing to play defense?”
The Case for Dividends:
As one of my favorite writers on CNN Money, Paul R. La Monica , points out, one of the best places you could have positioned yourself before this whole mess was in strong dividend paying stocks.
A dividend stock is one that pays the owner a small percentage of the earnings in return for holding the stock. The reason that people like them is because not only could they make money from the stock increasing in value, but they could also receive a steady stream of payments while they wait to find out.
Investing in dividend stocks is nothing new. Dividend stocks have traditionally been regarded as strong investments because the face that the company can pass some of those earnings on to their investors signifies the strength about company.
The CNN Money article highlights the success of the AT&T (T) and Verizon (VZ) that were quoted as paying as high as 5% yields. When was the last time you received a 5% payout from a bank CD or savings bond?
I Just Bought Some Dividend Stocks This Year:
After reading “The Little Book of Big Dividends” by Charles B. Carlson last year, I was really anxious to find a way to add dividend paying stocks to my portfolio.
This year is the first year I have actually done so. My portfolio includes Johnson & Johnson (JNJ), McDonalds (MCD), Chevron (CVX), and Eaton (ETN). And although my portfolio is down (since each of these basically move with the major Indices), this combination should yield a dividend payout of approximately 3.0 to 3.5% for the year.
Think you’re too late to join the game? Buying any of these stocks (or your choice of hundreds others) looks more attractive than it did two months ago. For example, when I bought JNJ, the yield was around 3.6 to 3.7%. At today’s price you’d be looking forward to 3.9%.
Disclaimer: Don’t buy something just because I did. Make sure you do your homework before you put money into any investment.
Some Things to Remember Before You Buy Dividend Stocks:
Before you bet the farm on dividend stocks, make you understand what you’re doing:
• All stocks are never guaranteed. Unlike a bank CD or even treasury bonds, there is a much greater possibility you could lose your principal investment (the money you used to buy the stock).
• You’ll want to buy companies that have shown growth in their dividend payments year over year. The ability to do so signifies that the future of the company is healthy enough to do so.
• A dividend that is extremely high may be a sign that the company is trying to attract greedy investors. Look carefully at the financials of the company; you may find out why they need you so bad.
Readers: What have you been doing to protect yourself these past few months? Have you been looking at or buying investments that pay dividends? Have you been trying something completely different?
Photo Credit: Hedges at Pinehurst by deltaMike on Flickr