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?
Related Posts:
1) Book Review: “The Little Book of Big Dividends” by Charles B. Carlson
2) Will Dividend Stocks Help Me Retire Early?
Photo Credit: Hedges at Pinehurst by deltaMike on Flickr
I admit that I’m still a pretty naive investor. As I build up the cash flow to get more involved in it, I’m definitely going to be looking into some dividend stocks. I sure wouldn’t mind some regular dividends each year on top of whatever gains the stocks make.
That’s what I plan to do. If you already accept index funds and mutual fund investing, why not skim a little off the top with dividends?
I actually like the major selloffs in the the market. I am in my mid twenties so I can afford for my portfolio to be down for now and since I dollar cost average I get to pick up more shares at a lower price. I agree that dividend stocks can be great, but I’m not a huge fan of buying individual stocks.
Nor am I still a big fan when compared to mutual funds. But I’m testing the waters. And good eye buying when the prices are down!
I feel pretty bullish. The markets (in general) never do that well in the summer. And my stock investing is for the long-haul, so lower prices just mean better investment opportunities. I also prefer low-cost index funds to individual stocks for long-term investing. I don’t gamble with short-term money. Long-term in stocks (and some bonds as we age), short-term in cash and possibly mortgage pre-payment.
Still, I do like dividends, but we get some from our broad-base indexes whether we want them or not.
I’m feeling the same way. My gut tells me there will be a rebound, and we’ll all have slightly more gains than when we started this year. And we’ll have our dividends on top as well.
I have only bought one stock and it was McDonalds. I had no clue it was a dividend stock. I just picked it on a whim. I like the idea of dividend stocks, it would be great to get a check throughout the year.
I hope you bought that about five years ago before their coffee drinks started getting really popular. In either case – good job testing the waters!
the dow dogs theory, what are your thoughts on that holding theory. i think over time it has shown to outperform the market.
It is one of the more interesting theories. I’ve read both good and bad reviews; like anything it depends of which clip of data you’re looking at. I’d like to run through a few examples myself to understand the potential more clearly.
I’ve been “protecting” myself by being in debt. All kidding aside, I’m waiting until all consumer and student loan debt is paid off. There are a lot of strong dividend-paying companies worth building a dividend portfolio around.
Ha! The debt is like a building a moat around your castle, only to have yourself fall in it. I agree with waiting to pay off some loans and debt before going hands down into buying stocks. If your debt rate is higher than the short-term guaranteed rate of the dividends, then it wouldn’t make sense.
To protect myself, I make sure to diversify my investments across company type, size, industry and country. A low-cost target retirement fund is an easy, effective way to invest for retirement.
Finding a fund to help balance your asset allocation is smart. That is one of the beauties of mutual funds and why I still like them.
I remember reading a dividend investing book written by a Wharton professor about 10 years ago. He had a list of 100 dividend paying stocks. These companies were in business for over 100 years ( i.e. GE, JNJ, FORD, ALCOA) etc. He proved that any novice investor can make money by picking 10 stocks randomly every year from his list.
Given enough time, the power of blue chip companies combined with dividend payouts would likely put you ahead of most professional investors.
Are there any good mutual fund comprised of just dividend stocks? I don’t like the idea of buying individual ones.
Good question and I am still working on that one myself! For example, I comb through Vanguard and Fidelity all the time and even narrow in on the “High Yield Dividend” or similar sounding names. But their dividend yields are always very sad (< 1%). I've thought about looking through ETF's next. I should mention that there are also REIT's which invest in real estate and supposedly have very high yields. However, I have both no experience with them and have heard that they are VERY risky. I'm doing some research now (which will become a post) on the Dow Dividend strategy which is supposedly one of the safer and higher yielding strategies (3 to 4%) for investing in stocks. Even though it would mean having to buy individual stocks, you'd be buying 1) large big companies that are strong enough to pay out their earnings as dividends and 2) value companies which have less fluctuation that normal stocks. I can understand your hesitation with buying individual stocks. I've been there before.