Archive for year: 2011

As I’ve started putting together an income portfolio that includes dividend stocks, I sometimes find myself feeling discouraged about the income that I receive. This frustration was further underscored when someone I know said that dividend stocks were a waste of time. “Getting 2 cents a quarter? What kind of income is that?” she scoffed. (Incidentally, she and her husband both plan to work for 30 more years in jobs they don’t particularly enjoy, relying on 401ks. This helped me get beyond her sneering remark.)

However, as I’ve kept with it, I’m becoming less frustrated. Sure, if you buy a few shares of a dividend stock, and then let it just sit there, you will never end up with anything approaching a stable income. A successful income portfolio often requires time to build up. Many of us don’t have the capital necessary to invest in dividend stocks and then enjoy a decent income.

Patience as Your Income Portfolio Grows

If you want success in your income investing efforts, you have to show patience. A portfolio needs to be built over time. Choose the investments you want in your portfolio, and then buy shares regularly in order to build it up. The more shares you have of a company, the greater your dividend will be when it is paid. Looking at statements, and watch my dividend rise, has been a great motivator.

Of course, you do need a plan. Right now, my income portfolio is growing rather slowly. This is because we have other obligations right now. However, it’s not as important to us to see big leaps and bounds in our dividend income. This is because we have a longer timeframe. I have my own home business, and my husband just finished his Ph.D. Up until this point, we have been expecting that our built up portfolio won’t need to provide substantial income for at least 15 more years. Now that my husband is done, though, we can start thinking about increasing what we put in, allowing us to speed up our timetable if we wish.

If you want income from your dividend stocks more immediately, you will have to increase what you put in now. Sit down and do the math. Decide if you can put more into building up your income portfolio now so that in five to 10 years you will be able to pay certain expenses with your dividend income.

Without a realistic plan, and a little patience, it can be tempting to just give up on your efforts to build an income portfolio. However, if you focus on the essentials, and stick with a good plan, you might be surprised at what you can accomplish.

There are a number of people out there who like investing in funds. I’m one of them. I’m a big fan of index funds and ETFs. And, as I learn more about dividend investing, I have been excited to discover that there are dividend funds. You can find index funds and ETFs comprised of dividend stocks, providing you with a way to build your portfolio while enjoying income in the form of dividend payouts.

Funds: Instant Diversity and Income

One of the reasons that funds are so popular amongst some investors is that they provide almost instant diversity (if you pay attention to the investments in the funds and choose funds accordingly), and there is a certain expectation of better-managed risk with many funds.

If you combine an index fund or an ETF with dividends, then you have a dream from many investors who are somewhat cautious about the whole investing thing. Dividend funds are composed of investments that offer regular payouts. There are high dividend funds, funds comprising dividend aristocrats, and other specializations. Chances are, there is a dividend fund out there to designed to help you reach your goals.

And, of course, you can use your dividend fund as a source of income, or as a way to boost your portfolio building efforts. You can usually choose to receive regular payments from the fund, providing you with a regular stream of income, or you can decide to have those funds automatically reinvested. Reinvested dividends buy you more shares, helping you build future wealth a little bit faster.

Choosing Dividend Funds

If you decide that dividend funds are the way to go, you will need to choose which to include in your portfolio. When choosing dividend funds, one of the most important things to consider is the cost of fees. Many investors like index funds and ETFs because the have low costs. Additionally, you should find out what stocks are in the fund. Make sure that the stocks in the fund are in line with your goals. If your goal is diversity, choosing a sector fund may not help you reach that goal.

A number of brokers provide access to dividend funds. If you already have a broker, you can look through the dividend fund options, or perhaps open another account if someone else has what you are looking for. In many cases, you can use dollar cost averaging to get started, gradually building your portfolio. Whatever you decide, you might discover that dividend funds provide just what you need.

When putting together a dividend portfolio, it is important to remember to diversity. In some cases, it can be tempting to chase the high dividend yields related to certain sectors. However, as many found out during 2008 and 2009, putting too many of your dividend eggs in one basket can create serious problems.

When a Sector Runs Into Trouble: Dividend Cuts

Some dividend sectors are popular due to their high yields. REITs, utilities and financials are good examples. Financials provide an especially apt example of the need for diversification in a dividend portfolio. Prior to the financial crisis, banks were viewed as Titans among dividend stocks. They paid reasonably high dividends (that always seemed to be rising), and they provide decent capital gains.

However, as trouble began brewing in 2007 and 2008, dividend increases slowed to a crawl. After the financial crisis, which hit banks quite hard, dividends were slashed in 2008 through 2009. For those heavily invested in bank stocks not only saw huge losses in terms of capital as stock prices dropped, but they also saw a reduction income as dividends dwindled away.

Of course, this is something that can happen in any sector. As a result, it is important to consider diversity in your dividend portfolio Consider ways to include dividend stocks from a variety of sectors, and consider including a health mix of dividend aristocrats. This way, if one sector verges on complete collapse, you aren’t as devastated by the results. You are especially vulnerable if you count on dividends for income.

Diversifying Your Dividend Portfolio

As you diversify, make sure that you are considering quality stocks, and that you include a mix that will help you meet your goals. Pull from different sectors of the market, and you can also add diversity with dividend funds and foreign dividend stocks. There are a number of ways that you can add a little diversity to your portfolio and still enjoy a stable income stream and limited risk.

Be sure to do your research and analyze the stocks you include. You want good quality stocks in your dividend portfolio, ensuring that you have solid choices that are unlikely to see big drops in payouts at the first sign of trouble. If you have a little extra room for the risk, though, it might not be a bad idea for your diversity to include some good growth dividend stocks with a little more risk. Just make sure that you are balanced out elsewhere so that if your bet turns out to be a bad one, you aren’t devastated.

Sometimes, when building a dividend stock portfolio, it can be tempting to chase the highest dividends yields. However this is not always the best idea. Indeed, many recommend that a yield target of 4% to 6% is ideal, and even that 2% to 3% is acceptable. That can sometimes seem a little low, especially when you consider that there are yields of more than 8% – and even yields of more than 13%.

One of the reasons that some companies offer such high dividends is to encourage others to invest in shares. There are some smaller companies or start up companies that offer high yields in order to try and get more investors. If you are looking for something short term, this might not be a bad idea in some instances. You could see high yields, and make money. However, if you are looking for a long term investment or stable income, higher yields aren’t always the best answer.

Issues Associated with High Dividend Pay Outs

There are some issues that you have to be aware of when you see high dividend pay outs. When a company pays high dividends, it is paying a portion of its profits. Making high dividend payments cuts into the cash that a company has available. Companies may not be able to sustain such high payments for an extended period of time. If you are counting on dividend payments for regular income, you might be disappointed if the company can’t sustain high pay outs for a long period of time.

Another problem is that sometimes high dividends are used as a way to attract investors – even though the company isn’t stable. Sometimes, high dividend yields can be a cover for a company that is crumbling. You could find yourself invested in stock that turns out to be worthless later.

Finally, you might be wary of dividends that fluctuate. You might see high dividends for a couple years, and then see a dividend cut later. If dividends fluctuate regularly, it can be difficult to set up a regular income portfolio. High dividend stocks, even those that fluctuate, can be interesting additions if you are looking for growth instead of income (especially if you reinvest), but you may not be able to rely on them for regular income.

Screening Dividend Stocks

A good way to filter out bad dividend payers is to look for stocks that have a solid dividend history of raising dividends. Our safe dividend list has stocks that have been raising their dividends for 25 years or more. You should also pay attention to the payout ratio and dividend growth rate. We like stocks that have a payout ratio under 60 and a dividend growth rate of 5% or more. Take a look at the top dividends list for more info.

Even if you do use high yield dividend stocks as part of your strategy, it is wise to be careful, and to keep an eye on the news about the companies involved so that you can sell your stock at signs of trouble.