What are dividends? Dividends are paid out to shareholders by companies. When a company goes “public” it offers up shares in exchange for money. The company can use this influx of money to make the company bigger. The shares represent a portion of the company. If the company offers up a large portion of shares, then it most likely will offer a Dividend too. A dividend is a portion of a company’s sales returned to the shareholder. In industries where companies are mainly owned by shareholders, like utility and phone service companies, you will find larger dividend amounts. In industries where companies have few shareholders, like technology stocks, you will find smaller dividend amounts. Some companies are legally required to pay out a dividend, like Real Estate Investment Trusts (aka REITs) and carry very large dividend yields; though their stock price remains stable.
How do you invest with dividends? Dividends are an essential element for anyone investing. Some people create portfolios, or collection of investments, solely on maximizing dividends. There are several mutual funds dedicated to find the safest and highest dividend amounts through Fidelity or Vanguard. You can measure dividend amounts by a stock or mutual funds’ dividend yield. A dividend yield is the amount of dividend divided by the stock price. Large dividend yields don’t always mean a good investment. If a stock is about to go bankrupt or is failing horribly, its stock price will go down and its yield will look huge. For the riskiest investors, this may present a short-term gamble, but for most of us, this is to be avoided.
The best idea is to look for large companies that pay out large dividends and increase them regularly. Look around your house and determine what you purchase every week and see if it’s the same brand. Coca-Cola (KO), currently offering a 3.2% yield, and Johnson & Johnson (JNJ), at 2.9%, are favorites among dividend investors. Over the long history of the companies, they also raise their dividends. AT&T (T) and Verizon (VZ) are also favorites because telephone-service companies pay out large dividends; 5.7% and 4.5% respectively.
These dividends should be reinvested immediately back into the stock or mutual fund it came from or to your cash balance to purchase different stock. You can set the automatic re-investment through your bank. If you are under 55, you SHOULD NOT be spending your dividends. Reinvesting dividends is one of the top strategies of rich people.
You must also think about taxes. If you’re receiving dividends through your IRAs, then they are tax-free. If you are receiving them through a taxable account, then the dividends may increase your tax rate. As of now, dividends are only taxed as high as 15%. They can be taxed at 20% for the ultra-rich, but I don’t imagine they would be reading this blog if they were. You can read more about dividend taxes here: http://www.irs.gov/publications/p550/ch01.html#en_US_2013_publink100010066
Current News on dividends. Some companies retain a large amount of cash on hand. In times of low-interest rates, like we are currently seeing, investors become angry when companies “sit” on large hoards of cash. If there are enough shareholders becoming angry and there are enough shares to have a controlling interest, then the company will be pressured to offer a dividend or increase its dividend. Most recently, this has happened to Apple (AAPL). Its size and success has made it to difficult to invest the money into Research and Development or future projects and the cash is just building. Investors got together and forced the company to pay out a dividend. AAPL currently offers a 2.3% dividend while Google (GOOG) does not. Microsoft (MSFT) was forced into a similar position and offers a 3% dividend.
BL: For the average investor, we rely on our IRAs, TSP and/or 401(k)s, so dividends aren’t such a big deal. But for those of us investing ourselves, dividends should be a big deal. Your total portfolio of investment should have a yield equal to or higher than the interest rate on a 10-year bond. Unless you are extremely confident with your stock picking abilities, then there should be no reason you are taking on the risk of stock market losses AND earning less than a 10-year bond. You can find the dividend yield on any stock or mutual fund by using Google or Yahoo! Finance.
No comments:
Post a Comment