Stock Market Basics for Dividend Investing
The recession that began in late 2007 changed the dividend landscape completely, and not necessarily for the better. In the last quarter of 2009 alone there were 288 companies who cut their dividend payouts. In fact, Standard and Poor’s reported another 804 companies who were forced to follow suit in 2009. This cost investors another fifty-eight billion dollars.
There are four lessons you should learn before you get involved in dividend investing.
1. There are no guarantees
Many people decided to ignore this lesson in the years before the recession hit. While collecting interest on other investments, such as CDs and bonds, is something you can count on, the same is not true of dividends. The board of directors get to decide whether or not shareholders will be entitled to cash dividends. Most companies recognize that it is in their best interest to maintain or ideally increase payouts. Continuing to pay dividends is a good sign of a company’s financial health. A financially strong company can also attract more investors, enabling them to grow.
2. Do not go after high yields
In the last few years there were many investors that got too greedy and started taking higher and higher risks to find yields that were acceptable. This was possible because interest rates and market yields were very low. However, this turned out to be a bad decision in the long run. To minimize risk, investors should avoid any yield higher than 2.5 times market average. For example, the current market average is two percent, therefore you should stay away from anything five percent or more.
3. Cash flow is king
Do not just look at a company’s earnings this year, but also look carefully at the cash going out and coming in for the last five years, at least. If you focus just on earnings, you will not have a good picture of a dividend’s sustainability. Also try to account for capital expenditures as well. The remaining amount is called the free cash flow and is what the company has available to either pay dividends or buy back shares. Also check how much the company pays out in dividends every year. The free cash flow needs to be greater than the dividends paid so the company can maintain dividend payouts.
4. Don’t put your eggs in one basket – diversify
No matter what the current financial situation may be, diversifying your portfolio will help you weather even the toughest situations. Diversification is the basic rule in your building your portfolio and this is a lesson that should learnt in your stock market basics class. The financial industry was hurt worse than others over the last few years, and even those who diversified were hurt. However, they were also less affected than people who put all their money into high yield financial stocks. Diversifying is still important even if the yields are lower.
These four tips will ensure that you have a much easier time building your portfolio. You will be able to find companies that have a sustainable dividend payout with a higher than average yield.
Tags: bonds, cash dividends, cash flow, diversifying your portfolio, dividend, dividends, interest rate, investment, investments, investor, investors, market yields, recession, shareholders, standard and poor, Stock Investing Basics, Stock Investing Tip, Stock Investment Software, stock market, Stock Market 101, Stock Market Basics, Stock Market Basics, stocksRelated posts
Useful Stock Tips
Stock tips are a dime-a-dozen, the problem is where can you get some that will actually work out for you and your portfolio. No matter where you go on the internet, TV or the radio, you’ll see or hear about someone else who has the right investment tips for you. Unfortunately there’s more misinformation out there than there is solid reliable leads. Here are just a few stock tips for you that will help your future.
Never take the word of someone else as an investment tip. If someone is giving you the “inside scoop” on a particular stock, you need to make sure for yourself. There are laws against inside trading, so for an average trader or investor to have any good information, it’s highly unlikely.
Never buy all of your shares at once, you should buy into any position incrementally. Stocks rise and fall all the time so to lower your cost basis. Most likely you’ll never be able to buy at the bottom so you need to be prepared to buy more when the price falls. Typically I wait for an 8% pull back from the stock’s recent high or 5%-8% drop from my cost basis before buying any more shares.
If you’re still looking for good solid reliable information, but not sure where to go. I use Yahoo Finance as well as The Street.com. Jim Cramer has been a never-ending resource of good stock leads for me. Not only is he entertaining, but very well aware of the stock market. I listen to his “suggestions” on what stocks or sectors are looking good, but I still don’t buy into the company because he thinks it’s good. I do my own research into the company to see what he sees or doesn’t see.
Diversifying your portfolio is very important if you want to protect your you profits or minimize your losses. If you go ahead and invest of your money into one company or sector, you could lose a big portion of you portfolio in the process. As I said before, all stocks rise and fall and that also goes for complete sector at times. That is why you need to invest across the board (equities, bonds, precious metal and other commodities). Divide your investments into several different vehicles, typically no more than 20% into any one sector or stock.
Look for companies that offer dividends, larger companies are the ones to look towards. Dividends are a return of the company’s profits that are distributed among the share holders. Let’s say the company’s stock is $20 per share and they have a 10% annual dividend. Each year you would receive $2 per share (paid quarterly) for just own the stock no matter what the stock price is. So even if the company loses 5% value on the stock price, you’ve still made 5% on your investment.
In later posts, I will offer other stock tips that will also help increase you gains.
Tags: bonds, commodities, cost basis, diversifying your portfolio, dividend, dividends, investment, investment tip, investment tips, investments, investor, jim cramer, losses, profits, Stock Investing Basics, Stock Investing Tip, stock market, Stock Market 101, Stock Market Basics, stock price, stock tip, stock tips, Stock Tips, Stock Trading Information, stocksRelated posts
Stock Market Trading Strategy
If you’re going to trade stocks, you’ll need to find a stock market trading strategy that will work for you. Not all strategies work for each trader or investor. So to know which one is good for you and your financial future, you’ll need to try different ones. Depending on the condition of the economy and the overall markets, you will most likely use a combination of a few.
One strategy that should be followed is never investing all of you capitol into one or two companies. The typical amount of money invested in a company should not surpass 20% of your total portfolio. Keeping your portfolio diversified will help prevent major losses during any particular time. Invest your money within several different sectors (ie: commodities, equities, precious metals and bonds).
The buy and hold method is a strategy that doesn’t require too much work. Yes of course you’ll still have to do your research into the fundamentals of the company. What I don’t like about this type of investing is the fact that you are not paying attention to what is really go on with your investment. If you what to make the most out your investments, you need to be active and watch what the company as well as the overall market is doing
Shorting stocks is one of the more popular ways to play the market. The idea is that a trader believes that a certain company’s stock price is going to go down in price. A treader will go ahead and borrow share from an investor. Within a certain period of time, the trader will have to replace the shares he borrowed. The trader in turn sell the shares at the current price. When the price per share has dropped, the trader will buy shares to return to the investor. This type of trading is not for those who are just starting out in the stock market. You’ll need to get a good understanding of the stock market before you start shorting stocks.
After you’ve been trading stocks for some time you might want to look at day trading. Be careful though, many average investors have lost more money than they’ve made doing day trading. You need to be quick and alert to what is going on in the markets on a daily basis. Many day trader will trade penny stocks because of the higher percentages that can be made in a day, but you can lose just as much just as quick.
Whichever stock market trading strategy you decide to use, make sure you do your due diligence and follow the news on the companies you’re invested in.
Tags: bonds, buy and hold, commodities, day trading, dow, due diligence, economy, financial future, investment, investments, investor, investors, money, penny stock, penny stocks, shorting stocks, Stock Investing Basics, Stock Investing Tip, stock market, Stock Market 101, Stock Market Basics, Stock Market Strategy, stock market trading, Stock Market Trading Strategy, Stock Market Trading Strategy, stock price, Stock Trading Information, trading stocks, trading strategy