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.

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.

Where to go to get good information? Well that could be anywhere. I’ve learned to take information from all sources to assist me and my trades. The one thing to keep in mind is to make sure you follow up on the information to assure that it’s correct and valid. There are more mistakes made in the stock market than there are not. Traders and Investors make mistakes everyday and that’s just the way it is. To help limit your mistakes, you need to do your own research and due diligence before you invest.

Getting stock tips are not the only information you should be looking at when it comes to buying and selling stocks or investing your hard earned money. What about the condition of the economy? Is it stable? See what’s going on in Washington. If the U.S. Treasury is printing out money like it’s going out of style, then realize that the dollar isn’t worth what it was before the increase of currency. Unemployment plays a major role in the condition of the markets and when you see the unemployment rate climbing, then it’s going to push the overall markets down.

What about the new tax laws (or the end of old tax breaks) that will effect your gains? In 2011, the Bush tax credits will come to an end and traders as well as investors are going to pay more in capitol gains taxes. The will be increases across the board when it comes to investment taxes. There will also be increases on dividends.

Have you given any thought about investing in precious metals? Gold, silver and platinum are a good way to hedge against the falling dollar. No matter what happens to our currency (or any other), gold will always be the investment of choice when the economy is getting worse. Gold has been a great investment during those times of trouble.

Just remember that looking for stock market information, you need to look further than just a bunch of stock tips.

First, one must understand the basics and the foundation of stocks. Stocks are nothing more than parts of ownership in a company. Basically, a company offers stocks to the public to finance their company. Buying stock makes you a shareholder, and in essence, you own part of the company even if you are buying penny stocks.

There are different types of stock that one could buy. First is common stock. Common stock is exactly as it is stated, common, and holds no preferences. When the company offers a dividend, you are entitled to it. The next step up is preferred stock, which means you get a higher priority when it comes to dividends, meaning you get paid first.

Voting / participating stock is also available, where you can vote on issues of the corporation. Stocks of large publicly traded companies are traded on the open market, at such places such as the New York Stock Exchange, NASDAQ, etc. At the New York Stock Exchange, deals are done face to face in person. Prices are determined by an auction format in essence, meaning whoever pays the most, gets the stock. While this is going on, people can sell stocks at that price, and you are actually “trading” stocks. You may never meet the person you are trading with, but in essence that is what happens in two separate transactions.

Stocks can change constantly, due to many different things. It works on supply and demand, meaning if more people want a stock, the stock prices go up, and conversely, less interest equals a lower price. The most common way to purchase a stock are through brokers.

There are in person brokerage companies, such as Merrill Lynch, or you can go online and trade online yourself or through a broker. Online sites such as Scottrade, Etrade, etc let you trade stocks on a real time basis, and only cost a few dollars per trade. Many people may be enticed to buy penny stocks, but those are almost a sure bet to make you lose money.

Overall, there are some basics that were outlined that are important to trading stocks, but to really be successful, there is a bunch more to learn.

The stock market is not just one market. When the news refers to the stock market, they typically mean the DOW (Dow Jones Industrial Average), but there are actually several different markets. I won’t list them all, but to name a few. NASDAQ (National Association of Securities Dealers Automated Quotation), S&P 500 (Standard and Poors 500), NYSE (New York Stock Exchange) and the NYMEX (New York Mercantile Exchange).

Stock is a share (piece of the company) unit of ownership. There are two different types of stocks within a company. There are preferred and common stocks. Preferred stocks carries a little more weight in regards to dividends, but not when it comes to voting rights. The preferred shares will receive any payouts before the commons in any bankruptcy issues. In bankruptcy, the commons share are the last to get paid and in most cases, never do.

There are different sectors within the stock market. Each sector represents the different industries in the world. Agricultural,  Basic Materials, Commodities, Financial and Energy are just a few of the many sectors. Each one effects another depending on what is going on in the world.

ETF’s and Mutual Funds are a different way to play the stock market. Instead of buying individual stocks of a company, you can purchase into an ETF’s or mutual fund which buys into several companies in one particular sector. The idea is that typically you don’t have to know exactly which stock to own, but to just focus on the sector. This is a good way for beginners to learn how to trade without taking too much of a chance.

In later posts I will go over many of the other things that you would need to know to benefit from trading stocks in the stock market.

Points- There are several different ways that this word is used throughout the markets. A point is referred to as a way to measure. In regards to a stock gaining a point, it means that the value went up one dollar. When the news says that the federal reserve lowered the interest rate by 50 basis points, that would mean that the interest rate dropped by a half of a percent (0.5%).

Long/Short- You will hear traders say that they are either long or short a stock in their portfolio. What they mean by “long” is that they are invested in the stock for the purpose of it going up in value. When they refer to being “short” a stock. They are investing in the stock expecting it to go down in value. Yes, You can make money in stocks as the price per share drops (that’s something that you will learn later).

Bonds- A bond is actually a loan with a little more complicated terminology added to help keep the average investor from getting involved without the help of a professional. When the government or a company wants to raise capital (cash) for one reason or another, they issue bonds to individuals or other entities. The interest is paid to the lender on a yearly basis (annuities). The actual principal (money borrowed) is not paid back until the end of the terms stated in the bond.

Dividends Dividends are what a company pays to their shareholders in the form of cash or more shares of the company. Companies that have grown to their maximum and have no plans to acquire other companies pay dividends. The dividends are calculated on a percentage of what each stock is worth. The payment is broken down into four payments (each quarter). There is some other factors involved with dividends that I won’t get into in this post.

Diversified Portfolio- A portfolio that only contains stock from one sector will not do as good as one that contains stocks from several sectors. Stocks rise and fall all the time, but that doesn’t mean that they all go in the same direction or by the same amount together. If you balance your portfolio correctly, you will do quite well on a regular basis.

In later posts I’ll add some other term and phrases that will help you understand the stock market better.