Stock Market Basics

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: , , , , , , , , , , , , , , , , , , , , , ,

Related 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: , , , , , , , , , , , , , , , , , , , , , , , ,

Related posts

Need Some Stock Trading Information?

Doesn’t everyone need a little stock trading information? I know even after being involved in the stock market for so many years, I’m still looking on a regular basis for new information on how to increase my portfolio. No matter what it may be, stock tips, a new IPO, or just some other ways to diversify my portfolio during these unstable times. I’m going to share a few pointers for you to help you with your portfolio.

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.

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Related posts

keep looking »