Investing In Dividend Paying Stocks

Dividend is a crucial part for investors' investing return historically. According to Wikipedia, when dividend yield is high or rising, it is when investors' return among the greatest. For example, dividend yield of the Dow Jones Industrial Average plunged to a low of 3.2% during the market bubble of 1929 and rise to 15% during the stock market collapse of 1932./

I do not have a hard cold fact to back it up but let's just assume a historical average dividend yield of 3 %. Since the world war II, stock market index has returned investors 10.5 % return annually. That implies that dividend contributes to 28.6% of overall investors' return. Ignoring dividend will decrease your investing performance by that much, which can be devastating in the long run.

Having said that, what is the characteristics of stocks giving out dividend yield of more than 3 % ? One thing that can help is to find companies trading at below their fair value. The fair value of a common stock is when it is trading at around a P/E of 13.4. This means that a company trading at $ 13.40 would have to earn $ 1 annually. Assuming that it pays half of this profit as a form of dividend, you can then expect a dividend yield of ($ 0.50 divided by stock price $ 13.40 ) = 3.73 %.

For growth stocks trading at 50 times earnings, you can rest assured that they won't have pay dividend that yields 3% year in and year out. The reason is quite simple. If a company earns $ 1 while its stock price is trading at $ 50, the most dividend it would pay is $ 1. At $ 50, the dividend yield for that stock is a measly 2 %. Your dividend yield will actually be lower since most companies do not pay all of its profits in the form of dividend.

In summary, to boost your investing return by 28.6%, you need to find stocks trading at above average dividend yield of 3 %. You won't find these dividend payers at a company whose stock is trading at 50 times earnings. The reason is simple. Even when they are paying out all of their profits as dividends, their dividend yield is still less than what average stocks pay historically. To find stocks paying dividend yield of 3 %, you can start by buying companies trading at below fair value, which is defined as the stock trading at a forward Price/ Earning Ratio of 13.4, assuming a 0 % growth in earnings./

Would you want to boost your investing return by 28.6% in one simple swoop? Of course you do. It is like catching two birds with one stone. Finding stocks trading below fair value will enable you to extract capital gain as well as dividend payments.

You can write your own investing articles and get your free investing idea at http://www.noviceinvesting.com/

How to Cheat the Market

Your odds of picking stocks that beat the market aren't good. Stats are thrown about claiming that 75% to 90% of professional mutual fund managers lose to the S&P 500. But wait -- there's a catch.

By James Early
August 28, 2006

Can Individual Investors Beat the Market?

That's a good question -- and the title of a now-famous academic paper. For most investors, the answer is an emphatic "no." At least, not by any meaningful degree ... but more on that later.

Full Article

Dividends act as shelter during bear market storms

I found this article and found it informative. Hope you enjoy!

Full Article

Instant Prizes -- Are they Real?

Ok, so I am not normally big on prize sites but this one was recommended by a friend that I trust. Yes, I know. This isn't about dividends but it is interesting and I promised I would post it.

Here is the link:

Instant Prize Site

Understanding Dividend Yield

I ran across this excellent discussion on dividend yield.

High Yield May Signal Problems

Companies that pay dividends can be wise investments, especially if you hold the stock over a long period.

When you add the dividend into any price appreciation, you can enjoy not only current income, but growth too. Of course, you can reinvest dividends if you don’t need the current income.

Full Article

Penny Stocks and Dividends

Although I am not a big fan of penny stocks, several readers of this blog have asked about them.

I though I would post a link for an article about investing in Penny Stocks:

Trade Penny Stocks?

The Best Stock To Own

Every investors want to own that dream stocks where it will provide them with high return for as long as possible. For that purpose, people painstakingly pour hundred of pages of annual report and financial news. We want to discover the next Microsoft, those tiny companies that change the world with their little brilliant ideas. Despite all the excitement, I believe that finding the next Microsoft (or Google) is a losing game. The reason is simple. Of all those tiny companies waiting to be the next Microsoft, only a small percentage will ever make it big, perhaps as little as one percent or so. Do you remember how many computer companies are there in the United States during the 1980s? Plenty. Now, the total companies in the industry can be counted by hand.

How about this? Instead of investing in the next Microsoft, why don't we invest in the current Microsoft which is on sale? Now, I don't literally mean that you invest in Microsoft Corp. (MSFT) stock but rather, you need to find solid quality companies such as Microsoft trading at a discount. Want proof that finding the next Microsoft is a futile effort? Well, an article from Jeremy Siegel, 'The Best Stock For The Long Term' lists the best performing stock from S&P 500 from 1957 to 2005, a span of 48 years. The result may surprise you but no Microsoft or Google or Intel of the world appears on the list. In fact, the list appears quite different than one would expect. Here is a glance of the 5 best performing stock for S&P 500.

1. Altria Group (MO) - Average Annual Return: 19.80% 2. Bristol Myers Squibb (BMY) - Average Annual Return: 15.79% 3. Abbott Labs (ABT) - Average Annual Return: 15.72% 4. Merck & Co (MRK) - Average Annual Return: 15.59 % 5. Coca Cola (KO) - Average Annual Return: 15.54%

A glance shows that the best five performing stocks for S& P 500 are from two industries: consumer products and pharmaceutical companies. If you go down the entire list, you will find similar companies from the like of Procter and Gamble (PG) to Wyeth (WYE) to Hershey Foods (HSY). These companies have already existed way before 1957.

The list goes on further to elaborate that all but one of the stocks on the list pay out an above average dividends. That should be something. I have long felt that dividends are sign of strength and profitability, not weakness. Without profit, one cannot pay sustainable dividends. Furthermore, all of the stocks on the list have a P/E of less than 20 with average earning growth of 9%. That agrees with our guidelines of finding fair value of a common stock, mainly by comparing its earning relative to price and interest rate. At current interest rate, a stock with 0% growth rate is fairly valued at a P/E of 14.6.

So, the choice is up to you. Do you want to invest in the next Microsoft, Intel or Google? Or do you want to invest in companies with proven histories of profit?

About the Author

Hari Wibowo

Novice Investing is combining force to provide investing forum with incomehunting.com. Come join our discussion there. You can still get your free investing idea with Novice Investing.

Different Investments: Person to Person Lending

This is an interesting post regarding person to person lending.

Some more of my favorite links:

San Jose CPA

Debt Management

San Jose Tax

Ipod

Part 2: Making Money in the Stock Market

Picking stocks to buy is not actually that hard. It should not take a great deal of work. There are lots of places you can look for investment ideas: in fact there are hundreds of investing websites, including The Graham Investor where we tend to profile stocks that come up in value-based screens and give an opinion as to why a particular may be worth following - not necessarily buying.

There are many different strategies to take; a typical one is to first screen for stocks that meet a particular value criterion which might be any one of: a low PEG, high intrinsic value when compared to current price, price below two-thirds of the Graham Number. Once we have a list of suitable stocks meeting the basic criterion, we can filter out stocks with poor cash flow, excessive debt, poor earnings, or insignificant anticipated growth. We also avoid stocks with low liquidity by making sure average daily volume is as high as possible, and stocks with low prices (typically steering clear of stocks trading at less than $3).

Once the additional criteria are met, look at the charts for each stock. Look for a recent clear downtrend or new 52-week low. Put the stocks with a most obvious downtrend onto a watch list. In particular watch those where the downtrend also shows declining volume. Look at the news for these stocks to see if there is an obvious reason for their recent poor performance. Do not buy - they could go down more. We don't want to try to catch the bottom; it's a sure way to lose money. What we are watching for is a clear sign of a reversal and buy as the stock moves up. Often a reversal can take place slowly and imperceptibly, other times it can be an abrupt reversal. Most often it is somewhere in between. Perhaps the stock has been beaten down by investor sentiment in the form of an overreaction to bad news. At some point the bad news may be dispelled or proven to be unfounded, and the stock will begin to return to fair value. Or, some good news may come in and the stock reverses as investor sentiment comes in. Typically when this happens, we want to see the downtrend broken convincingly and the price rising on increasing volume.

How do we know if the downtrend has broken? Simply draw a line joining the high points in the downtrend, and wait for that line to be broken to the upside with significant volume. What is significant volume? It depends. The higher the volume the better. Look for at least 150% of the average daily volume.

Once you have bought, set a stop loss order around 8-10% below where you bought. If at all possible, set the stop loss order just below the lowest low point before the reversal, so long as it's not too far away from your entry. Spreading your risk can help minimize losses. Divide your equity into at least 10 lots; if you have $5,000 to invest only buy $500 worth of each stock and keep your stop loss 10% of that, or $50. If the logical stop loss point is too far from your possible entry point, don't invest. Stick to the rules and cut your losses short. Let your profits run. In the long run you will make much more on the winners than you lose on the losers -- you can have 5 losers and still be down only $250 or 5% of your equity.

Buying undervalued stocks with good fundamentals in this way at or near low points when nobody else has been interested for a while but there are signs of a reversal is possibly one of the least risky investment techniques because of the built-in "Margin Of Safety".

(c) 2005 The Graham Investor - Value Investing You may use this article, as-is, provided this copyright notice is kept intact.

Author Info: John B. Keown is an IT specialist, website builder and private investor who enjoys all things stock-related and in particular seeking out undervalued stocks. He can be contacted via http://www.grahaminvestor.com

Part 1: Making Money in the Stock Market

The key to making money in the stock market is invest for the long-term, buying only undervalued stocks which, to quote Benjamin Graham, have a "Margin Of Safety". Ben Graham and Warren Buffett both made enormous fortunes through long-term value investing. Indeed, Buffett continues to do so and has averaged over 22% average compounded annual gains over a 39 year period.

These results are phenomenal and not easy to emulate. However, with time on your side and a little bit of work it is possible to do nearly as well as Buffett. Even if you beat the S&P 500's average long term return of around 11%, you are doing very well indeed.

Suppose you invest $3,000 in a Roth IRA or other tax-efficient retirement account every year for 20 years and achieve an average annual compounded gain of 11% over that period. At the end of the 20 year period you could have around $238,000 disregarding dealing costs and dividends. You have only invested $60,000 - so $178,000 is generated entirely through compound interest. If you were to emulate Buffett's 22%, that $60k would become $1,031,000. If you were to start earlier and invest $3,000 a year for 40 years at 11%, you would end up with $2,132,483. Match Buffett's 22% on these investments over 40 years and you may wind up with a whopping $55,000,000, for an investment of $120,000! That is the power of compound interest.

Many people ask me "Which stocks do I buy?" and "How do I start?" They keep making excuses NOT to start investing for the long-term. My advice is a bit like a Nike commercial: JUST DO IT! Get started. Open a Roth IRA, start by putting money in regularly, even if it's only $25/month. It's important to get into the HABIT of regular savings. In the meantime you can worry about which stocks to buy.

Picking stocks to buy is not actually that hard. It should not take a great deal of work. There are lots of places you can look for investment ideas: in fact there are hundreds of investing websites, including The Graham Investor where we tend to profile stocks that come up in value-based screens and give an opinion as to why a particular may be worth following - not necessarily buying.

(c) 2005 The Graham Investor - Value Investing You may use this article, as-is, provided this copyright notice is kept intact.

Author Info: John B. Keown is an IT specialist, website builder and private investor who enjoys all things stock-related and in particular seeking out undervalued stocks. He can be contacted via http://www.grahaminvestor.com

A Few of My Favorite Links

This is an excellent site on debt management: reduce-debt-help.com

This blog announces some of the best articles on the web: AnnounceArticles.com

This site pomotes awareness of Congenital Heart Defects (CHD): CHDInfo.com

Top Ten Dividend Yields

I was searching around today and found this list of top yielding stocks. The information is fairly current too. You will note the top dividend paying stock has a 8%+ yield. Wow!

Here is the link to the full list:

The Top 10 Yields by Industry

With many investors looking for income as well as capital gains, we now publish the top ten yielding stocks in certain industries each week. This week we look at Staffing & Outsourcing (scroll down for other industries). These stocks have been selected from a screening program. They are not recommendations to buy or sell. If you have an interest in any of them, please investigate them completely before taking any action.

Continue Reading: Top 10 Yields

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