BEFORE INVESTING IN ANY
ASSET CLASS REMEMBER ONE THING:
“You should not be as
concerned with the Return on Money as you should about the
Return of Money!”
NEVER LOOSE YOUR MONEY
Why own Dividend Stocks
Unlike annuities and bank deposits, which offer
only a guaranteed principal and yield that could be dented by inflation,
dividend-paying stocks also offer the potential of growth to keep up with
inflation.
Are there quality, dividend-paying stocks in
today ’s market that are just waiting to make you rich?
The answer is YES. There are
dividend-paying stocks in today ’s market that will make you rich.
A Recipe for Riches
If you want the recipe for getting rich in the
stock market, here it is: Find stocks with above - average appreciation
potential and safe and growing dividends, and buy them at attractive prices.
Why We Invest in the first place
We invest to get paid. Otherwise, we wouldn’t’ do
it. How do we get paid for investing? Two ways:
1.
The value of
our investment goes up. You buy a stock at $ 10, and it jumps to $ 20. You made
$ 10 on your investment. That $ 10 profit is called a capital gain. If you sell
and lock up the profit, you have a realized capital gain. If you still hold on
to the stock, you have an unrealized gain.
2. We receive a portion of the company profits on a regular basis. As a
shareholder of a company, you’re an owner. As an owner, you have a claim on the
profits of the company in proportion to your ownership.
Dividends are usually paid quarterly (every three
months), although some companies pay dividends only once or twice per year.
Companies may differ in the months when they pay their dividends. Some
companies pay dividends in March, June, September, and December; some pay in
February, May, August, and November; others pay in January, April, July, and
October.
Knowing the dividend - payment dates can be
useful when constructing a dividend portfolio to provide regular cash flows to
meet financial obligations.
A stock ’s total return — the total amount you
get paid for investing — is capital gains plus dividends. Let’ s say you own a
stock that goes from $ 10 per share to $ 11 per share in a year. During the
year, the stock paid $ 0.50 per share in dividends. The stock’ s total return
for the year is 15 percent ($ 1 per share in price appreciation plus $ 0.50 per
share in dividend divided by the starting value of $ 10 per share). As you can
see, dividends represent an important component of a stock ’s total - return potential.
In fact, roughly 40 percent of the stock market’s
long - run total return comes from dividends.
A stock’ s capital - gains potential is influenced
significantly by what the market does in a given year. On the other hand,
dividends are usually paid whether the broad market is up or down. The
dependability of dividends is a big reason why investors should consider
dividends when buying stock.
Another attraction of dividends is that they can grow.
And the rising dividend stream not only hedged against inflation but also
accelerated the payback on investment.
So, what firms pay dividends? They are generally
larger, more established companies. Dividend - paying companies have probably
experienced their biggest growth spurt and
don’ t require all of their cash flows to fund their
operations. Such companies are reasonably confident that their future
profitability will support a dividend payment.
Dividends are ultimately paid out of a company’s
profits, so pay attention to the relationship between the two.
DIVIDEND YIELD
A stock’s dividend yield is computed the same way. You
take the amount of dividends paid over the last year and divide by the stock
price. For example, a stock that trades at $ 10 per share and paid $ 0.50 per
share in dividends over the last 12 months has a yield of 5 percent ($ 0.50
divided by 10).
Dividend is not free money
While dividends are often referred to as an investor “free
lunch” that’s not exactly true. A dividend is not free money. Think of your own
finances. If you constantly paid out cash to family members, your net worth
would decrease. It’s no different for a company. Money that a company pays out
to shareholders is money that is no longer part of the asset base of the
corporation.
You may be surprised to learn that a stock price
adjusts downward when a dividend is paid. The adjustment may not be easily
observed amidst the daily price fluctuations of a typical stock. But the
adjustment does happen.
My Ex
This downward adjustment in the stock price takes
place on the ex - dividend date. Typically, the ex - dividend date is two
business days prior to the record date. The key thing about the ex - dividend
date is that it represents the cut – off point for receiving the dividend. You
have to own a stock prior to the ex - dividend date in order to receive the
next dividend payment. If you buy a stock on or after the ex - dividend date,
you are not entitled to the next paid dividend.
The stock market is not perfectly efficient, but one area
where the market really shines is in telling investors when a dividend is in
trouble. The market sends that signal by hammering a stock.
As the stock crumbles, the dividend yield rises.
(Stock prices react more quickly to investment risk than boards of directors,
which is why the stock price will decline in a big way before the dividend is
cut or omitted.) Investors who choose to ignore a stock’s price action when
evaluating the safety of the dividend make a huge mistake.
An unusually
high yield can foreshadow big problems at a company
Yield not to temptation. Yield and risk are joined at
the hip. Stocks with yields that seem too good to be true are disasters waiting
to happen. Avoid them. You need to choose stocks that have attractive total -
return potential, not just dividend return.
The payout ratio is perhaps the most powerful tool for
getting a quick snapshot of whether a company will maintain and grow its
dividend. Focus on stocks with payout ratios of 60 percent (0.6) or lower
Find good quality stocks that have a safe
dividend that is likely to be increased over time.
Finding Big, Safe Dividend stocks
1. Momentum (growth in earnings, cash flow, and sales)
2. Quality (return on investment, return on equity, return
on assets)
3. Value (price/sales, price/earnings, price/book
ratios)
4. Financial strength (debt levels)
Remember: the best stocks to own are those with
the best total - return potential.
Young investors possess the most important ingredient
in producing big returns: time.
One way to hedge against inflation is to focus on
stocks that are likely to boost their dividends on a regular basis.
The moral of the story: Buying dividend growers is not
just a good idea as an inflation hedge. It’s a good idea because dividend
growers, as a group, outperform the market.
Profits every month
By owning stocks with different dividend payment dates,
you can receive a dividend check every month of the year.
Real Estate investment trusts (REITs) are securities
that trade like stocks.
REITs have extremely high payout ratios
DIVIDEND REINVESTING
If you want to build wealth over time, cashing your
dividends is not the way to go. Reinvesting them is. By reinvesting dividends,
you take advantage of what Einstein reportedly called the eighth wonder of the world
— compounding. It’s using your dividends to buy more shares of stock — with
those shares producing more dividends to buy more shares, and so on, and so
forth.
Most investors focus on the parts — their
individual stocks. The reality, however, is that long - term investment success
depends on the whole — your portfolio.
By employing diversification correctly,
investors can reduce risk without sacrificing returns.
1.
Diversification
across assets
2.
Diversification
within assets
3.
Diversification
across time
4.
Diversification
across investment strategies
Summary
prepared by: Muhammad Saleem Awan
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