The Basics of Investing in Dividend-Paying Stocks

Those who are investing for income have numerous options outside of bonds, and the most traditional and easiest to understand choice is high-dividend stocks. Although investing in the stock market involves more risk than investing in bonds, dividend-paying stocks offer modest income and the potential for longer-term capital appreciation. High-dividend stocks have become a more popular option for income-oriented investors in recent years, since traditional fixed-income investments such as bank accounts, certificates of deposit, and U.S. Treasuries pay next to nothing. Throughout most of the second half of 2011 and 2012, for instance, large-cap stocks (as gauged by the S&P 500 Index) actually offered a dividend yield roughly equal to, or greater than, the yield on the 10-year U.S. Treasury note. At a time of low bond yields, the typical 1.5%-5% yield you can get from dividend-paying stocks becomes much more attractive. Benefits of Dividend-Paying Stocks High-dividend stocks tend to outperform the broader market over time. From January 31, 1972 through September 30, 2010, U.S.-based dividend-paying stocks returned an average 7.1% annually, far exceeding the 1.5% average annual return for stocks with no dividends. This trend continued through 2011, but high-dividend stocks have underperformed in 2012. Additionally, more than half of the total return of U.S. equities from 1930 through the end of 2010 was the result of dividends rather than price appreciation. Learn more: How important are dividends in the stock markets long-term total return? Historically, dividend-paying stocks also perform better than the overall market during times in which stock prices are weak. Since stocks that pay dividends are generally more conservative and have stronger cash flows than those that do not, investors tend to gravitate toward dividend payers during times of trouble. Dividends, by returning actual cash to shareholders, also provide an indication of the strength of the business underlying the stock. Additionally, companies tend to use their resources more efficiently when they are less plentiful which cash is once dividends have been paid. Higher dividends mean more cash in the hands of investors, and less in the hands of a management team that may not necessarily make the right decisions. Whats in a Yield? Naturally, there is more to dividend-based investing than simply searching for stocks with the highest yields. In some cases, an elevated dividend yield can serve as a warning that a stocks price might be depressed for a fundamental reason. Investors also look for companies with strong fundamentals backing up the dividend, such as robust earnings growth, solid balance sheets, and attractive valuations. On the other hand, it isnt necessary to give up growth to invest in dividend-paying stocks. Many companies with attractive yields are innovative world leaders

and not the type of stodgy, slower-growth companies that would provide investors with little in the way of capital appreciation potential over time. Learn more: How to Invest in High-Dividend Stocks Bonds versus Stocks Investors who are trying to decide how to allocate between stocks and bonds need to look at their broader investment objective. If safety is the primary goal, the best course of action is to invest in more conservative instruments, such as government bonds or mutual funds that invest in bonds with shorter maturities. If income is the foremost consideration and an investor can afford to take on some risk, high yield bonds and emerging market bonds will usually be the best sectors in which to find the highest possible yields. If capital appreciation is a priority and income is secondary but still a consideration dividendpaying stocks can play an important role. Naturally, theres no need to invest in just one asset class. Very often, a combination of these and other investments is necessary to generate the optimal combination of risk, total return potential, and yield. How to Invest in Dividend-Paying Stocks Investors can assemble a high-dividend portfolio in three ways: buy individual stocks (an updated list of the highest-yielding companies is available here), invest in dividend-focused mutual funds, or utilize the wide range of dividend ETFs that have been created in recent years. Among the most popular dividend-focused ETFs are iShares Dow Jones Select Dividend Index ETF (ticker: DVY), Vanguard Dividend Appreciation ETF (VIG), and SPDR S&P Dividend ETF (SDY). There are also numerous ETFs that invest in the highest-dividend stocks in particular market segments, such as small-cap stocks or the emerging markets. You can purchase stocks or ETFs through a broker, and mutual funds are typically available either from a broker or from the company via a direct investment. Be sure to contact a financial advisor or use all the vast online resources available to conduct comprehensive research before investing. Disclaimer: The information on this site is provided for discussion purposes only, and should not be construed as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities. The thing about dividend checks is that unlike capital gains, they are always positive. As long as the company you purchased is sound financially, it should be able to distribute cash in your brokerage account like clockwork every single quarter.

As a result, it is no surprise that dividend stocks are getting a lot of attention from current and future retirees. The most important decision for someone who wants to retire with dividend stocks is to actually get started. This means saving money consistently, and then investing it in the dividend stocks of their choice. In this article, I am going to outline a few dividend stocks, which make very good candidates for a beginning income portfolio. In other words, if I were starting a portfolio tomorrow, I would include the following stocks. Consumer Staples Clorox Company (CLX : 84.16, -0.63), The-Global Auto-Care Business is a United States-based Company, which manufacturers and markets consumer and institutional products. The company has raised distributions for 35 years in a row. The stock trades at 17.60 times earnings and yields 3.50%. Check my analysis of the stock for more information. The Procter & Gamble Company (PG : 76.91, -0.29) is focused on providing consumer packaged goods, which are sold in more than 180 countries primarily through mass merchandisers, grocery stores, membership club stores, drug stores and high-frequency stores. The company has raised distributions for 56 years in a row. The stock trades at 18.70 times earnings and yields 3.30%. Check my analysis of the stock for more information. Colgate-Palmolive Company (CL : 115.37, 0.02) is a consumer products company, which operates in over 200 countries and territories worldwide. The Company operates in two product segments: Oral, Personal and Home Care; and Pet Nutrition. The company has raised distributions for 49 years in a row. The stock trades at 20.40 times earnings and yields 2.40%. Check my analysis of the stock for more information. Kimberly-Clark Corporation (KMB : 93.97, -0.66), is engaged in the manufacturing and marketing of a range of products made from natural or synthetic fibers using advanced technologies in fibers, nonwovens and absorbency. The company has raised distributions for 40 years in a row. The stock trades at 17.50 times earnings and yields 3.50%. Check my analysis of the stock for more information. The Coca-Cola Company (KO : 39.11, 0.1) is a beverage company, which owns or licenses and markets more than 500 nonalcoholic beverage brands, primarily sparkling beverages but also a variety of still beverages, such as waters, enhanced waters, juices and juice drinks, ready-todrink teas and coffees, and energy and sports drinks. The company has raised distributions for 50 years in a row. The stock trades at 18.80 times earnings and yields 2.80%. Check my analysis of the stock for more information. PepsiCo, Inc. (PEP : 77.17, 0.365) is a global food and beverage company. The company has raised distributions for 40 years in a row. The stock trades at 18.10 times earnings and yields 3.10%. Check my analysis of the stock for more information.

Walgreen Co. (WAG : 40.13, 0.18), operates a drugstore chain in the United States which provides its customers with access to consumer goods and services, pharmacy, and health and wellness services in communities across America. The company has raised distributions for 37 years in a row. The stock trades at 16.50 times earnings and yields 3%. Check my analysis of the stock for more information. Wal-Mart Stores, Inc. (WMT : 73.33, -0.04) operates retail stores in various formats around globally. The company has raised distributions for 38 years in a row. The stock trades at 13.90 times earnings and yields 2.30%. Check my analysis of the stock for more information. Philip Morris International Inc. (PM : 91.82, 0.21), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has raised distributions for five years in a row. The stock trades at 16.50 times earnings and yields 4.10%. Check my analysis of the stock for more information. Consumer Discretionary McDonalds Corporation (MCD) franchises and operates McDonalds restaurants in 119 countries globally. The company has raised distributions for 36 years in a row. The stock trades at 16.50 times earnings and yields 3.50%. Check my analysis of the stock for more information. Health Care Johnson & Johnson (JNJ : 77.74, 0.34) is engaged in the research and development, manufacture and sale of a range of products in the healthcare field. The company has raised distributions for 50 years in a row. The stock trades at 14.20 times earnings and yields 3.50%. Check my analysis of the stock for more information. Becton, Dickinson and Company (BDX : 88.24, 0.13) is a global medical technology company engaged in the development, manufacture and sale of medical devices, instrument systems and reagents used by healthcare institutions, life science researchers, clinical laboratories, the pharmaceutical industry and the general public. The company has raised distributions for 41 years in a row. The stock trades at 13.80 times earnings and yields 2.50%. Check my analysis of the stock for more information. Medtronic (MDT : 45.73, -0.295) develops and manufactures a range of products and therapies providing a continuum of care to diagnose, prevent and monitor chronic conditions. The company has raised distributions for 35 years in a row. The stock trades at 12.40 times earnings and yields 2.50%. Check my analysis of the stock for more information. Financials Aflac Incorporated (AFL : 51.57, 0.485) is engaged in providing supplemental health and life insurance, through its subsidiary, American Family Life Assurance Company of Columbus, which operates in the United States and as a branch in Japan. The company has raised

distributions for 30 years in a row. The stock trades at 8.60 times earnings and yields 2.60%. Check my analysis of the stock for more information. Materials Air Products and Chemicals, Inc. (APD : 87.89, 1.19) has a portfolio of products, services, and solutions that include atmospheric gases, process and specialty gases, performance materials, equipment, and services. The company has raised distributions for 30 years in a row. The stock trades at 15.20 times earnings and yields 3%. Check my analysis of the stock for more information. Industrials Emerson Electric Co. (EMR : 56.485, 0.12) is engaged in designing and supplying products and technology, and delivering engineering services and solutions in a range of industrial, commercial and consumer markets globally. The company has raised distributions for 56 years in a row. The stock trades at 19.50 times earnings and yields 3.10%. Check my analysis of the stock for more information. United Technologies Corporation (UTX : 91.69, 0.61) provides high technology products and services to the building systems and aerospace industries worldwide. The company has raised distributions for 19 years in a row. The stock trades at 16.60 times earnings and yields 2.60%. Check my analysis of the stock for more information. Energy Chevron Corporation (CVX : 118.59, 0.19), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company has raised distributions for 25 years in a row. The stock trades at 8.70 times earnings and yields 3.30%. Check my analysis of the stock for more information. Kinder Morgan Energy Partners, L.P. (KMP : 85.45, 0.45) operates as a pipeline transportation and energy storage company in North America. The partnership has raised distributions for 16 years in a row. The units currently yield 6.50%. Check my analysis of this MLP for more information. Enterprise Products Partners L.P. (EPD) provides midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals in the United States and internationally. The partnership has raised distributions for 15 years in a row. The units currently yield 5.30%. Check my analysis of this MLP for more information. It is important when you build you income portfolio is to aim at being diversified. Holding at least 30 individual stocks is essential to ensure that income is relatively diversified. While the list above includes 20 stocks, with heavy representation from Consumer Staples stocks. I have found that over time new companies could become attractively priced, and thus be added by the

enterprising dividend investor. It is important to be diversified, but do not diversify at all costs. For example technology companies are in an industry characterized with rapid technological advancement and obsolescence of existing products. As a result, tech companies might have to invest large amounts each year simply to stay competitive. This leaves little money for establishment of a consistent streak of dividend increases. In addition, it is also important to build your portfolio slowly, by dollar cost averaging your way into positions. It is also important to focus on entry price as well, since overpaying even for quality stocks can lead to subpar returns. Investors should also remain flexible in their investment approach. They need to focus on the big picture, and not get lost in the details. Of course. dividend investing is a buy and monitor, not a buy and forget type of investment strategy. Investors should monitor each investment regularly, and decide whether it makes sense to buy more, simply hold on or sell right away. Once invested, I would look for opportunities to add into shares of other companies. By accumulating dividends in cash, and then selectively initiating shares of quality dividend stocks over time, the investor would be able to diversify their portfolio even further, while also compounding their capital as well. To summarize, the companies above represent great buys at current valuations for a portfolio in 2013 and beyond. By monitoring your portfolio holdings, adding funds, and reinvesting dividends, your passive income stream will eventually lead to your dividend crossover point.
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