Investing in Dividend Stocks
Investing in dividend stocks is really the ideal of money management. We’ve been discussing asset management in a crazy economy and most recently looked at financial companies. Today, we’ll look at investing in dividend stocks. In times past, you could simply buy stocks that paid solid, healthy dividends and know that your portfolio would be growing as the income grew. If you needed to live off of this income, it right there for you. Investing in dividend stocks pays you the investor every year while most stocks don’t bother to.
Unfortunately, interest rates have gotten so low in recent decades that there are very few options to do this today. Today if you see a stock with a big dividend payment, your first question should be, “What’s wrong with this company?” Investing in dividend payers is much trickier than it should be in this market.
However, there are a couple ways to approach this topic in today’s environment….
1) First, we can know what to look for and be ready for wonderful companies paying strong dividends to get to such a low price that these dividends are once again exciting to collect. Because we believe that the stock market will go much lower, we also believe that incredible bargains and opportunities will present themselves.
Historically, when the stock market really bottoms out (not the fake bottoms which usually occur on the way down), the stock market will get cheap enough that dividends are paying out at 5-8% across the board. Obviously, higher dividend paying stocks will be higher and lower dividend paying stocks will be lower, but this type of environment usually appears. But it come after such a hard market downturn beats most investors into oblivion such that they never want to invest in stocks again. When the stock market is this hated, and everyone agrees that you can never make money in stocks, then a bottom is formed! This is when plentiful dividend payers can be found.
Since most people don’t want to short stocks, the best thing might be to wait and make sure that you are ready to pounce when this day comes. Investing in dividend stocks takes good timing today. Remember, you’ll have to fight against your gut which says the stock market only goes down. You’ll have to fight against your friends and the media which says the same. This is when you know you’re at a bottom! This is when stocks pay the highest dividends.
2) The second thing to look for is the fact that there are still some companies which are today paying good to great dividends. You want to be careful to look and make certain that the company is strong enough even in hard times to continue paying this dividend. Because not only do you lose your planned dividend payment when it is cut, but the market doesn’t like it either and so the price of the stock will immediately drop. A double whammy!
A similar investing idea is to invest in blue chips. Often a company might be both a blue chip and a strong dividend payer, although these aren’t always the same list. You can look for the companies in the US or internationally.
In the next post of this series, we’ll look at the advantages of “Investing with the Masters”. If you have any thoughts or questions on this or other topics, please let us know.