Investment is always a balancing act. One one hand, you want to earn the best possible return on your money. On the other hand, you'd like to take as little risk as possible. Finding a comfortable spot between those two often-contradictory goals isn't easy, which is why financial advice is such a lucrative business. One investment that can often provide excellent returns with a reasonable degree of safety is dividend stocks. It might make sense to increase their presence in your portfolio.
About Dividend Stocks
Companies handle their revenues differently. Some accumulate large cash holdings to fund acquisitions or insulate themselves against hard times. Others court investors by paying regular dividends. These are a portion of the company's profits, allocated either as a set dollar amount per outstanding share or as a percentage of profits divided among the outstanding shares. This provides a reliable source of income, even if the underlying stock is flat or experiencing sluggish growth.
Choosing Dividend Stocks
The best dividend stocks for conservative investors are stable companies with good fundamentals and consistent management, operating in mature industries. Bear in mind you aren't looking for a home run: These aren't the kind of stocks that become the next Google. You're looking for secure, reliable companies that will be around for the long haul, providing moderate dividend income and steady long-term growth. A good starting point is your own cupboards. They're probably full of brands that you've known all your life, and everybody you know buys them. That's the kind of company you're looking for.
Dividend Stocks in Mutual Funds
There are literally thousands of mutual funds to choose from, and most of their highly skilled professional money managers also appreciate the value of dividend stocks. Read the prospectus for any given fund to find out how much of its portfolio is in dividend stocks. Typically you'll find them described as "income" or "growth and income" funds. Choose a low-cost fund with no loads or back-end loads, so all of your investment goes directly into the mutual fund instead of paying sales commissions.
The Value of Dividends
Dividends benefit your portfolio in a lot of ways. At the most basic level, they increase the return on your investment in a given company. However, they can be used more creatively. Re-invest your dividends in the stock or fund, if you don't need the income. Over time, that means owning a lot more shares than you could pay for from your earnings. Alternatively, you could also use the dividends to invest in high risk, high-yield funds or equities. That way you can try for a home run, while keeping your capital relatively safe. In time of need, you can also withdraw the dividends as taxable income.
- "The Wealthy Barber: A Common-Sense Guide to Successful Financial Planning"; David Chilton
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