Source: sxc.hu Photo: penywise

Investing for dividend income is a smart way to invest in the market and participate in the profits of successful businesses. Sure, the income from dividends might not be as tax efficient as long term capital gains, but there are many other benefits. Depending on your goals and your situation in life, a well constructed dividend income portfolio maybe something to consider.

Is Dividend Investing the Same as Income Investing?

Great question. Sure, dividends are income so all dividend investing is income investing. But income investing can be done in a variety of ways, stock dividends are only one of them. The interest or coupon payments on bonds is also one way of income investing, and so is private loans to individuals or businesses, either negotiated as a commercial note or done through online debt exchanges such as Prosper or Lending Club. Income from rental property also classifies as income investing. When you compare interest income vs. dividend income or even rental property income, keep in mind that their tax treatments can be quite different. Interest income typically earns the regular income tax rates, while dividend income may be taxed at a lower rate. The income tax laws regarding dividend income keep changing, but the tax rates are generally the same or lower than regular interest income.

You Should Consider a Dividend Portfolio if any of the Following is True

• You are retired or are close to retirement and need a regular, fairly dependable income stream to live on without having to sell your investments
• You have a full time job or a business and want to invest in unrelated businesses (diversify your income) and generate additional passive income through dividends
• You are investing for the long term and are looking for an easy way to find profitable companies to invest in. Dividend paying companies are typically better managed, and the cash flow is less likely to be misrepresented as real cash needs to be paid out to the shareholders as dividends
• You are looking to invest in DRIPs (Dividend Reinvestment Plans) either for yourself or may be to teach a child about investing using DRIPs. DRIPs allow you to bypass a traditional stock broker and their fees for the most part and invest directly with the company, and you get a real stock certificate in your name.
• You want the peace of mind that can only come when the stock you invest in shows you the real cash.

Frankly, I like dividend stocks just because they throw up cash that I can than use to make new investments. This allows me to stay fully invested in my stocks so I do not miss those precious few days of stock appreciation in any year that make all the difference between a great performance and a dismal one. Whatever your reasons may be, there are many choices available to you as you select stocks that you want to include in your dividend income portfolio.

Your Investing Choices

Depending on your income requirements, the amount of risk you want to take, as well as the level of complexity you want to handle in your taxes, you may want to integrate one or more of the following types of investments in your portfolio.

1. Stable no or little growth dividend payers: Most utility companies fall in this category. While these companies do not expect to grow much or grow their dividends much in the future, these companies have a stable customer base, predictable revenue streams and typically some sort of regulatory protection that keeps competition away. You will be rewarded with a predictable quarterly dividend stream and you can sleep better at night knowing it is unlikely that these companies will disappear overnight (Enron and Calpine were exceptions, they went way beyond what a typical staid utility companies do). They also generally pay higher dividends. 4%-6% dividend yield is not uncommon. Two examples are DTE Energy and Southern Company. Beats putting money in a CD any day.
2. Dividend growth companies: These companies have a long history of not only paying uninterrupted dividends, but they also grow their dividends every year as their business grows. Johnson and Johnson is my favorite, but of course there are many others. It is not uncommon with these companies to find after decades of ownership that the dividends you are getting now every quarter per share are actually more than the original investment in each share of these companies. In other words, you get paid back and more. If you reinvest these dividends in more shares, you actually compound your dividend income even faster. Pretty powerful!
3. REITs: Real Estate Investment Trusts, or REITs, technically do not pay dividends. The trust payments are classified more as a traditional income. Still these are structured and more liquid way of enjoying real estate/rental income without the hassle of property management, mortgage negotiations, etc. REIT income yield can be high, but depending on what the REIT invests in, you may be on a riskier territory. If you want to go this route, make sure you understand what the REIT is investing in. For example, a REIT that invests in hospitals and medical offices maybe safer than a REIT that invests in developing Florida marshlands for baby boomer retirees.
4. Royalty Trusts and Master Limited Partnerships: These are less understood but can be highly lucrative. Royalty trusts and MLPs also in the strict sense of the word do not pay dividends. Due to their corporate structure, they pay out a distribution to their unit holders. This distribution is directly linked to the profits in the business they are involved in, as profits technically flow through to the unit holder. As a unit holder, you are considered as a partner in the business, which means that you will receive a partnership K1 form for completing your taxes, which might get quite involved. You will definitely want to get a competent CPA for your taxes. Understand that many CPAs are also not properly educated on how these entities work. The yields can be very high and as a flow through entity, accounting expenses such as depreciation or resource depletion can be used to offset your income tax liability. The risk with US based Royalty trusts are that they will eventually dissolve. They are not allowed to raise new capital or fund growth so as the wells or mines are depleted, so is the income. An alternative is to invest in Canadian trusts (also called CanRoys) that have no such restrictions.

Most of the companies pay dividends on a quarterly basis. There are a few companies that pay annual or semi-annual dividends. REITs, MLPs and Royalty Trusts are your best bets if you are looking for monthly dividend income. Alternatively, you can structure a portfolio of quarterly dividend paying stocks whose dividend schedule fall on successive months. This way you are sure that you will be earning predictable income every month.

Post from: Personal Dividends. Subscribe to the original site Feed

Dividend Income Investing – Constructing a Dividend Income Stock Portfolio

Related posts:

1. Dividend Investing for Passive Income and Portfolio Growth
2. What is Income Investing?
3. Improving Cash Flow with Passive Income
4. Investing in Bonds for Portfolio Security and Modest Growth
5. Investing Money in the Stock Market – What You Need to Know

Source: sxc.hu Photo: dotblendz

If you have young kids or grand kids you have probably thought about ways of teaching them early about money. Teaching them how to invest is an integral piece of the money puzzle. Early exposure to investing teaches them about how business works, the difference between an asset and an expense, financial responsibility and the most magical concept in finance: compounding.

Stocks are great for teaching kids about the investing process, business and profits as well as the concept of ownership of a business. You may not want to open a brokerage account for young kids for them to buy stocks. It is just too easy for the kids (and most adults) to start speculating. The easiest way to get them started is by using what are called DRIPs. DRIPs stand for Dividend Re-Investment Plans and are offered by many well established and solid companies. They allow you to buy stock directly from the companies, and as the name suggests, any dividends paid can be re-invested back into the company stock automatically.

Why Investing for Kids with DRIPs make sense?

There are several key features that make DRIP investing ideal for kids.

• Most DRIPs have low investment requirements. In some cases, you can invest as little as $10 per month. This is great for kids who may not have too much disposable money to invest.
• Generally you do not pay a transaction fee or a brokerage fee for additional investments. Low costs means higher returns over a period of time.
• Automatic reinvestment of dividends. This can be very powerful as the children can see how over time their investments are compounding both in value and in the number of shares they hold. It also provides a direct correlation to the value of their investments with the profits of the companies they have invested in.
• DRIPs require physical stock certificates which can be very empowering and tangible to kids as a reminder that they own part of a real business. Stock certificates are also effective in curbing impulse selling and will force the kids to look long term in their investments.

How to Start a DRIP Account for Your Kids?

Starting a DRIP account is not difficult. Most companies require you to own atleast 1 share of stock that is registered in your name, or in this case in the name of the child. Once this share is purchased and a stock certificate obtained, you can contact the company directly to enroll in their DRIP program. Be sure to check the Investor Relations part of their website as well, as it might have more information on how to enroll or may even allow you to enroll in the DRIP program directly through the web.

There are a few ways you can buy the initial share of stock. You can open a discount brokerage account in your kids name, buy the share and than have them send it to you in the certificate format. Different brokers have different fees for buying a stock and registering them (to get a certificate), so you will need to check them with your broker. There are also specialty sites like OneShare and GiveAShare that will let you buy a single share of stock and register it to anyone you like.

There are also many companies who will let you buy the initial shares directly through them as you start the DRIP program. Regardless of how you do it, look into setting up a UGMA account for your child. That way the income will be taxed at the child’s rates and not your own.

How to Find Best DRIP for Children

Think about the products and services that your children are familiar with and will get excited about owning a part of the company. It may be Coca Cola or McDonald’s or Disney. Something that will remind them of their ownership as they go through their daily lives. These are the stocks that will most keep their interest. Listed below are a few stocks that you might consider. We have noted where you can buy the 1st share directly from the company:

As is the case with any investment, be sure you read the prospectus first and research the company before you decide to invest. You can get the kids involved in reading the annual reports as well.

Post from: Personal Dividends. Subscribe to the original site Feed

DRIP Investing for Kids

Related posts:

1. Dividend Investing for Passive Income and Portfolio Growth
2. Dividend Income Investing – Constructing a Dividend Income Stock Portfolio
3. DRIPs: Maybe The Best Investment in the Post Market-Crash Environment
4. Investing Basics: Fundamental Analysis
5. Socially Responsible Investing for “Values” Investors

Source: sxc.hu Photo: ilco

Now that the word “recovery” seems to appear more often than “recession” in the news media, many investors who have been waiting on the sidelines (and there are still quite a few of them) might be wondering what to do with their money.

• Is it safe to leave it in the hands of a third-party broker, post-Madoff?
• Is it safe to stash it in the money markets, post-lending crisis that “broke the buck”?
• Is it safe to put in your home, now that real estate prices clearly no longer always rise?
• Is it safe to leave it in savings account, now that even the FDIC is almost bankrupt?

These are some dramatic examples, and I’m not suggesting that all financial advisors or banks are untrustworthy.  But they do illustrate the breadth and scope of the risk that can extend throughout the investment world.  Even if you just held the most basic of financial instruments during the 2008-2009 credit crisis — like a mortgage, and a money market fund — you may not have been immune from the great market crash of this century.

So where does that leave you today?  You know you need to seek out more return than the average savings account, but you don’t want to be caught up in market timing – you just don’t have time for all of that.

Tread Carefully With ETFs

One great option lies with pure ETFs that passively track a broad-based index – you don’t need to do constant research, just put your money in and wait.  But choose carefully, because not all ETFs are pure passive index-trackers anymore.  Some include active management.  And some are far more risky than that, rebalancing daily and doubly or triply leveraged to the underlying index.  All this can wipe out your principal faster than you can think of the first three major bank failures in 2008.  Besides, you have to pay a commission fee each time you want to purchase an ETF, and on top of that they still include some management fees, even if these are much lower than your typical mutual fund.

The Perfect Investment?

What if there was a way you could invest in equities without paying any commissions or management fees, and still get the benefits of passive index investing?  This is where DRIPs come in.  Also known as DRPs (Direct Reinvestment Plans), or DSPs (direct stock purchase plans), the DRIP universe is quite large and varied.

The DRIPs I’m referring you to comprise a small galaxy within that universe.  These are the DRIPs with no fees whatsoever. You can purchase company stock and have your dividends reinvested for free.

“DRIP” is just a loose term for any one of these plans which allows you to buy stock directly through the company itself (not through a stock exchange) and in which, usually, the company has your dividends reinvested back in the same stock.  I like to think of it as a high-return savings account (with the added risk that comes with equities).

Top 5 Reasons DRIPs Are The Best Place For Your Money Now

1. No More Fees: Cut Out the Middle Man.  As I just mentioned, there are many DRIPs with companies that charge no fees to purchase or reinvest your dividends back into the stock.  This beats even the lowest management fees on any Vanguard ETF. You’ve just lost a ton of money in the Great Recession.  Why pay more than you have to again, now?
2. Invest In What You Understand.  Face it, do you really know how your money market fund is structured and how it produces its returns?  What could be more simple than owning shares in Coca-Cola or PepsiCo?  At least if you buy the stock, you can get some of the money back on all the Pepsi products you have consumed over the years.  DRIPs are very simple products.  The company grows, it makes money, and it gives some of its profits back to you.  You can make things even simpler by choosing a company that sells simple products, like beverages.
3. More conducive to dollar cost averaging.  Broad consensus says that dollar cost averaging is better than trying to time the market.  You don’t have to sit around reading the news or paying attention to what the S&P is doing.  Just invest the same amount on a monthly basis.  This can really add up if you’re DCA-ing with an ETF and you’ve got a monthly commission plus that 0.5% MER.  With a fee-free DRIP, you don’t have to worry about monthly charges like this.
4. Stronger Companies, and You Don’t Have to Stock-Pick.  Companies with DRIPs are companies with a history of paying out dividends, which means they are usually more mature companies within their sector and have a stable cashflow payout.  This already means the company is less risky to you as an investor.  If the company is in trouble, it can always reduce its dividend a bit to drum up some cash before needing to dilute its shares on the market.  Also, a public history of stable dividends is a great way to show a company’s strength.  For this reason, some companies fiercely protect their dividend stream.  Because of this, there is much, much less stock-picking and screening for you to do.  Stick with the companies that provide free DRIPs and which also increase their dividends regularly and you’ve already screened them out on two levels of risk.
5. Get In Now While Dividend Payouts Are Still Low.  During the depths of the recession, some companies reduced their dividends in order to better buffer their cashflow positions.  In most cases, dividends have still not recovered from the crash.  This means there is still more upside.  If you invest more money in these companies now, you will benefit even more when they do start to raise dividend payouts again.  A dividend increase is a healthy sign of earnings growth, which can cause the share prices to rise.

DRIPs Aren’t Risk Free, But They Are Risk-Reduced

All this being said, just because a company has a DRIP doesn’t mean it is a great company with no risk.  Once you’ve identified a handful of excellent DRIP plans, you should still do some basic initial research and evaluation of the company to determine whether it’s a good long term investment.  The best DRIPs are those with companies that show signs of success over the long term and prospects for consistently rising dividends.  And remember:

All DRIPs are different. The ones I am recommending you consider are those that do not charge you any fees on neither optional stock purchases NOR dividend reinvestment.  Of course, it is your investment: if you decide that a company’s stock is worth the fee you might pay, that is up to you.

How To Find and Enrol in a DRIP?

How do you know if a company has a DRIP?  Go to its website, click on “Investor Relations,” (or “Investor Center”) and you will usually find an FAQ section or a “Shareholder Services” section.  Here you will see whether they have a DRIP or not.  Read the DRIP prospectus to find out whether there are fees involved with the DRIP.

Best bets for finding DRIPs are with the large, stable dividend-payers like utilities companies, consumer products, some banks, and telecommunications companies.  Home Depot has a DRIP, as does Johnson & Johnson, Walt Disney and Kraft.

To enrol in a DRIP, just follow the instructions from the company’s website.  They will be slightly different for each company.  You will end up dealing with the company’s transfer agent (which is like an administrative assistant) – Bank of New York Mellon, Wells Fargo, Computershare are the big ones.

DRIPs just might be the best solution for your money today.  They are a nice “middle road” between active and passive investing; they will give you greater return with less risk than simply owning a basket of all the good stocks with all the bad stocks, and they’re easy to understand.  Some even call them “training wheels” for learning how to invest in equities more generally.  They’re great for beginners, and many use them to give as gifts to their kids to get started in investing.

Whether you end up investing in DRIPs or not, it’s definitely worth your time to give them some good consideration.  For more information, see the quick guide I wrote on on how to get started in commission-free, fee-free investing.

Post from: Personal Dividends. Subscribe to the original site Feed

DRIPs: Maybe The Best Investment in the Post Market-Crash Environment

Related posts:

1. Dividend Investing for Passive Income and Portfolio Growth
2. DRIP Investing for Kids
3. Dividend Income Investing – Constructing a Dividend Income Stock Portfolio
4. Investing Money in the Stock Market – What You Need to Know
5. Separately Managed Accounts could be a good investment management option

Photo: David Niblack

Among the buzzwords you hear a great deal when you read about finance and investing is “passive income.” One way that you can earn money in a regular income stream, passively, is to invest in dividend paying companies. These are companies that regularly pay out a portion of their profits to shareholders, called dividends. “Dividend” is derived from the Latin “dividendum”, which indicates something that is divided. In truth, in ancient times it probably meant spoils of war or portions of some trade venture parceled out to participants. Today, many companies keep a portion of their profits (referred to as retained earnings), and if there is anything left over, it is divvied up and distributed amongst shareholders according to how much equity they have.

Dividends are paid monthly, quarterly, semi-annually or yearly. A special dividend may be issued at any time, if a company feels it is warranted. This is in addition to a regular dividend. While normally paid in cash, it is possible for dividends to be settled as store credits (if the investment is in a retail consumer cooperative) or as shares in the company (these are either bought on the market or created new). When you hold shares in a dividend paying company, you can receive regular cash payments without doing anything other than hold the stock.

Dividend Investing with Dividend Reinvestment Plans (DRIPs)

One of the most popular ways to take advantage of dividend paying companies is to invest using dividend reinvestment plans. Instead of receiving a regular cash payment, your dividend is used to automatically buy more shares in the company. It is like receiving free shares. You do not have to actively buy them, and in many cases you avoid the transaction fees that come with making purchases of additional shares. DRIPs can be a way to help grow your investment portfolio for the future. It is a plan that delays the gratification of receiving cash until a later date. You don’t get the cash as part of a regular income stream, but you do end up with a larger portfolio. If the company’s stock does well, a DRIP can lead to higher returns overall.

Many companies offer DRIPs to stock holders. In fact that there are more than 1,000 dividend paying companies, and a large portion of them offer DRIPs. Most banks and other financial institutions pay dividends, and many offers DRIPs. Some other companies that offer DRIPs include:

1. General Electric (GE)
2. Kraft Foods (KFT)
3. AFLAC (AFL)
4. Allstate (ALL)
5. Merck (MRK)
6. Marriott International (MAR)
7. Exxon (XOM)
8. IBM (IBM)
9. Intel (INTC)
10. Verizon (VZ)
11. UPS (UPS)
12. Wendy’s (WEN)
13. Hershey (HSY)
14. Waste Management (WMI)

It is important to understand that DRIPs often come with requirements. Some companies require that you own a minimum amount of shares before participating in a DRIP. Others insist that shares in the company be held in your own name, rather than in the name of a brokerage. There may also be restrictions on when you can sell your shares if that need arises. Before you invest, you should understand the requirements expected by the companies. You should also be comfortable with owning fractional shares.

DRIPs encourage good investing habits

Another often overlooked advantage of owning a stock through DRIPs is that it forces your portfolio to do ‘dollar cost averaging‘. This is a method of investing where same amount of cash is invested each period to buy additional shares. When the stock price is high, less number of shares will be bought and when the stock price is low, more number of shares will be bought. This has an effect of keeping the cost basis of the shares low.

Even if you chose to do your investments through a broker (keeping your shares in street name as opposed to taking a stock certificate), you may still be able to set up a dividend reinvestment program. Many brokers today offer an option to reinvest your dividends in additional shares as the dividends are received. Most such offerings are complementary, meaning you will not be charged additional transaction fees or commissions. If you would like to know more about this, please check with your stock broker.

Dividends in funds

It is possible to include dividend paying stocks in funds. Mutual funds and ETFs often include dividend paying stocks. The advantage of owning funds that focus on dividend paying stocks is that your dividends could be more frequent and uniform than if you had owned a few stocks directly. This is because the funds can be more diversified than a individual portfolio can be and while it may own a few stocks that pay semi-annual dividends, it probably also owns many other stocks that pay quarterly or even monthly dividends. You should realize that, even if your fund is tax advantaged, you may have tax obligations on the dividends you earn.

Dividend paying stocks can be of great benefit to you, whether you choose to use them as a source of passive income immediately, or whether you decide to use DRIPs to grow your portfolio for the future. However, it should be remembered that dividends can be cut. In these economic times, many companies have slashed their dividends in order to reduce costs. You should understand that, just like any other investment, there is the risk that the returns will not always be as high as you would like.

Photo: David Niblack

Post from: Personal Dividends. Subscribe to the original site Feed

Dividend Investing for Passive Income and Portfolio Growth

Related posts:

1. Dividend Income Investing – Constructing a Dividend Income Stock Portfolio
2. What is Income Investing?
3. Investing in Bonds for Portfolio Security and Modest Growth
4. Improving Cash Flow with Passive Income
5. DRIP Investing for Kids