Stock Market Information

When examining a dividend paying stock, one of the most important things to keep in mind is the potential for that dividend to grow as you hold onto it. This is due to the fact that in today’s environment, low yields are much more common than high dividend-yielding stocks (and those that have high yields are dangerous, just look at the financial sector right now), so you’ll want to rely on dividend growth in the future to pad your performance.

An ever increasing dividend with a low yield now is much more valuable than a high dividend that remains flat as the years pass. When analyzing a stock and looking at it’s prospects, there’s a very simple formula to keep in mind:

Dividend Yield + Dividend Growth = Prospective Return

Remember that much of the dividend investor’s performance is driven by a long term buy and hold strategy coupled with a rising dividend stream as you hold it. You should be willing to hold onto a company as long as the dividend stream continues to grow and the company’s future prospects remain relatively firm. The market price at any given moment is less important when you’re focused on dividends. It still does have it’s place, however, especially when accounting for your total return in the event that you have to (or want to) sell stock in a particular company.  When selecting stocks, you’ll likely want a minimum return (like 10%) in order to make buying them worth your while. This will be fueled by the company’s growth as well as rising dividends.

When it comes to being a dividend focused investor, it’s important to understand the strategy you’re employing and why. According to research done by Wharton Professor Jeremy Siegel, dividends are what has driven much of the market’s growth historically, and so it’s important to take at least a part of your portfolio and devote it to long-haul, usually large cap companies that give out hefty dividends as a reward for being a shareholder. If you’re curious as to what exactly entails a dividend, here’s the exact definition (courtesy of Investopedia:

A distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield. Dividends may be in the form of cash, stock or property. Most secure and stable companies offer dividends to their stockholders. Their share prices might not move much, but the dividend attempts to make up for this.

So with that said, what should you look for when seeking out a great dividend-oriented company? Historically speaking, banks and other financial institutions were a great place to start, and many dividend-focused ETFs and other mutual funds were heavily weighted in that sector. Given the recent subprime mess and credit crisis affecting many banks, however, the risks are much higher than what they were previously. If you’re in it for the long haul (as you should be if you want superior performance), you’ll want a company that continually pays a dividend and continues to increase that dividend payout each year at the rate of inflation or better. In future posts we’ll take a more detailed account into what it means to be a dividend investor and why it could be a lucrative strategy for anyone looking for performance over the long term.

The hardest part of getting started with investing in the stock market is the sheer amount of information available at your finger tips. From complex quantitative analysis to Jim Cramer blaring his latest recommendation on CNBC, it can be hard just to get things straight and form your own opinion. With that in mind I’ve compiled a short list of 5 books that would be a welcome addition to any beginner’s repertoire.

• The Only Investment Guide You’ll Ever Need by Andrew Tobias: Tobias presents a lot of information in an entertaining and witty writing style. While most people fall asleep trying to read an investment book, you’ll actually be able to breeze through mutual funds, bonds, and treasury bills. A great all around introduction to the subject of investing.
• The Random Walk Guide to Investing by Burton Malkiel: If you want to talk about someone who shares my hatred for debt, this author is your man. He also likes to keep things simple: Establish an emergency fund, make regular investments to a diversified portfolio of index funds, and utilize patience.
• The Bogleheads’ Guide to Investing by Larimore, Lindauer, and LeBoeuf: John Bogle is one of the most well known index investors of all time (and founder of the largest mutual fund company that encourages index fund investing too!) These authors follow the Vanguard’s founder enthusiasm for investing and help the average investor understand things like mutual fund investing and asset allocation.