Investing For Dividends

By Author: kelly15501
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Looking for a relatively safe investment that will provide you with a continual return on your investment? Stocks from companies that return dividends every year allow you the option of dividend reinvestment to increase the value of your stock. Dividend reinvestment uses the compounding principle to provide growth in your investment over the years you own it by allowing you to buy partial shares with your dividends. In addition, a dividend reinvestment strategy allows you to switch between receiving dividend income on a regular basis and a reinvestment strategy as your financial situation changes during your lifetime.

Important Things to Understand

*Your choice of stocks in which to invest should not be driven by the highest dividends paid by a company. A higher annual dividend may not always be an indicator of a financially strong company.

*A company can choose whether to constantly increasing its annual dividend, or offer a dividend in the same amount each year, or cut its dividends if necessary. Following a company's track record for dividend payments will provide some insight of what to expect ...
... in future years. If a company has a single year reduction in stock dividends, it is important to understand the reason for the reduction. It could point toward a more fiscally responsible company than you might otherwise think. Remember that a dividend is voted upon by a board of directors whose job it is to ensure the company's future.

*The requirement to pay annual dividends usually keeps a company from hoarding cash and instead incorporates a strategy toward investing in its own future.

*It is important to understand financial statements such as a balance sheet and statement of cash flow because they will tell you more about solvency than a simple income statement that may indicate profit or loss, but does not determine whether a dividend payout will happen. Dividend payouts are ultimately determined by a company's cash flow.

*An investor's choice of solid stocks that generate dividends will help to diversify their overall investment strategy, but only if the "right" stocks are chosen.

Things to Look for in Dividend Generation Stocks

*Invest in a company with a wide spectrum of products that people use everyday. In that way, an already diversified portfolio becomes further diversified through the selection of a company with a wide range of products. A highly diversified company can also more easily weather an unexpected downturn in the market.

*Companies that pay a slow, but steadily increasing dividend are usually a better choice than high yield stocks that may be cutting their future dividend due to fluctuations in their business.

*A dividend generating stock from a company that regularly buys back its own outstanding stock will usually net you a bigger share of dividends in the long run. Everything else being equal, the fewer shares on which the total voted dividend is based correlates to a higher dividend per share.

*Do some basic math. For example, [annual dividend per share] divided by [cost per share] will yield a percentage that you can easily use to compare your return on investment (ROI) between your stock choices. Of course, this is only one of the many pieces of information on which an investment decision is made.

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