Investing & Retirement: The Dividend Effect

Some of the most influential investors recognise the value of dividends. Investors use dividend paying stocks to build their portfolio or to supplement their income. Regardless of the reason, utilising stocks that pay income is one of the best moves you will make.

The truth is there are millions of equities on the markets but not all are worth your time, and as such, all dividend stocks are not the same, so here are five tips to keep in mind when choosing dividend stocks:

  1. Consistency

An excellent indicator of a company’s profitability is consistent dividends. Dividends are paid from the company’s earnings so if a company is doing well; shareholders will be rewarded likewise if the business is not performing then dividends will be affected. Equities that continually pay dividends for an extended period, e.g. five years or maintained payment during a financial crisis illustrates a stable company worth considering.

  1. Companies You Know

Think about the bank [NYSE: BNS] you have been saving with since you were a child, your favourite cereal [NYSE: K] or the phone [NYSE: AAPL] you are addicted to, chances are the company is listed on the stock market. Since you trust them to use why not consider them for your portfolio, odds are they have been around for a long time and that is a good indication of great management.

  1. Diversification

If you do not remember anything else from this article, remember this, diversification is essential! Putting all your money in one security or one industry exposes, you to unnecessary risk and while you cannot avoid all risk associated with investing, being smart about the risk you take will save you much grief. Remember the saying, don’t put all your eggs in one basket.

  1. Risk – Reward

Speaking about risk, it is true that the greater the risk, the greater the reward but there is also a flip side. The key is to understand your risk tolerance. Are you an aggressive, moderate or conservative investor?

CenturyLink [NYSE: CTL] has a dividend yield of 10.68%, while AT&T [NYSE: T] has a dividend yield of 5.13%. The difference between these two stocks other than a 5.55% yield is the risk you will undertake in owning shares; CTL is a volatile company that was recently slapped with a $12 billion dollar lawsuit. Meanwhile, T has just completed a merger with Time Warner Cable making it one of the largest and most diversified companies in the US.  Which one would you?

  1. Reinvest Your Dividends

If you do not need the income immediately, reinvest. Your portfolio will thank you as it grows, even without you adding to the principal amount. This policy allows for stable growth and will benefit you long term, imagine reinvesting the income from ten securities that you invested in for the next five to ten years. Your portfolio would grow not only in price appreciation but in value as well.

There is no one size fits all in investments but understanding is important. Remember no one woke up knowing everything about investing, everyone started with the basics.