Financial Goals of Dividend Investing

Posted on by Ryan

When you decide that you want to become an investor, one of the first things you must do is map out your goals. Figuring out what goals you want to achieve with your investments will help you determine what type of investing you should do and what strategy you may want to use.

Your Goals are your Investing Guide Map

Your goal in investing is going to be your mission statement. The goals you set will help be a guideline for your investment decisions that you make in the future. When setting your goals, make sure not to be vague. Most people that are investing are obviously out to make money. The question is why are you trying to make money through investing. Maybe you want to invest in order to gain a higher return on your money so that you may be able to afford something in the future. Possibly you are investing so that you can build up a passive income from rents, interest and dividends to spend now or/and in the future. Whatever you decide, be sure to write out a clear goal statement and focus on it frequently as you advance through your investing career. Modify your goal if and when things change. Remember that it is OK if what was once your goal has now changed and you find yourself trying to achieve something different. Just make sure to formulate your investing plan with your goals in mind.

Dividend Growth Stock Investing Goals

There are a few different goals you may be interested in pursuing where a dividend growth stock investing strategy is a suitable approach.

Building a passive income from dividends for current needs

Rather then spend all your money from your paycheck, you may be interested in investing some money each month in dividend paying stocks. This will allow you to build up an investment portfolio over time and provide some supplemental income if you decide to take the dividends in cash to spend as the companies pay out.

Building a passive income from dividends for future needs

You may decide that you don’t need more of a current income to meet your current needs and wants. However, you don’t plan on working forever and someday that paycheck will quit coming in if you quit working. Building a portfolio of dividend growth stocks is a good way to build an income for the future. You can grow your portfolio quicker by reinvesting your current dividends and eventually the annual dividend income may be enough to cover your living expenses. At this time you can afford to not have to work for a paycheck and just live off of your dividend income. This is a good strategy for retirement.

Preserve investment capital

When you are looking for a safe investment to keep your money safe most people will thing of bonds. While bonds will help keep your principal safe, they don’t offer much in the way of investment returns. Another option if you are willing to take on a little more risk is dividend paying stocks. Stocks are definitely a riskier asset class then bonds. However, dividend paying stocks have typically been less volatile compared to other stocks. Dividend paying stocks offer a decent income component and if you select your investments wisely will give you better preservation of your capital then non dividend paying stocks. Compared to bonds, dividend paying stocks may be a little more risky in that you can lose some or all of your investment. However they also typically offer greater returns then you would receive by investing in bonds.

Good returns

Financial Risk Tolerance vs. Emotional Risk Tolerance

There have been studies that have shown that dividend paying stocks tend to outperform over time non dividend paying stocks. Also companies that annually increase their dividend payments tend to outperform companies that do not increase their dividend payments. So over the long run, we can hope that we will be getting the best return in the market from our dividend paying stocks of solid well known companies. You will probably be less likely to lose your money and earn a decent return from a Coca Cola type company compared to a company that you have never heard of and don’t understand how they make money. Dividend growth investors pick solid stable companies that have a history of increasing earnings and paying out increasing dividends. These companies perform well over the long run.

My Dividend Growth Stock Investing Goals

Personally, I am investing in dividend growth stocks for all the reasons I’ve listed above. I believe that dividend growth stocks will over time give me a great return with less risk to my investing portfolio. I understand that dividend growth stocks will pay me out an income this year that I can use for expenses if needed. My main goal when investing in dividend growth stocks is to build up a portfolio that will provide me with a sizable income later in life. I am 30 years old and have at least another 30 years of working for a paycheck. However, I’d like to build up a portfolio of dividend stocks that eventually will pay me enough income that I can retire if I want. I will be able to use the income from my portfolio to pay my expenses without ever having to sell any of my stock assets and decrease my portfolio.

So for my goal I have a long journey ahead of me. Short term I measure my success by tracking my dividend income on a monthly and annual basis. I expect to see these income numbers rising as time passes and if this is happening I will know I am on the right track towards achieving my investing goals.

In Conclusion

Before you get started investing, make sure to take a moment and think about what you are really trying to achieve. Figure out your goals and use them as a guide map for your investing decisions in the future.

Investment Risk Explained

Posted on by Ryan

What is Risk?

We are often told to take risks in life, but what does risk mean when it comes to investments? Risk is defined as a source of danger or possibility of incurring loss or misfortune. For example, you are taking a risk when you decide to go out the night before a big exam instead of study. You might end up failing your exam.

At first, risk sounds entirely unnecessary. Why would you do something that could possibly lead to misfortune? When you take a risk, you are not just setting yourself up for a possibility of failure, but you are also setting yourself up for the possibility of something extra.

You took the risk of failing your test so you could have a good time going out the night before. If you did not take that risk, you might have spent the time studying, but you wouldn’t have been happy staying home.

What does risk have to do with investing?

Risk plays a huge role in investing. An investment can be risky to varying degrees or risk-less. Risk-less investments are those investments backed by the governments such as government bonds or and FDIC insured savings account. Because the government backs them, you are guaranteed to get your money back. The only problem with risk-less investments is that you usually won’t get a very high return.

You have to take a risk to get a higher return which is why there are risky investments. The higher possible return on the investment, the riskier it is. The riskier the investment, the less likely you will get a return at all or even your principle investment back for that matter.

Why buy risky investments if you might not get it back?

Simple answer, a riskier investment gives a higher return. Sure, there’s a chance you might not get your money back, but that’s why you need to research your investments and weight the risks.

If you notice there are bonds for sale that offer 25% interest for a new start up company, you can’t just buy it and think “Well, I might get my $1,000 back and if I do I’ll get $1,250 back.”

Look into the company. Does it show promise? Do they seem like the’yre the kind of people that will pay you back? 25% interest is very high for a bond which would make it very risky.

On the other hand, there might be a bond that promises 8% interest from a company that has been around for a while and that you may have bought from before. Should you invest your $1,000 in this company for 8% or stay save and invest in a government bond for 4%?

This is where you need to way the risk. You decide if it’s right for you. Remember that if you don’t take any risks, you will continue to get a small return. The stock market is full of risk. You could invest in the stock market for the next 50 years and get a low historical average of a 10% return, or you could stay safe and invest in 4% interest government bonds.

Taking a little risk could mean thousands or even millions of dollars for you.

Should I always take the risk?

Generally, if you are young, take more risks, if you are older and nearing or in retirement, take very little risks. As a teenager or someone in their 20s, if you lost $25,000, you still have 20 to 30 years to get it back. If you lose that money when you are 65, you could be cutting into your living expenses in retirement.

Understand your risk and don’t always take the safe route. Take the risk and you could end up enjoying a much richer retirement sooner because of it.

Understanding Margin Investing

Posted on by Ryan

Almost all stock brokerage firms offer margin trading, which is essentially borrowing money from them to purchase more stocks. Many investors do not understand margin trading or whether or not it is good for them.

Deciding whether or not to borrow on margin is a business decision like any other. When you borrow on margin, you are borrowing money to buy stocks, using the stocks you currently own as collateral. If you think the stocks you will buy will significantly outperform the margin rate you pay, then borrowing on margin may be good for you.

Why Use Margin When Trading?

For example, let’s say you have a very large asset base, let’s call it $10 million. You believe the market is incredibly oversold, as it was a couple weeks ago. You want to borrow money to invest in the market. Deciding to borrow $2 million, paying 5% interest. You believe that you can make 15-25% on the money you borrow, well above the interest rate you are paying. In this case, borrowing the money on margin looks like it will make a good payoff.

As you can see, the three key factors here are the margin rate you are paying, the amount you can make off of the money you borrow, and your risk tolerance. The above example, however, is a very optimistic one. Most of the time, for people with average or small asset base, margin rates are very high, generally 8.5% or more and can easily be 10% or more. Furthermore, the market returns about 10% a year on average, so most of the time, borrowing on margin mean taking on a lot of risk for potentially very little reward.

Margin Trading Risks

What exactly are the margin risks? Well, besides the fact that you are betting more money, so you can lose more money, you also risk a margin call. Let’s say you have $50k and borrow $50k on margin. The market gets pummeled, and your $100k in total investments ($50k yourself plus $50k you borrowed) drop down to $70k. At this point, there’s a very good chance you’ll receive a margin call. The broker will demand that you sell securities (or put up additional funds) so that you reach a certain level. For example, the federal government requires brokers to have at least a 25% maintenance requirement, though most brokers have a higher number.

Let’s say your broker has a 30% maintenance requirement. Since you borrowed 50k on margin, you will need to maintain an overall balance of about $71k or more before receiving a margin call. If you get a margin call, you will need to put up more money from your bank account or start selling securities.

Let’s say, in the $50k +$50k example that you’re somehow forced to sell all of your securities after your balance dropped to $50k. Now, all you have is $20k minus what you paid in margin interest. Even though the market only dropped down by about 30%, you ended up losing over 60% of your funds since you leveraged yourself.

As you can see, margin trading involves a lot of risk. It should only be done by expert investors who know what they are doing and can get access to a decent margin rate. For average investors, margin trading is generally a bad idea.

What Are DRIPs? – Dividend Reinvestment Plans

Posted on by Ryan

DRIP stands for Dividend Reinvestment Plan. Sometimes you have the option to participate in a Dividend Reinvestment Plan, or DRIP, when buy stock in a company. It is very simple. When you buy a stock you can choose to have all the dividends reinvested in the stock.

For example, let’s say you buy some stock from CVS. If you buy 20 shares of stock and they pay dividends of $.50, you will receive $10 in dividends. Instead of paying you, they will automatically reinvest it and buy you more stock. If they stock cost $20 per stock, they will buy you ½ of a share of the company.

How can you participate in DRIPs?

Some stock brokerage firms will give you the option to participate in DRIPs through them. With fidelity, they will automatically reinvest your dividends for you in more stock.

You can also participate directly with the company. You can send a check directly to the company and pay much smaller fees. It is also better because you don’t need to buy a large amount of stock shares, you can start very small sometimes as low as $100.

For example CVS’s plan of how to invest directly to a DRIP, see CVS’s plan here. With this plan, there is not transaction fee for the reinvestment of dividends.

Why should you use a DRIP?

Investing in DRIPs is a great way to start investing when you have little money. You can invest $100 in a company directly and watch it grow through capital gains and reinvested dividends. By reinvesting dividends, you will also receive more shares.

Some plans require you to own one share of stock to start. If you are investing directly, it is easiest to just buy a share online through sites such as oneshare.com or singleshare.com. You can also purchase these as gifts for children.

If you are interested in investing and you don’t want to have to invest $1,000 or more to start, you should consider participating in a DRIP. You can also invest very inexpensively through fidelity.com. Their commissions are on $4.95 per transactions and you can invest as little as you want.

Give it a try and start making money! If you are under 18, you should talk with your parents for help.

What Is A Money Market Fund?

Posted on by Ryan

Money market funds are very similar to mutual funds. With a mutual fund, your money is pooled with other investor’s money and it is all divided among many different investments.

Money market funds are the same, except the money is invested in government securities. They are not federally insured like general savings accounts, but they are lower in risk than regular mutual funds.

What types of securities will my money be invested in?

Money market fund accounts invest in highly liquid and low risk securities. Liquid means that it can be taken out very quickly. A savings account in your bank is highly liquid because you could go to the bank and take out money right away. Real estate has low liquidity because it would take time to get the money back that you invested into it.

The government securities that they invest in are usually certificates of deposit (aka CDs), commercial paper of companies, and other short term investments. In the U.S. these funds are regulated by the Securities Exchange Commission or SEC.

How do Money Market Funds work?

The value of a money market fund is always $1. The value doesn’t fluctuate like a share of stock, it earns interest similar to a bond. The securities always include short term bonds that reach maturity in 90 days or less. This allows for low risk.

If you are interested in investing in a fund, I would suggest a traditional mutual fund. They are higher risk, but can probably earn you more money. If you are interested in low risk government securities and don’t have a lot to invest, I suggest going for government bonds.