a dividend investing primer

Once regarded as a haven for retirees or unsophisticated investors, dividend-paying stocks and ETFs have recently roared into the spotlight as investors of every

orientation search for ways to eke out more immediate income from longer term equity holdings.

But judging a stock only by its dividend yield is not necessarily the best way to approach dividend investing. So as an

aid to dividend-oriented investors, and with the help of our awesome contributors, I've put together this Dividend

Investing Primer which I hope will help readers get the most from their dividend stocks.

Why Dividend Stocks?

Dividend payments are generally made monthly, quarterly or annually. In uncertain times, generating real and reliable

income from their portfolio can be a boon to anyone's budget. More importantly, a healthy assortment of dividend-

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Evelyn C. Roth

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A Dividend Investing Primer

Feb. 13, 2011 2:53 AM ET | 15 comments | Includes: AUSE, AXJL, DBU, DEM, DES, DEW, DFE, DFJ, DGS, DHS, DIM, DLN, DLS, DNL, DOL, DON, DRW,

DTD, DTH, DVY, DWM, DXJ, GNAT, GULF, HEDJ, IDV by: Evelyn C. Roth

A Dividend Investing Primer [iShares Dow Jones Select Dividend (ETF), iShares Dow Jones ... http://seekingalpha.com/article/252479-a-dividend-investing-primer

1 of 10 5/4/2014 4:27 PM

paying stocks can be the backbone for your long-term investment strategy no matter the economic climate, as David

Van Knapp notes in Why I Love Dividends.

One traditional knock on dividend stocks has been that, "only poorly-managed companies or companies in decline tend

to pay dividends," and that successful companies aggressively reinvest profits to spur innovation and growth. Dividend

Growth Investor disagrees: He details a variety of reasons why healthy, thriving companies pay dividends, including

corporate constraints on internal asset allocation; a company's position within an already mature industry; and the fact

that excessive reinvestment doesn't always guarantee successful growth or development.

Some people even argue that a company's dividend is a leading indicator for its fiscal health - because it's a gauge of management's optimism around the company's

future.

Factors to Consider

Many novice dividend investors focus primarily on a stock's yield - assuming that higher is always better. "Unfortunately, high yield stocks often carry higher than

average risk," Dividends4Life writes.

What sort of risks? Look for signals such as:

Is the company in a limited growth industry?

Is it in a particularly volatile industry?

Has it experienced recent financial problems?

Has its share price fallen?

Do shareholders believe there are financial problems on the horizon?

So while yield is clearly a factor to consider, other metrics worth focusing on are included in David Van Knapp's The 4 Qualities of the Best Dividend Stocks:

Initial yield - what does the stock yield today? (David's minimum is 2.5%)1.

The reliability of the dividend - does the company have a history of paying and growing dividends?2.

A history of dividend increases - are earnings growing at a clip that will facilitate dividend increases?3.

The stock's growth potential - over and above dividend increases, are you investing in a solid growth stock?4.

Companies with a history of paying and raising dividends for at least 25 years are often called Dividend Aristocrats or Dividend Champions (see: Comparing

Dividend Aristocrats to Dividend Champions).

Here are five questions Chuck Carnevale asks before investing in a dividend-paying stock:

Are dividends growing, and if so, at what rate, how consistently and for how long?1.

Has the company ever cut its dividend, and if so, why?2.

What about the payout ratio - is it reasonable, and is it increasing or decreasing?3.

What has been the cumulative total amount of dividends paid over a given period of time?4.

What has been the nominal yield and yield on cost (growth yield) that the stock has delivered?5.

And a warning from Nicholas Southwick Levis: "Make sure free cash flow covers most or all of the dividend payments made over the past few years." If debt is the


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primary resource for a company's dividend payments, you're likely looking at a dividend - or even a company - at risk.

Maximizing Dividend Returns

Don't overlook valuation when choosing dividend stocks. Past, present and future earnings will all have a significant impact on the size and distribution of a

company's dividend. Price-to-book ratio can also help you gauge the upside potential of a dividend stock by allowing you to determine which stocks are

undervalued.

Seasoned dividend investors often look to own a mix of high yielding stocks - for immediate, richer payouts - alongside dividend growth stocks which hold the

promise of future lucrative increases. "The dividend growth investment strategy has held up under severe questioning," David Van Knapp, a proponent of this

hybrid strategy, writes.

Young and novice investors shouldn't shy away from dividend paying stocks either. Kevin Parker, in 5 Tips for Young Investors Looking to Start Investing in

Dividend Stocks, highlights the huge upside:

...dividend stocks are a great area to focus on for new and young investors because they tend to be less volatile, provide a slight buffer against loss

because of the dividend, and most importantly, because the philosophy of investing in such stocks tend to be a more conservative long-term approach

rather than trading for a quick buck.

Reinvesting dividends can significantly increase your holdings, not to mention your yield on cost. As noted by David Fish in DRIPS Are for Kids (And All Kinds of

Grownups Too), there are hundreds of companies - including such Dividend Champions as Abbott (ABT), PepsiCo (PEP) and Johnson & Johnson (JNJ) - that

sponsor Dividend Reinvestment Programs (DRIPS), which saves investors from having to use their brokers and incurring additional fees.

More intrepid investors also use options to generate income from both dividend-paying and non-dividend paying stocks in their portfolio. To learn more about

generating income using covered calls, the Covered Call Tool has a great tutorial, not to mention a best-of-breed set of tools.

Possible Pitfalls

There's no guarantee that a company will continue to increase or even pay its dividend. In particularly difficult conditions, companies have been known to freeze or

even cut their dividend. Aficionados advocate selling a stock when it cuts its dividend, cautioning that it is often the warning sign of more trouble to come. When a

dividend is frozen, it's also time to keep a close eye on the stock.

Alternative Dividend Vehicles

MLPs or Master Limited Partnerships are similar to dividend stocks, but often boast significantly higher yields. Because of how they're structured, MLPs are

limited to certain types of businesses, such as those involving the extraction or transportation of natural resources such as gas, oil and coal.

Rather than becoming equity holders, MLP owners become limited partners in the parent company, and receive quarterly required distributions, subject to a

different set of tax implications than equity dividends.

Another alternative income-generating investment vehicle are REITs - (Real Estate Investment Trusts), which issue trust units rather than shares, and own and

manage different types of real estate properties including apartment units, shopping centers and office buildings. Distributions are made quarterly. Because REITs

are required by law to 'pass along' or distribute 90% of their income, they don't pay taxes, which makes each unit holder responsible to pay taxes on distributions.


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Dividend Investing and Retirement

A portfolio flush with dividend paying stocks, if smartly managed, can generate reliable income for years. No surprise then that retirees have always been drawn to

equities that generate regular income.

But a well-plotted, well-planned dividend stock portfolio can be an ace in the hole for any investor, no matter how far off retirement may be, as Dividend Growth

Investor describes in The Case for Dividend Investing in Retirement. Dividend stocks, he says, are "a must-own asset class not only for the retired investor who

needs income for the next three or four decades, but also for the investor who expects to retire in 30 or 40 years."

Once you're in retirement, how much of your portfolio should you allocate to dividend stocks vs. bonds? David Van Knapp shares the way he made the calculation

for himself in Asset Allocation For A Dividend Growth Investor.

So Now What?

To learn more about dividend investing and your portfolio - as well as to join the spirited conversation taking place right now within Seeking Alpha's dividend

investing community - start with our Dividend Stock Ideas theme page. There, you'll find a diverse array of informative posts, combined with lively and instructive

discussions between contributors and readers in the comments section following each article.

Want even more information on Income Investing? See our Investing for Income dashboard.

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Comments (15)

Register or Login to rate comments

fortypercent

, contributor

Comments (106)

great piece of work.

thanks

13 Feb 2011, 10:59 AMReplyLike4

InvestRite#1

, contributor

Comments (79)

Evelyn, looks like I've got some work cut out for me, thanks for the obvious time in putting this all together for this generous community.

10 Jul 2012, 08:05 AMReplyLike0

David Fish

, contributor

Comments (7103)

This is a great primer for the increasing number of people interested in dividend growth investing. I hope it will be part of an ongoing set of tools to help those

people.

16 Mar 2011, 07:48 PMReplyLike4

Robert Allan Schwartz

, contributor

Comments (12041)

Many congratulations to David Van Knapp, Dividend Growth Investor, Chuck Carnevale, Dividends4Life, and David Fish!

May this article bring your wisdom to many more SA readers!

24 Mar 2011, 05:45 PMReplyLike3


5 of 10 5/4/2014 4:27 PM

easyrob

, contributor

Comments (281)

Good work Evelyn.....good work

2 Apr 2011, 01:17 PMReplyLike2

Norman Tweed

, contributor

Comments (7199)

Thanks Evelyn for a great primer for prospective dividend investors. You point the reader in the right direction. I just heard about this paper today, and think

you should feature it on the front page.


mostserene1

, contributor

Comments (3322)

Thank you Ms. Roth, for this excellent primer, which I will recommend to some potential investor friends who could gain from this lucid explanation.

As a long-time dividend investor, I began to worry once dividend investing "became cool" and mainstream people like Suze Orman began recommending

dividend investing. The herd is generally wrong when it comes to the stock market, and it looks like the herd is taking a fancy to dividend investing.

But other than driving up the price of stocks, I'm not sure what damage the herd can do the the philosophy, moreover, I'm not convinced the Average Joe has

the discipline to buy the right stocks at the right time. Guess only time will tell.

Anyway, knowledge is a good thing, and SA is a valuable resource. Thanks again for this article and for the dashboard grouping for Income Investors.


David Fish

, contributor


6 of 10 5/4/2014 4:27 PM

Comments (7103)

Concerning DRIPs for Canadians, I found a very good site:

www.dripprimer.ca/cana...

Note that most Canadian DRIPs are not available to U.S. citizens, so this link is primarily for Canadian readers.

22 Apr 2011, 07:48 AMReplyLike3

retailinvestor

, contributor

Comments (822)

To be fair, there should also be a link that provides all the arguments that DETRACT from the common arguments pro-dividends.

www.retailinvestor.org...

2 Jul 2011, 11:12 AMReplyLike1

Amateur investor

, contributor

Comments (764)

Great article Evelyn. Great notes and alternatives. I also own MLP's and am very happy with their performance. Thank you

14 Jul 2011, 10:11 PMReplyLike1

Berninvestor

, contributor

Comments (772)

Wonderful article Evelyn Roth! I don't know how I missed it because I try to read most articles on SA about dividend investing. Thank you.


dutchog

, contributor

Comments (2)


7 of 10 5/4/2014 4:27 PM

this type of informative article is truly a pleasure to review and especially helpful for guiding and instructing those newer to the financial world. Keep up the

excellent work !


mstone

, contributor

Comments (20)

Ms. Roth,

An excellent article.. Thank you so much. We need more wonderful people like you. Hope to see your next article... Thanks again..

Michael W. Stone

12 Sep 2012, 12:37 AMReplyLike0

Robert Allan Schwartz

, contributor

Comments (12041)

Michael, Evelyn is no longer with Seeking Alpha, but there are many other excellent authors who write about dividend growth investing. May I suggest, to

start with, folks like David Van Knapp, David Fish, and David Crosetti? There are many others, but that is a good place to begin.

Robert

12 Sep 2012, 08:28 AMReplyLike1

Keeper7

, contributor

Comments (13)

Ms. Roth,

Excellent useful information.

2 May 2013, 12:26 PMReplyLike0


8 of 10 5/4/2014 4:27 PM

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a dividend investing primer

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