Tag Archives: Income

Cash Flow in Retirement | Fidelity Investments

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Cash flow simply means the amount of cash you have coming in and going out each month.

Think about cash flow as mapping your income versus your expenses. If you anticipate risk factors that can often come with retirement (health care expense, a downturn in the market, or a family emergency) then consider increasing your position in cash (or cash equivalents like Treasury bills, CDs, and money market accounts).

How will you help maintain a steady flow of income in retirement?

You’ve spent years saving money in anticipation of retirement, and while accumulating retirement savings is indeed important, it’s only half the story. Once you stop working, your focus shifts away from saving money and toward using that money to live the retirement you want.

Generating your retirement income

Retirement is an exciting stage of life that many Americans eagerly anticipate, yet retirement as we’ve known it has changed. Different concepts of retirement are emerging — your personal vision of retirement likely differs from how your parents, neighbors, and friends expect to spend their retirement years. In addition, Americans today are living longer and are more responsible for funding their retirements than past generations.

As we navigate this continually evolving retirement landscape, it’s important that your retirement-planning process reflect your unique situation. And remember that retirement income (or cash flow) planning requires a different set of strategies, products, plans, and choices than saving for your retirement. Education and guidance can help you develop an income plan and a spending strategy that are right for you.

Understanding retirement income

While most people understand the importance of saving money for retirement, the concept of retirement income planning is less familiar. Some basic definitions are.

  • Retirement income is the money you use to cover your expenses when you stop working.
  • Potential retirement income sources include Social Security, pensions, annuities, retirement savings from a qualified employer sponsored plan (QRP) like 401(k), 403(b) and governmental 457(b) as well as IRAs.
  • Retirement income planning is the process of determining how much money you’ll need in retirement, and where your cash flow will come from each year. Retirement income planning involves four components:
    • Planning:  Write a plan that includes your expected retirement expenses to help provide a roadmap through retirement.
    • Retirement investing strategies: Determine your various retirement income sources and consider the best way to invest your assets to help meet your retirement income goals.
    • Managing your retirement money: Decide how to manage your money to help maintain a steady flow of income that will cover your expenses throughout your retirement years.
    • Ongoing monitoring: Revisit and adjust your retirement income plan whenever your circumstances change, but at least once a year.

Benefits of planning your retirement income

Developing a written income plan can help you retire with confidence by considering questions such as: What do I want to do in retirement? Where do I want to live? Do I have enough to retire when I’d like? How do I create a steady income stream to take the place of my paycheck? How can I plan for the unexpected, such as extreme market fluctuations, health care needs, and other financial needs? And, will my money last throughout my retirement years?

For illustrative purposes only.

Starting the retirement income planning process five to 10 years before you retire allows you time to develop a thoughtful, personalized plan that will help make the most of your hard-earned savings.

cash flow to help meet both your near-term liquidity needs and longer-term needs for both income and growth

One approach to consider is to bucket cash for different shorter- and longer-term needs, such as living expenses, short-term goals, and emergencies. Here are some ways to implement each:

Read Viewpoints on Fidelity.com: Budgeting for retirees

References:

  1. https://www.fidelity.com/viewpoints/retirement/managing-cash-flow

Dividend Growth Stock Investing

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Dividend growth stocks, known for steady dividend increases over time, can be valuable additions to your income portfolio.

Since 1926, dividends have accounted for more than 40% of the return realized by investing in large-cap U.S. domestic stocks, according to American Association of Individual Investors. The 9.9% historical annualized return for stocks is significantly impacted by the payment of dividends. Research shows that if dividends were taken out of the equation, the long-term annual return for stocks would fall to 5.5%.

Dividend stocks have long been a foundation for steady income to live on and a reliable pathway to accumulating wealth for retirement. Even in times of market stress, companies could be counted on to do everything possible to maintain their payouts. Most dividend-paying companies follow a regular calendar schedule for distributing the payments, typically on a quarterly basis. This gives investors a reliable source of income.

This stream of income helps to boost and protect returns. When stock prices move upward, dividends enhance shareholders’ returns. Shareholders get the benefit of a higher stock price and the flow of income; when combined, these elements create total return. Dividend payments provide a minimum rate of return that will be achieved, as long as the company does not alter its dividend policy. This helps cushion the blow of downward market moves.

Yet, dividend stocks typically don’t offer dramatic price appreciation, but they do provide investors with a steady stream of income.

“I do not own a single security anywhere that doesn’t pay a dividend, and I formed a mutual-fund company with that very simple philosophy.” Kevin O’Leary

Kevin O’Leary, known to many as “Mr. Wonderful”, is Chairman of O’Shares Investments and can be seen on the popular TV show Shark Tank, invests only in stocks that have steady “cash flow” and “pay dividends” to shareholders.  He looks for stocks that exhibit three main characteristics:

  1. First, they must be quality companies with strong financial performance and solid balance sheets.
  2. Second, he believes a portfolio should be diversified across different market sectors.
  3. Third, and perhaps most important, he demands income—he insists the stocks he invests in pay dividends to shareholders.

Kiplinger

Power of Dividend Investing

Dividends are a commitment by a company to distribute a portion of its earnings to shareholders on a regular basis. Once companies start paying a dividend, they are reluctant to cut or suspend periodic the payments.

Dividends are payments that companies make to shareholders at regular intervals, usually quarterly. Dividends and compounding may be a strong force in generating investor returns and growing income.

Dividend-paying stocks are not fancy, but they have a lot going for them. Dividends have played a significant role in the returns investors have received during the past 50 years. Going back to 1970, 78% of the total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding.

“High” dividend yield stocks beat “Highest”

Investors seeking dividend-paying investments may make the mistake of simply choosing those that offer the highest yields possible. A study conducted by Wellington Management reveals the potential flaws in this thinking.

The highest-yielding stocks have not had the best historical total returns despite its ability to pay a generous dividend. The study found that stocks offering the highest level of dividend payouts have not always performed as well as those that pay high, but not the very highest, levels of dividends.

With the economy in recession, equity income investors may be at risk of dividend cuts or suspensions in their portfolios. Dividend quality matters more today than it has in a long time. Thus, it’s important to select high quality U.S. large-cap companies for their profitability, strong balance sheets and dividend quality, which increase the likelihood that they will be able to maintain and grow dividends paid to investors even during periods of economic uncertainty.

Income-producing dividend stocks

Dividends have historically played a significant role in total return, particularly when average annual equity returns have been lower than 10% during a decade. Seek dividend stocks that possess the following characteristics:

  • Currently pays a dividend;
  • Dividend yield above bench mark yields;
  • Higher dividend payments this year relative to last year, or a reasonable expectation that future dividend payments will be raised (in certain cases, a company that recently initiated a dividend will be considered if there is a reasonable expectation that it will increase its dividend in the future);
  • A free-cash-flow payout ratio below 100%(utility stocks are allowed to have a ratio above 100% if free cash flow is positive when calculated on a pre-dividend basis);
  • Improving trends in sales and earnings;
  • A strong balance sheet, as measured by the current ratio and the liabilities-to-assets ratio;
  • An attractive valuation, as measured by the price-earnings ratio;
  • Has no more than one class of shares; and
  • Dividends are paid as qualified dividends, not non- dividend distributions.

Dividend Growth Key to Outperformance

You should invest in corporations that consistently grow their dividends, have historically exhibited strong fundamentals, have solid business plans, and have a deep commitment to their shareholders. They also demonstrate a reasonable expectation of paying a dividend in the foreseeable future and a history of rising dividend payments.

You should also take into consideration the indicated yield (projected dividend payments for the next 12 months divided by the current share price) for all stocks, but place a greater emphasis on stocks with the potential to enhance the portfolio’s total return than those that merely pay a high dividend.

The market environment is also supportive of dividends. A pre-pandemic strong US economy has helped companies grow earnings and free cash flow, which resulted in record levels of cash on corporate balance sheets. This excess cash should allow businesses with existing dividends to maintain, if not grow, their dividends. And while interest rates have risen from historic levels, they’re expected to stay stable for another year or so. This means dividend- paying stocks should continue to offer attractive yields relative to many fixed-income asset classes.

Furthermore, dividend growers and initiators have historically provided greater total return with less volatility relative to companies that either maintained or cut their dividends. There is ample evidence that dividend growers outperform other stocks over time with much lower volatility. For instance, a Hartford Funds study of the past 50 years showed dividend growers outperforming other dividend payers by 37 basis points annually and non-dividend payers by 102 basis points.

One reason dividend growers tend to outperform may be the expanding earnings and cash flow and shareholder-friendly management teams that often characterize these companies. In addition, consistent profitability, solid balance sheets and low payouts enable dividend growers to weather any economic storm.

Trends that bode well for dividend-paying stocks include historically high levels of corporate cash, historically low bond yields, and baby boomers’ demand for income that will last throughout retirement.

Traits of consistent dividend payers

Today’s historically low interest rates have caused investors to invest heavily in dividend- paying stocks and strategies, which has helped bolster their performance. This trend shows no sign of abating as long as interest rates continue to remain relatively low, and demand for these investments will only grow as investors continue to seek income and return.

Here are several financial traits investors should look for in consistent dividend payers:

  • Relatively low payout ratios. A payout ratio measures the percentage of earnings paid out as dividends. The median is 38% for S&P 500 companies, according to Goldman Sachs. In theory, the higher the ratio, the less financial flexibility a company has to boost its dividend
  • Reasonable debt levels. As with payout ratios, this isn’t a one-size-fits-all metric. But if a company has a big debt load, there’s less cash available for the dividend.
  • Strong free cash flow. This typically measures operating cash, minus capital expenditure. It’s important for a company to cover its dividend with its free cash flow.
  • Stable earnings growth. Put another way, dividend investors should be wary of companies with volatile earnings, which can pressure the ability to maintain, let alone raise, payouts.

It’s important to know that not all dividends are treated the same from a tax perspective.

There are 2 basic types of dividends issued to investors:

  • Qualified dividends: These are dividends designated as qualified, which means they qualify to be taxed at the capital gains rate, which depends on the investor’s modified adjusted gross income (MAGI) and taxable income (the rates are 0%, 15%, 18.8%, and 23.8%). These dividends are paid on stock held by the shareholder, which must own them for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. This means if you actively trade stocks and ETFs, you probably can’t meet this holding requirement.
  • Nonqualified dividends: These dividends are not designated by the ETF as qualified because they might have been payable on stocks held by the shareholder for 60 days or less. Consequently, they’re taxed at ordinary income rates. Basically, nonqualified dividends are the amount of total dividends minus any portion of the total dividends treated as qualified dividends. Note: While qualified dividends are taxed at the same rate at capital gains, they cannot be used to offset capital losses.

Dividend growth stocks, known for steady dividend increases over time, can be valuable additions to your income portfolio. A dividend grower typically has a cash-rich balance sheets, formidable cash flow and meager payouts allowing room for more dividend growth. Additionally, dividend growth stocks can provide an hedge against inflation by providing a bump in income every time the dividend is hiked.

References:

  1. https://www.aaiidividendinvesting.com/files/pdf/DI_UsersGuide_12.pdf
  2. https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/WP106.pdf
  3. https://www.kiplinger.com/investing/stocks/dividend-stocks/602692/dividend-increases-stocks-announcing-massive-hikes
  4. https://www.valdostadailytimes.com/news/business/kevin-o-leary-says-thanks-a-billion-as-aum-passes-1-0-billion-for-o/article_0c22d134-4004-5bc5-868b-c705e26194cc.html
  5. https://vgi.vg/37Gls7y

Past performance does not guarantee future results. Dividend-paying stocks are not guaranteed to outperform non-dividend-paying stocks in a declining, flat, or rising market.

Passive Income Ideas | Bankrate

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JAMES ROYAL, BANKRATE 8:00 PM ET 5/19/2020

Passive income can be a great supplementary source of funds for many people, and it can prove to be an especially valuable lifeline during a economic recession or during other tough times, such as the government lockdown imposed which has throttled the economy and exponentially increased unemployment in response to the coronavirus pandemic. Passive income can keep some money flowing when you lose a job or otherwise experience some type of financial hardship.

If you’re worried about being able to earn enough to pay essential living expenses or to save enough of your earnings to meet your retirement goals, building wealth and building retirement savings through passive income is a strategy that might appeal to you, too.

What is passive income?

Passive income includes regular earnings from a source other than an employer or contractor. The Internal Revenue Service (IRS) says passive income can come from two sources: rental property or a business in which one does not actively participate, such as being paid book royalties or stock dividends.

In practice, passive income does involve some additional effort upfront or labor along the way. It may require you to keep your product updated or your rental property well-maintained, in order to keep the passive dollars flowing.

Passive income ideas for building wealth

If you’re thinking about creating a passive income stream, check out these strategies and learn what it takes to be successful with them, while also understanding the risks associated with each idea.

1. Selling information products

One popular strategy for passive income is establishing an information product, such as an e-book, or an audio or video course, then the cash from the sales. Courses can be distributed and sold through sites such as Udemy, SkillShare and Coursera.

Opportunity: Information products can deliver an excellent income stream, because you make money easily after the initial outlay of time.

Risk: “It takes a massive amount of effort to create the product,” Tresidder says. “And to make good money from it, it has to be great. There’s no room for trash out there.”

Tresidder says you must build a strong platform, market your products and plan for more products if you want to be successful.

“One product is not a business unless you get really lucky,” Tresidder says. “The best way to sell an existing product is to create more excellent products.”

Once you master the business model, you can generate a good income stream, he says.

2. Rental income

Investing in rental properties is an effective way to earn passive income. But it often requires more work than people expect.

If you don’t take the time to learn how to make it a profitable venture, you could lose your investment and then some, says John H. Graves, an Accredited Investment Fiduciary (AIF) and author of “The 7% Solution: You Can Afford a Comfortable Retirement.”

Opportunity: To earn passive income from rental properties, Graves says you must determine three things:

  • How much return you want on the investment.
  • The property’s total costs and expenses.
  • The financial risks of owning the property.

For example, if your goal is to earn $10,000 a year in rental income and the property has a monthly mortgage of $2,000 and costs another $300 a month for taxes and other expenses, you’d have to charge $3,133 in monthly rent to reach your goal.

Risk: There are a few questions to consider: Is there a market for your property? What if you get a tenant who pays late or damages the property? What if you’re unable to rent out your property? Any of these factors could put a big dent in your passive income.

3. Affiliate marketing

With affiliate marketing, website owners, social media “influencers” or bloggers promote a third party’s product by including a link to the product on their site or social media account. Amazon might be the most well-known affiliate partner, but eBay, Awin and ShareASale are among the larger names, too.

Opportunity: When a visitor clicks on the link and makes a purchase from the third-party affiliate, the site owner earns a commission.

Affiliate marketing is considered passive because, in theory, you can earn money just by adding a link to your site or social media account. In reality, you won’t earn anything if you can’t attract readers to your site to click on the link and buy something.

Risk: If you’re just starting out, you’ll have to take time to create content and build traffic.

4. Invest in a high-yield CD

Investing in a high-yield certificate of deposit (CD) at an online bank can allow you to generate a passive income and also get one of the highest interest rates in the country. You won’t even have to leave your house to make money.

Opportunity: To make the most of your CD, you’ll want to do a quick search of the nation’s top CD rates. It’s usually much more advantageous to go with an online bank rather than your local bank, because you’ll be able to select the top rate available in the country. And you’ll still enjoy a guaranteed return of principal up to $250,000, if your financial institution is backed by the FDIC.

Risk: As long as your bank is backed by the FDIC, your principal is safe. So investing in a CD is about as safe a return as you can find. Over time, the biggest risk with fixed income investments such as CDs is rising inflation, but that doesn’t appear to be a problem in the near future.

5. Peer-to-peer lending

A peer-to-peer (P2P) loan is a personal loan made between you and a borrower, facilitated through a third-party intermediary such as Prosper or LendingClub.

Opportunity: As a lender, you earn income via interest payments made on the loans. But because the loan is unsecured, you face the risk of default.

To cut that risk, you need to do two things:

  • Diversify your lending portfolio by investing smaller amounts over multiple loans. At Prosper.com, the minimum investment per loan is $25.
  • Analyze historical data on the prospective borrowers to make informed picks.

Risk: It takes time to master the metrics of P2P lending, so it’s not entirely passive. Because you’re investing in multiple loans, you must pay close attention to payments received. Whatever you make in interest should be reinvested if you want to build income. Economic recessions can also make high-yielding personal loans a more likely candidate for default, too.

6. Dividend stocks

Dividends are payments that companies make to shareholders at regular intervals, usually quarterly. Dividends and compounding may be a strong force in generating investor returns and growing income.

Many stocks offer a dividend, but they’re more typically found among older, more mature companies that have a lesser need for their cash. Dividend stocks are popular among older investors because they produce a regular income, and the best stocks grow that dividend over time, so you can earn more than you would with the fixed payout of a bond, for example.

Shareholders in companies with dividend-yielding stocks receive a payment at regular intervals from the company. Companies pay cash dividends on a quarterly basis out of their profits, and all you need to do is own the stock. Dividends are paid per share of stock, so the more shares you own, the higher your payout.

Investors looking to boost the income generated by their portfolio may want to consider high quality dividend paying stocks. Profitable dividend paying companies have the ability to maintain and even grow dividend payments to their investors. This is demonstrated by the growth in dividends per share paid by the companies in the S&P 500. From 2010 through 2019 the dividends per share paid by the companies in the S&P 500 have more than doubled, a growth rate of nearly 11% per year.

Opportunity: Since the income from the stocks isn’t related to any activity other than the initial financial investment, owning dividend-yielding stocks or focusing on a quality dividend investment strategy can be one of the most passive forms of making money.

While dividend stocks tend to be less volatile than growth stocks, don’t assume they won’t rise and fall significantly, especially if the stock market enters a rough period. However, a dividend-paying company is usually more mature and established than a growth company and so it’s generally considered safer. That said, if a dividend-paying company doesn’t earn enough to pay its dividend, it will cut the payout, and its stock may plummet as a result.

Risk: The tricky part is choosing the right stocks. Graves warns that too many novices jump into the market without thoroughly investigating the company issuing the stock. “You’ve got to investigate each company’s website and be comfortable with their financial statements,” Graves says. “You should spend two to three weeks investigating each company.”

That said, there are ways to invest in dividend-yielding stocks without spending a huge amount of time evaluating companies. Graves advises going with exchange-traded funds, or ETFs. ETFs are investment funds that hold assets such as stocks, commodities and bonds, but they trade like stocks.

“ETFs are an ideal choice for novices because they are easy to understand, highly liquid, inexpensive and have far better potential returns because of far lower costs than mutual funds,” Graves says.

Another key risk is that dividend stocks or ETFs can move down significantly in short periods of time, especially during times of economic uncertainty and high market volatility, as in early 2020 when the coronavirus crisis shocked financial markets. Economic stress can also cause some companies to cut their dividends entirely, while diversified funds may feel less of a pinch.

7. Savings or Money Market accounts

It doesn’t get any more passive than putting your money in a savings or money market account at the bank or in a brokerage account offering high yields. Then collect the interest.

Opportunity: Your best bet here is going with an online bank or a brokerage account, since they typically offer the highest rates. Online bank and brokerage account rates can often be higher.

Risk: If you invest in an account insured by the FDIC, you have almost no risk at all up to a $250,000 threshold per account type per bank. However, money market accounts are not FDIC insured. The biggest risk is probably that interest rates tend to fall when the economy weakens, and in this case, you would have to endure lower payouts that potentially don’t earn enough to beat inflation. That means you’ll lose purchasing power over time.

8. REITs

A REIT is a real estate investment trust, which is a fancy name for a company that owns and manages real estate. REITs have a special legal structure so that they pay little or no corporate income tax if they pass along most of their income to shareholders.

Opportunity: You can purchase REITs on the stock market just like any other company or dividend stock. You’ll earn whatever the REIT pays out as a dividend, and the best REITs have a record of increasing their dividend on an annual basis, so you could have a growing stream of dividends over time.

Like dividend stocks, individual REITs can be more risky than owning an ETF consisting of dozens of REIT stocks. A fund provides immediate diversification and is usually a lot safer than buying individual stocks – and you’ll still get a nice payout.

Risk: Just like dividend stocks, you’ll have to be able to pick the good REITs, and that means you’ll need to analyze each of the businesses that you might buy – a time-consuming process. And while it’s a passive activity, you can lose a lot of money if you don’t know what you’re doing.

REIT dividends are not protected from tough economic times, either. If the REIT doesn’t generate enough income, it will likely have to cut its dividend or eliminate it entirely. So your passive income may get hit just when you want it most.

9. A bond ladder

A bond ladder is a series of bonds that mature at different times over a period of years. The staggered maturities allow you to decrease reinvestment risk, which is the risk of tying up your money when bonds offer too-low interest payments.

Opportunity: A bond ladder is a classic passive investment that has appealed to retirees and near-retirees for decades. You collect interest payments, and when the bond matures, you “extend the ladder,” rolling that principal into a new set of bonds. For example, you might start with bonds of one year, three years, five years and seven years.

In a year, when the first bond matures, you have bonds remaining of two years, four years and six years. You can use the proceeds from the recently matured bond to buy another one year or roll out to a longer duration, for example, an eight-year bond.

Risk: A bond ladder eliminates one of the major risks of buying bonds – the risk that when your bond matures you have to buy a new bond when interest rates might not be favorable.

Bonds come with other risks, too. While Treasury bonds are backed by the federal government, corporate bonds are not, so you could lose your principal. And you’ll want to own many bonds to diversify your risk and eliminate the risk of any single bond hurting your overall portfolio.

Because of these concerns, many investors turn to bond ETFs, which provide a diversified fund of bonds that you can set up into a ladder, eliminating the risk of a single bond hurting your returns.

10. Rent out a room in your house

This straightforward strategy takes advantage of space that you’re probably not using anyway and turns it into a money-making opportunity.

Opportunity: You can list your space on any number of websites, such as Airbnb, and set the rental terms yourself. You’ll collect a check for your efforts with minimal extra work, especially if you’re renting to a longer-term tenant.

Risk: You don’t have a lot of financial downside here, though letting strangers stay in your house is a risk that’s atypical of most passive investments. Tenants may deface or even destroy your property or even steal valuables, for example.

11. Advertise on your car

You may be able to earn some extra money by simply driving your car around town. Contact a specialized advertising agency, which will evaluate your driving habits, including where you drive and how many miles. If you’re a match with one of their advertisers, the agency will “wrap” your car with the ads at no cost to you. Agencies are looking for newer cars, and drivers should have a clean driving record.

Opportunity: While you do have to get out and drive, if you’re already putting in the mileage anyway, then this is a great way to earn hundreds per month with little or no extra cost. Drivers can be paid by the mile.

Risk: If this idea looks interesting, be extra careful to find a legitimate operation to partner with. Many fraudsters set up scams in this space to try and bilk you out of thousands.

How many streams of income should you have?

There is no “one size fits all” advice when it comes to generating income streams. How many sources of income you have should depend upon where you are financially, and what your financial goals for the future are. But having at least a few is a good start.

“In addition to the earned income generated from your human capital, rental properties, income-producing securities and business ventures are a great way to diversify your income stream,” says Greg McBride, CFA, chief financial analyst at Bankrate.

© Copyright 2020 Bankrate, Inc. All rights reserved

Source: https://www.bankrate.com/investing/passive-income-ideas/

References:

  1. https://oshares.com/research-paper-dividend-investing-ousa-ousm/

Seniors Are Stressed About Income in Retirement. What To Do. – Barron’s

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A large number of American workers closing in on retirement are showing anxiety not just over how much they’ve saved but also over how to manage their different income sources during their post-career lives.

A new study by Charles Schwab found that most pre-retirees—defined as those within five years of retirement—have at least one fear about their income in retirement. The findings were gleaned from a survey last summer of 1,000 Americans aged 55 and older with $100,000 or more in investable assets, half of whom fell into the pre-retiree cohort. 
— Read on www.barrons.com/articles/most-seniors-stress-about-income-in-retirement-heres-what-theyre-most-worried-about-51582977602

Dividends Income Strategy

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“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” John Rockefeller, founder of the Standard Oil Company

For retirees, dividends are a source for cash flow and a great form of income security in their post work years. For smart investors, dividend investments represent one of the closest things they can find to guaranteed income and possible capital appreciation.

John D. Rockefeller, founder of the Standard Oil Company and the world’s first billionaire, was a vocal advocate of dividends. He once commented that, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

Dividend investing provides a steady income stream from the distributions of a company’s earnings to its shareholders. It works well for investors looking for long-term growth and for individuals preparing for or living in retirements who have a lower risk tolerance.

Dividend stocks are companies that pay shareholders a portion of earnings, or dividend, on a regular basis. These payments are funded by profits that a company generates but doesn’t need to retain to reinvest in the business. Dividend stocks are a major factor in the total return of the stock market. About 3,000 U.S. stocks pay a dividend at any given time.

Divdend income investor.

Dividend paying stocks are major sources of consistent income for investors. They can create income and wealth when returns from the equity market are highly volatile or at risk. Essentially, dividend–paying stocks have become an attractive alternative to bonds for investors looking for a reliable stream of investment income.

Companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by providing payouts or sizable yields on a regular basis. If you’re looking to build wealth or generate income, dividend stocks are pretty hard to beat.

Dividend-focused stocks do not offer much price appreciation in strong bull markets. However, they do offer a steady stream of income along with the potential of capital gains. These are the major sources of consistent income for investors to create wealth when returns from the equity market are at risk.

Companies that pay out dividends generally act as a hedge against economic uncertainty or downturns. They tend to provide downside protection by offering payouts or sizable yields on a regular basis.

Dividend stocks offer solid returns in an era of ultralow bond yields and also hold the promise of price appreciation. The S&P 500 index’s yield was recently around 1.9%, about even with that of the 10-year U.S. Treasury note.

Dividends also offer a number of advantages beyond income, one being that qualified dividend income is taxed as a capital gain and at a lower rate than ordinary income receives. The top federal capital-gains tax rate is 23.8%. Payouts can also help buffer volatility in tumultuous markets, providing returns even during a market decline.

Dividend stocks can reduce the amount of volatility or beta in a portfolio. Essentially, dividend investing is boring, and lacks the thrill of a small cap tech stock with exponential revenue growth and avoids the volatility of small caps.

Dividend Payout Date

Getting a regular income from the companies investors own are a testament to their discipline, the health of their business, and their confidence in its future. Companies will announce when their dividend will be paid, the amount of the dividend, and the ex-dividend date. Investors must own the stock by the ex-dividend date to receive the dividend.

The ex-dividend date is extremely important to investors: Investors must own the stock by that date to receive the dividend. Investors who purchase the stock after the ex-dividend date will not be eligible to receive the dividend. Investors who sell the stock after the ex-dividend date are still entitled to receive the dividend, because they owned the shares as of the ex-dividend date.

Dividend Payout Ratio

Dividends are typically paid from company earnings, but not all dividends are created equally. If a company pays more in dividends than it earned, then the dividend might become unsustainable. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable.

Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a dividend payout ratio of above 100% is definitely a concern.

Another important check is to see if the free cash flow generated is sufficient to pay the dividend, which suggests dividends will be well covered by cash generated by the business and affordable from a cash perspective.

Still, if the company repeatedly paid a dividend greater than its profits and cash flow, investors should be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

High Dividend Yield

A high dividend yield strategy does have several drawbacks. Those disadvantages include vulnerability to rising interest rates and the potential exposure to financially challenged companies that may have trouble maintaining and growing dividends. Since the stock prices of firms with stable cash flows tend to be more sensitive to fluctuations in interest rates than those with more-volatile cash flow streams.

With lower interest rates and the stock market trading at near all-time highs, the high dividend paying stocks and ETFs could be excellent picks at present. Dividend ETFs provide investors with a diversified portfolio of dividend-paying stocks that allows you to invest and collect income without having to do nearly the amount of research you’d need before buying a large number of the individual components.

Another source of income are preferred stocks. Preferred stocks are known for offering higher dividends than their common stock counterparts. In fact, they can be viewed as a safe haven in case of a market pullback as the S&P 500 is up nearly 24% so far this year.

Stocks with a history of above-average dividend yields typically can be a sign of companies with deteriorating business fundamentals. While that can be the case in certain situations, there are many companies with strong underlying fundamentals that are some of America’s largest and most stable companies.

Bottom line, don’t fall for a high dividend yield in a vacuum. It may not paint an accurate picture of the stock’s potential. Instead, look at the company’s fundamentals and determine how dividend payouts change over time. That may indicate a company’s financially stability. Also, it may illustrate long-term dividend potential.

Dividend-Growth Strategies

An investor should not buy dividend stocks just for the sake of dividends to generate income…they should also be seeking capital appreciation to keep up with inflation and mitigate the risk of the long term loss of buying power of the dollar, as well. The most successful dividend investors seek dividend paying stocks that have the potential to grow their dividend each year.

Dividend payers with a history of dividend growth over a prolonged stretch (10 years’ worth of dividend hikes) tend to be highly profitable, financially healthy businesses. While dividend growers prioritize delivering cash to their shareholders, they’re balancing that against investing in their own businesses. Such firms have often held up better than the broad market, as well as the universe of high-yielding stocks, in periods of economic and market weakness.

During the market downturn from early October 2007 through early March 2009, dividend appreciation stocks, such as Dividend Aristocrats, held up better as a category versus the broad market and versus high dividend yield benchmark.

Dividend-growth strategies also look appealing from the standpoint of inflation protection, in that income-focused investors receive a little “raise” when a company increases its dividend. Dividend-growth stocks will tend to hold up better in a period of rising bond yields than high-yielding stocks. That’s because dividend-growth stocks’ yields are more modest to begin with, so they’re less vulnerable to being swapped out when higher-yielding bonds come online.

The dependability of dividends is a big reason to consider dividends when buying stocks. Not every stock pay a dividend, but a steady, dependable dividend stream can provide a nice boost to a portfolio’s return.

Sources:

  1. https://finance.yahoo.com/news/dividends-capital-gains-differ-195903726.html
  2. https://www.fidelity.com/learning-center/investment-products/stocks/all-about-dividends/why-dividends-matter