The Wealthy Investor On Dividend Paying Stocks

It is certainly no secret that interest rates are at historical lows. Ever since the financial crisis that threatened to bring down the banking system, the Federal Reserve has been dedicated to keeping rates as low as possible. While those low rates may have succeeded at stimulating the economy and spurring a recovery in housing, those low yields have also punished savers and those attempting to live off their assets in retirement.

Unfortunately, those savers and investors have few options when it comes to safe and conservative places to put their money. Investors can choose certificates of deposit from the local bank, but chances are the interest rate will not even be enough to keep up with inflation. Savers can substitute bonds for those CDs, but they run the risk of loss of principal if and when interest rates do begin to rise.

A Second Look at Dividend Stocks

Some investors are dealing with these low rates in creative ways, from building a ladder of CD’s with varying maturities, to purchasing individual bonds and higher yielding bond funds. Each of these strategies has it’s own set of rewards and risks, so it is important for investors to weigh their options carefully.

One strategy investors have been using is building a portfolio of dividend-paying stocks. A carefully constructed mix of dividend stocks can easily yield twice as much as a short-term bond fund or certificate of deposit. That means more income for retirees and others who need to rely on their savings to make ends meet. That extra income can help to preserve the remaining portfolio and give investors time as they wait for lower risk yields to recover.

Risk and Reward

Adding dividend stocks to your portfolio means taking on more risk, so it is important to look at your overall holdings and determine how much you want to allocate to the stock market. Some investors choose to increase their income by directing a portion of their stock market holdings to companies that pay a dividend. That strategy increases the revenue stream coming from the portfolio without increasing overall exposure to the ups and downs of the stock market.

Make no mistake – dividend stocks are not the same as CDs and government bonds. Even the highest quality dividend stock can go down in value, and that reduction in price could negate the value of the dividend yield. That is why it is important to choose dividend stocks with care, and to look at everything from the underlying earnings of the firm to its history of dividend increases.

Look at the 5 Year Charts of these 2 companies that pay dividends:

*Cheveron (CVX) 5 Year Chart

Even though the stock has recently taken a dip, the dividend remains notoriously high at over $1 a share.

*AT & T (T) 5 Year Chart

Although this stock is range-bound, the dividend still remains at .44 cents a share with a 5% yield.

Now look at Pandora’s 5 Year Chart:

*Pandora (P) 5 Year Chart

Because of its lack of dividends, this is not a stock that fits The Wealthy Investor discipline. 

Successful investing always involves a tradeoff between risk and reward. Return and risk are always linked, and it is simply not possible to separate them completely. Even so, dividend stock investing can be a good way to boost income in a low interest rate environment, if you know which dividend stocks to choose. This is what The Wealthy Investor Program is all about.

In the Wealthy Investor program I teach three major strategies:

* DISCLAIMER:  Stocks and options trading involves risk and is not suitable for every investor. The stocks and options prices vary and, as a result, clients may lose or gain from their original investment.  Stock illustrations posted on TheWealthlyInvestor.net web site are for illustration purposes only. Your personal results as a trader/investor may vary from the WI students listed above.