Investing In Dividends For Dummies. Carrel Lawrence

✓ You have some money (capital) to invest. It doesn’t need to be stuffed in your pocket or sitting in a bank account. It can be money you already have invested, perhaps sitting in an IRA or 401(k).

       ✓ You want a safer way to invest your hard-earned dollars, so you’re interested in introducing or adding more dividend stocks to your portfolio.

Icons Used in This Book

      Throughout this book, you can spot icons in the margins that call your attention to different types of information. Here are the icons I use and a brief description of each:

      

Everything in this book is important, but some of it’s more important. When you see this icon, read the text next to it not once but two or three times to brand it on your brain cells.

      

Tips provide insider insight from behind the scenes. When you’re looking for a better, faster, safer, and/or cheaper way to do something, check out these tips.

      

This icon appears when you need to be extra vigilant or seek professional help before moving forward.

      

Investing has its fair share of highly specialized language and concepts that typically fly above the heads of mere mortals. Whenever I explain something highly technical, I flag it with this icon so that you know what’s coming.

Beyond the Book

      In addition to all the material you can find in the book you’re reading right now, this product also comes with some access-anywhere goodies on the web. Check out the Cheat Sheet at www.dummies.com/cheatsheet/investingindividends for helpful insights and details about whether you should hire a financial advisor and considerations for building a nest egg. You can also find interesting companion articles at www.dummies.com/extras/investingindividends.

Where to Go From Here

      Investing in Dividend For Dummies is designed to appeal to a universal audience of intermediate and experienced investors at all stages of developing and managing their investment portfolios.

      For the new dividend stock investor, I recommend you read the book from cover to cover starting with Chapter 1. More experienced divided stock investors who already know themselves and their goals and have an effective strategy in place to reach those goals may want to skip to Chapter 7, where I show you how to track down income-generating, dividend paying stocks, or Chapter 8, where I show you how to evaluate them.

      Regardless of your experience, however, feel free to skip around and read whatever catches your interest. Each and every tidbit of knowledge and insight you acquire can only serve to make you a more astute investor.

      Part I

      Getting Started with Dividends

      

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       In this part …

      

Get the basics on the risks and rewards of dividend stocks as you prepare to become a savvy investor.

      

Find out what to look for as you invest and how to adapt as the holdings in your portfolio develop.

      

Discover stock market indexes and the interplay between dividends and market.

      

Understand what to look for when you’re looking for sound companies to invest in.

      

Delve into some of the reasons that the popularity of dividend investing tends to rise and fall.

Chapter 1

      Wrapping Your Brain Around Dividend Investing

       In This Chapter

      

Understanding dividend stocks and their benefits and risks

      

Preparing to become a savvy dividend stock investor

      

Knowing what to look for as you shop for dividend stocks

      

Monitoring and adjusting the holdings in your portfolio

      For many investors, dividend stocks offer the best of two worlds: a healthy balance of risk and return. Investors receive the benefits of both share price appreciation and the ability to realize profits through dividends (cash payments) without having to sell shares. (Later in this chapter, I list more of the many benefits of dividend stocks, and in Chapter 3, I explain them in greater detail.)

      In this chapter, I pack the essentials of dividend investing into a nutshell, starting with the bare basics, such as defining what a dividend is, and taking you to the very end – managing your portfolio after you populate it with promising dividend stocks. Along the way, I reference other chapters in this book where you can find additional information and guidance on each topic.

Coming to Terms with Dividend Stocks

      Dividend stocks are stocks that pay dividends – payments in cash (usually) or shares (sometimes) to stockholders. Through dividend payments, a company distributes a portion of its profits to its shareholders, typically every quarter or every month, and pumps the remaining profits back into the company to fuel its growth.

      

The percentage of total profits a company pays out in dividends to shareholders is called the payout ratio. For more about payout ratios and how to use the number in evaluating dividend stocks, check out Chapter 9.

       Why companies pay dividends

      Successful companies are profitable companies. They earn money, and they can use that money in several ways:

       ✓ Reinvest it: Companies usually invest a good chunk of their profits, if not all of them, into growing the business.

       ✓ Pay down debt: If, in addition to selling shares, companies borrowed money to raise capital, they may use profits to pay down the debt, thereby reducing the expense of their interest payments.

       ✓ Buy back shares: Companies may use profits to buy back shares that they feel are undervalued, or for other reasons. In some cases, they initiate buybacks to artificially inflate the share price and improve investor confidence in the company.

       ✓ Pay dividends: Paying dividends is a form of profit sharing – spreading the wealth among the company’s owners, the shareholders.

      A company’s dividend policy generally reflects the board of directors’ and shareholders’ preferences in how to use profits. Two schools of thought govern their decision:

       ✓ Pro growth: This school believes a company is better off reinvesting its profits or using profits to pay down debt or buy back shares. This strategy makes the company more valuable,