Sunday, July 19, 2009

Dividend Stock Investing Is Far From Dead

Dividend stock investing has been an attractive investment strategy for several reasons. They provide you with a real return immediately, in the form of dividend payouts as opposed to growth stocks, which only provide profits when you sell. Increasing dividend payouts, offer the shareholder a hedge against inflation not provided by non dividend paying stocks. Shareholders are able to choose what to do with dividend cash, paying bills, adding to cash savings, reinvesting in stock or whatever strikes their fancy. Now that so many weak dividend paying companies have either cut or eliminated their payouts entirely, it might seem as though dividend investing is no longer a viable strategy. On the contrary, getting rid of the weaker dividend payers has made the stronger companies even more apparent, making it easier to build a solid dividend portfolio. In fact, with stock prices well off last year's highs, dreadfully low interest rates, dividend yields higher than they've been in years, now is an excellent time to load up on the best dividend stocks.

Some things to keep in mind when searching for dividend stocks:

Look for stocks with above-average dividend yields (currently 2.25%). I personally shoot for around 6 to 8% yields, higher risk yes, but potentially much higher returns. You will also want to make sure the company generates enough free cash flow to maintain and possibly increase its dividend, otherwise it's doubtful they will continue payouts. While it's no guarantee of future returns, it's also beneficial to look for companies with a long history of increasing its payouts in proportion to earnings growth. If the company is growing earnings it should be rewarding shareholders with increases in dividend payments. In order to accomplish all of the above, you would definitely want any prospective investment to have a solid balance sheet. If they are carrying too much debt and are unable to repay creditors, they will not be able to pay you.

So even though we've seen drastic cuts in payouts, from some dividend stocks and others who have eliminated their dividends entirely, now is really a good time to be a dividend stock investor. Far from being a dead investment strategy, it may prove to be one of the best strategies going forward.

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