Boomers should pay attention. As our portfolios age, common wisdom is to transfer our wealth to more conservative investments. Nothing is more conservative in the world of equities than companies who pay dividends. Not only is the return historically better the companies who pay, such as those in the Dow offer older and more stable investments allowing you to skip the middle man and buy directly.
Dividends offer the investor an opportunity to not only own a share of a company but also to share directly in that company's profits. As you may recall, when a company makes a profit, they have numerous options. Many businesses simply reinvest the money into the company. Some buyback shares with the profits or reduce their debt. But older, more established companies distribute those profits among shareholders.
Some even offer a dividend reinvestment plan or DRIP. And many of these plans allow you to receive the dividend in the form of more stock. These plans are an inexpensive way to increase your portfolio's value and do so without much in the way of effort on your part.
The best part of these types of plans is the cost. Not only is the purchase automated but buying stocks directly from the issuing company is also, in most cases, free of brokerage costs. Add to that, most companies allow you to begin the process with as little as $10. The automated feature of these plans also allows you to invest via automatic deduction from existing accounts you might own.
Involvement in this type of program allows you to purchase individual shares rather than taking a cash disbursement. This reinvestment can be set up in a variety of ways: full reinvestment (where any and all dividends are used to purchase more stock), partial reinvestment (designates how much of the dividend goes to buying additional shares and how much you want to receive in cash), or as a cash payment.
To enroll, you need to own at least one share in your name (if you are buying them for a minor, your name must be entered as the custodian). You can do this using an online brokerage or similar discount broker.
There are over 300 companies listed on the S&P 500 list that offer these sorts of options. All of the companies on the Dow Jones 30 offer either a direct stock purchase (DSP) which eliminates the need for a broker or a DRIP, which requires ownership of at least one share to begin the reinvestment plan.
Last week, Gina asked me what would an investor do with $25. Although I suggested opening an IRA directly with a mutual fund company (in large part because at least there are tax advantages in doing so), that same amount, invested every week could generate enormous amounts of profit for the investor as well. Keep in mind dividend payments create a tax event (although some allow them to be tucked inside your IRA).
Yet, considering the fact that dividend paying stocks generally outperform the overall market by 3%, this is an opportunity that has so much potential, you shouldn't pass it up.
Below is a list of the Dow 30 companies with dividends, direct stock purchase plans or dividend reinvestment plans.
3M Company (MMM) DRIP
Alcoa Inc. (AA) DRIP
American Express Co. (AXP) DSP
AT&T Inc (T) DRIP
Bank of America Corp. (BAC) DSP
Boeing Co. (BA) DRIP
Caterpillar, Inc. (CAT) DSP
Chevron Corp. (CVX) DSP
Citigroup Inc. (C)
Coca-Cola Co. (KO) DRIP
DuPont (E.I.) deNemours (DD) DRIP
Exxon Mobil Corp. (XOM) DSP
General Electric Co. (GE) DSP
General Motors (GM)
Hewlett-Packard Co. (HPQ) DRIP
Home Depot, Inc. (HD) DSP
Intel Corp. (INTC) DRIP
International Bus. Mach. (IBM) DSP
J.P. Morgan Chase & Co. (JPM) DRIP
Johnson & Johnson (JNJ) DRIP
Kraft Foods Inc. Cl A (KFT) DRIP
McDonalds Corp. (MCD) DSP
Merck & Co. Inc. (MRK) DSP
Microsoft Corp. (MSFT) DRIP
Pfizer Inc. (PFE) DSP
Procter & Gamble Co. (PG) DSP
United Technologies Corp. (UTX) DRIP
Verizon Communications Inc. (VZ) DRIP
Wal-Mart Stores, Inc. (WMT) DSP
Walt Disney Co. (DIS) DSP
Paul Petillo is the Managing Editor of Target2025.com and a regular contributor to MomsMakingaMillion Talk Radio. He is also a fellow Boomer.
Showing posts with label dividends. Show all posts
Showing posts with label dividends. Show all posts
Tuesday, December 8, 2009
Wednesday, November 18, 2009
Building Wealth with Dividends
Every Friday morning, I discuss different aspects of investing and retirement planning. The hosts of MomsMakingaMillion Talk Radio believe that if women were paid what men are paid for the same job, poverty in this country would decrease by 50%. This week, on 11.20.09, we will be discussing the art of dividend investing. (The format for my segment is broken down into five questions.)
So what are dividends?
When a company makes a profit there are basically three things that can be done. Some reinvest it, which is what newer companies or growth companies do. They take those profits and channel them back into the company in the form of research or simply hold the cash for future mergers and acquisitions. Some companies use the money to buy back their own shares. This happens when the company realizes that its share price is below what they think it should be. Some use the cash to clear up their balance sheets by buying down their debt exposure. Others share it with the shareholders.
These are all good things to do with the cash they have made but nothing benefits the shareholder over the long run better than dividends do. Why is that?
Dividends are old school. I wasn't that long ago that Wall Street considered the act of dividends the most important aspect of an investment. Now we can look to dividends for one thing: to increase our wealth.
How often do companies pay their shareholders?
Dividends are decided by the board of directors. Then they set a declaration date, which is the day the dividend payment to shareholders becomes a liability on the company's books. This is followed by the shareholder of record date. If you are holding the stock on that date, you receive the payment. They refer to this point in time as the ex-dividend price for the stock. If you buy the stock before the dividend is paid, you get the dividend. But be careful, a company considers the shareholder of record a person who owns the stock four days before the dividend is actually issued. Buying a stock in this four day period means you will not get the dividend; the person who sold it to you will. And the other important date in this process is when the company actually pays you.
Do they always pay cash?
This is the most common way of doing it. A company will declare a dividend and that amount usually is split among four quarters. So if the business offers you a dollar dividend, each quarter you would receive 25 cents for each share you own. Sometimes they offer a one time special dividend which is a lump sum payment with no other date specified when they will do this again.
What do investors need to keep in mind when buying dividend paying stocks?
Three thing investors can keep in mind when looking a dividend paying stocks: they are less volatile because the companies who pay them tend to be far more stable in terms of share price than other companies, they outperform non-paying dividend companies by almost 3%, and the are easily reinvested providing the investor with additional opportunity to buy more stock which means more dividends.
Paul Petillo is the Managing Editor for BlueCollarDollar.com and a fellow Boomer
So what are dividends?
When a company makes a profit there are basically three things that can be done. Some reinvest it, which is what newer companies or growth companies do. They take those profits and channel them back into the company in the form of research or simply hold the cash for future mergers and acquisitions. Some companies use the money to buy back their own shares. This happens when the company realizes that its share price is below what they think it should be. Some use the cash to clear up their balance sheets by buying down their debt exposure. Others share it with the shareholders.
These are all good things to do with the cash they have made but nothing benefits the shareholder over the long run better than dividends do. Why is that?
Dividends are old school. I wasn't that long ago that Wall Street considered the act of dividends the most important aspect of an investment. Now we can look to dividends for one thing: to increase our wealth.
How often do companies pay their shareholders?
Dividends are decided by the board of directors. Then they set a declaration date, which is the day the dividend payment to shareholders becomes a liability on the company's books. This is followed by the shareholder of record date. If you are holding the stock on that date, you receive the payment. They refer to this point in time as the ex-dividend price for the stock. If you buy the stock before the dividend is paid, you get the dividend. But be careful, a company considers the shareholder of record a person who owns the stock four days before the dividend is actually issued. Buying a stock in this four day period means you will not get the dividend; the person who sold it to you will. And the other important date in this process is when the company actually pays you.
Do they always pay cash?
This is the most common way of doing it. A company will declare a dividend and that amount usually is split among four quarters. So if the business offers you a dollar dividend, each quarter you would receive 25 cents for each share you own. Sometimes they offer a one time special dividend which is a lump sum payment with no other date specified when they will do this again.
What do investors need to keep in mind when buying dividend paying stocks?
Three thing investors can keep in mind when looking a dividend paying stocks: they are less volatile because the companies who pay them tend to be far more stable in terms of share price than other companies, they outperform non-paying dividend companies by almost 3%, and the are easily reinvested providing the investor with additional opportunity to buy more stock which means more dividends.
Paul Petillo is the Managing Editor for BlueCollarDollar.com and a fellow Boomer
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