WiseStockBuyer

Can you Make a Living off Dividends?

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Most financial planners argue that a person in retirement should withdraw four percent of his portfolio each year, and this will be by a combination of income from bonds and capital from stocks. This rule is designed to provide longevity to income, providing regular ‘income’ to the retiree. However, with yields from treasury bonds now at a little over 1.5%, many investors are looking for other ways to create income in retirement.

Investing in high quality, high dividend yield stocks can produce a good income stream. A stock that pays a dividend of, say, 7%, and that has a long record of increasing that dividend, will produce an income on an initial investment of $100,000 of $7,000. And this income should grow over time if the company continues with its dividend policy.

However, with careful planning early on, it may be possible to create a fund that will pay an income sufficient for all living expenses.

Building a dividend portfolio for retirement

Investing to create a portfolio for retirement requires a different approach to the traditional. Conventional wisdom states that the first aim of investing toward retirement should be for growth early on. As retirement approaches, this higher risk strategy should gradually be turned into one for stability and finally to produce income (and this income is usually recommended to be from “safer” bonds).

However, investing in dividend paying stocks early on, and then reinvesting those dividends paid, can be a valuable strategy, with the by-product that when the time to retire arrives you will know all there is to know about dividend investing (and make better income investing decisions accordingly).

As with all types of investing and investing strategies, there are rules that will help you achieve your goal of living off your dividends:

1)      Invest in stocks that have a history of growing their dividends. Companies that grow their dividends year on year tend to continue to do so. Investors expect it, and management want to protect the good name of their company in the market.

2)      Look for dividends that grow by more than inflation. This will help protect you against the effects of inflation, and preserve the spending power of your money

3)      Invest regular and often. By doing so, you will take advantage of dollar cost averaging, buying shares when the market falls as well as when it rises.

4)      Reinvest your dividends. Dividend reinvestment is the key to seeing your investment grow exponentially. You will receive dividends on the stock you buy with the dividends received, and over time your fund value will grow way above the average of an investor who does not do likewise.

5)      Diversify your portfolio. As with any other stock portfolio, diversification is important. Whilst high yield stocks tend to be less volatile than growth stocks, they will still be subject to market forces and outside influences that management cannot control. Seek to diversify your holdings across business sectors.

6)      Monitor your portfolio. With a long term strategy, and given that you will have conducted proper research before buying your dividend stocks, this does not need to be a daily process. But at least once-a-year you should take stock of your portfolio and alter accordingly. Perhaps one of your dividend stocks has stopped performing, or its yield has fallen below an acceptable level. Adjustment of the weights and make-up of your portfolio is a necessary process to keep you on track for your ultimate goal.

An example of dividend growth

If you invest $100,000 to create a portfolio that yields 4%, with a 6% dividend growth rate, and reinvest the dividends for 20 years, the dividend amount you will receive per year when you decide to withdraw dividends in year 20 will be $24,289. Without the dividend reinvestment, the dividend payment would be just $9077.

Clearly, combining dividend reinvestment, with high yielding stocks that offer a good rate of dividend growth pays more than dividends!

For those that are already retired

The effect of reinvesting dividend payments, and benefiting from the exponential growth that compounding produces, is great if you are investing for the long term toward retirement or other time when you require income from your investments. But what if you are already retired and looking to boost your income?

Here, yield is the most important factor. High yielding stocks such as REITS will help to pay those bills that are falling into your post box. However, the rate of dividend growth tends to be low on such stocks.

So, investing in stocks that have a good record of dividend growth may help toward beating the effect of inflation, but some current yield may have to be sacrificed to benefit from such future dividend growth.

Planning for the time you need to take income will allow better investment decisions and be cheaper over the longer term. Investing regular and often will help to negate the peaks and troughs of the market, and reinvesting dividends will help to power the value of the dividends in your portfolio to a level that may just pay for your lifestyle in retirement.

However, portfolio management will be needed, even if not on the level of that of an actively managed portfolio.

Making sure your investments are working toward your goal throughout the life of investment will help you to reach your goals and ensure your dividend income grows at a faster rate than inflation. If you have already retired, it is not too late to benefit from investing for dividends: decide whether you want to address your costs now by investing in high income stocks, or to create a rising level of dividends by investing in stocks that have a high dividend growth rate.

Remember though, making plans early may help you beat the four percent rule without the need to touch your capital.

Rising Dividend Stocks: Creating income, securing growth

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Many investors want to create an income from their investments, perhaps to meet the expenses of everyday life, pay for a child’s education, or meet mortgage payments without reducing capital. Other investors look for capital growth, but want to achieve this with a cautious outlook.

Often, fixed income investments are recommended to these investors. Cash bonds and treasury securities, for example, give a steady and known return with safety of capital.

But the level of income won’t increase from a fixed income security, and the rate at which the capital grows when interest is reinvested is unlikely to make one rich in any length of time. This creates problems for both income and growth seekers.

Inflation will take its toll

It may be comforting to have a known and steady stream of income from a fixed income investment, but when it comes to inflation then an investor needs to take into account the decreasing purchasing power of his fixed rate income over time.

For example, a fixed income investment of $50,000 that pays interest of 2.5% per year will yield $1250 each year that it remains invested. In 10 years, the annual income will still be $1250. Perhaps an investor who bought such an investment ten years ago did so in order to pay his electricity bill. But with inflation running at an average of 2.5% per year, the investor’s electricity bill will be $1600 now.

The $50,000 bond investment no longer pays enough income to satisfy the investor’s electricity bill.

Rising dividends combat inflation

Now consider the investor who invested his money in ‘ABC’, a business that generates and sells electricity and paid shareholders a dividend of $1.35 (a yield of 4.5%) ten years ago. He invested enough money to generate $1250 in income to pay his electricity bill, also.  His total investment was $27,750.

In fact, it turns out that ABC has increased its dividend for 10 consecutive years, and by an average of 4%. The dividend he was receiving on each share is now $1.95. At the time he made the investment, his dividends paid his electricity bill. Now they give him an income of $1850. Perhaps even better, the investment he made into an electricity company is paying his electricity bill, and more besides!

What about the capital value of the shares?

It’s true that share prices can fall as well as rise, so the value of the shares of a dividend stock could indeed have fallen over the duration of the investment. But dividend stocks that raise their dividend year on year tend to rise in price, for the reason explained below.

The first point to note, however, is if the investor were investing for income there is an argument that says the value of the investment is a secondary consideration: dividends are paid per share, not per dollar as interest is. If dividends are rising, and income level following suit, does the value of the investment matter?

Second, however, is this: the stock has been bought in the first place because of its yield: if the dividend keeps rising, then it is likely that the stock will continue to be bought for the yield. This will create buyers that will support the share price.

Consider the stock ABC in the example above. The yield had remained unchanged throughout the term, but the dividend had increased from $1.35 to $1.96. So the share price now is $43.55. The investor’s original investment has increased in value, as has his dividends. It is the increase in dividends that has driven the increase in the value of the shareholder’s investment.

Look for stocks with rising dividends

To protect against the effects of inflation, and give a rising income when it’s needed, an investor could invest in rising dividend stocks. But the rising dividend and high yield are not enough to make the stock a buy.

An investor should also look at the rate of growth of the dividend and the history of that growth. Companies that have a history of raising the dividend year on year are more likely to continue doing so.

On top of this, of course, the business itself should be on a firm footing. Is the dividend cover sufficient for dividends to continue to be paid? Does the company have a good cash flow? Are there legislative or competitive issues that may hamper earnings growth in years to come? What is its debt position? All these questions and more should be addressed before committing to an investment.

A good place to start the search for potential dividend candidates is to google for dividend aristocrats (those stocks that have a 25 year history of raising dividends) and dividend achievers (which have a 10 year history of consecutively rising dividends).

A company that raises its dividend is not only rewarding its shareholders but also indicating its confidence in the future, and its potential for on-going profitability. But before making an investment, you should conduct a level of research that produces reasons for owning the shares other than a good dividend paying policy.

Not all those companies that have a history of increasing dividends will continue to do so. Some investors will argue that a dividend stock should never be sold. But, perhaps, when a company that has raised its dividend for 20 years or more suddenly does not do so, or even cuts the amount, it is a sign of changing fortunes that should not be ignored.

As with any portfolio, although a dividend stock portfolio creates a passive income that can be reinvested easily, it should be managed and monitored on a regular basis. Keeping on top of individual constituents, and maintaining proper diversification, will help to ensure those dividends keep on rising and your income beats inflation.

And finally, on a side note, a special thanks to tiethemoneyknot.com and walkingtowealth.com for including me in the recent carnivals.

How to Earn Money Online Without Investing in the Stock Market

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The stock market, with the advent of online discount brokerages, is a good (albeit risky) way for seasoned traders to make money online. Unfortunately, in order to trade, you have to have:

  1. A good amount of capital
  2. Deep knowledge of the market and trading in general
  3. A healthy appetite for risk

Since many people lack one or more of the above, it’s hard to trade stocks effectively and profitably for much of the population. Fortunately, you can make money online in more ways than trading stocks, mutual funds, options, commodities, or other assets.

Here, I’ll outline a few common ways you can actual make money off the wonders of the modern-day Internet.

Blogging

Are you a good writer? If so, there is a world of opportunity out there for you through, among other things, blogging.

Blogs are everywhere. They not only provide useful information, but also attract users to websites- thus driving in revenue from web traffic and advertisements – and also build up the authority of the blogger and the company he or she represents. That indirectly brings in revenue as more customers begin to read these blogs regularly.

For these reasons, companies have begun to invest in blogs more than ever before. If you are a good writer and can write clearly, correctly, and captivatingly, then you are a good candidate to be a blogger. There are several websites online that you can use to find blogging work. Or, you could start your own about something you feel passionate about and create a website with advertisements to give you money based off how many people view your blog. Some great blogs that give advice on blogging include problogger.net, mattsmarketingblog.com and copyblogger.com.

Internet Marketing

Another way is to create a website and use it as a hub for internet marketing, which is a catch-all phrase used to describe the process of attracting visitors to a website, thus allowing you to profit.

One way is to place advertisements on your website that pay based on impression (the number of people who view it) or per click (based on the number of people who actually click the ad). Google AdSense is the most popular internet marketing program out there today that pays you based on clicks or impressions.

You can also do affiliate marketing with your website; this is when you join affiliate programs of retailers and distributors and place links on your website so your visitors can buy their products. For every product you sell through your website, you receive a commission.

To attract people to your website, you’ll have to take advantage of multiple marketing channels, such as social media marketing, search engine optimization, email campaigns, and other methods. The best solution is to start with a topic you are passionate or knowledgeable about and create a useful, informative, and relevant website based on it. Then, as you build up your network, you’ll gain more revenue.

Drop shipping is another term used with affiliate marketing that describes how the distributor ships goods on your behalf that are sold from your website, and you handle the customer and the money. Your profit is in the difference between how much you sell the product for and the discounted price you pay to purchase the products from the distributor.

EBay

Believe it or not, eBay is still a very viable way to make money online. The whole idea is simple: You take items that you either already own or find elsewhere (usually in garage sales, estate sales, auctions, etc.) and sell them on eBay through your account. You can either allow your customers to buy them direct for a certain fee, or allow them to bid on your product through an auction.

Selling successfully on eBay means you have to have a good idea of what things are worth, and have to know how to describe and market your product in an attractive manner. But, there are countless numbers of people who have earned a significant amount of money off eBay over the 17 years it has been in existence.

In 2011, eBay brought in $11.6 billion in revenue, which gives you an idea of just how popular the company is even today.

Share Your Opinion and Referrals

Another way to make money is to share your opinion and give referrals.

There are tons of websites that will pay you to take product surveys for either themselves or their clients. This is a way to conduct market research, so companies are willing to pay cash for people who take 15-30 minutes out of their day to answer questions and provide an opinion. Sometimes you have to fall into a certain demographic (i.e. you have to be a woman between the ages of 30 and 50) to qualify, but often that isn’t the case.

Furthermore, you can get paid to refer people you know to recruiters who are looking for candidates to fill certain jobs. Recruiters are willing to pay considerably for this; you can earn anywhere from $50 to several thousand dollars per referral. It also works for products; if you get someone you know to buy a certain product or service, you can get a fee or commission from the referral.

Search online for ways to make money on the Internet. But, be careful: If it sounds too good to be true, it probably is. Making money takes work, but possibilities are definitely out there for the taking.