Investing for Dividends

Some stocks actually pay investors cold, hard cash. It's called a dividend.

Investing for dividend income is one of the simplest strategies around. All you have to do is buy stocks that pay dividends, and finding them isn't hard. In 2010, 74 percent of the 500 big U.S. companies in the S&P 500 Index paid dividends. Keep in mind that buying stocks that pay dividends does not protect you against loss of your principal investment, and there’s no guarantee that a company will continue to pay dividends.

Details about dividends

One thing that is important is that you come up with a plan both for choosing dividend‐paying companies and using the dividend income.

One thing to consider in making your investment decision is a company's dividend yield. It's the amount of dividend income per share a company pays during the year, divided by the market price of the stock and expressed as a percentage. With a little research you can find the current average yield as well as stocks whose current yield is significantly higher (or lower).

The appeal of higher yield is more income. The risk is that companies that pay the biggest dividends often pay out a much higher percentage of their earnings to stockholders than other companies. If they're doing that to mask financial troubles, their ploy could backfire. That could ultimately mean cutting the dividend or eliminating it altogether.

What to do with dividend income?

Reinvesting may win the prize. Regularly buying additional shares of dividend‐paying stocks can give your long‐term investment return a real shot in the arm. Or, you might use the money to make other investments that also seem promising.

If you're retired, or thinking about it, dividend income can mean the difference between just getting by and having enough money to live comfortably after you stop working. When dividend yield is higher than the yield on traditional income investments like bond funds — which isn't always the case — dividend investing has even more fans.

The risk with relying on dividend income is that dividends aren't guaranteed. A company can reduce them or cut them entirely if times are bad. That could leave you short. And if that happens, it's likely to be at the worst possible time.