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Buying Dividend Paying Stocks

The following is a guest post written by one of our readers and friends, Bryan Postern.

There are many advantages to investing in dividend stocks. Most dividend paying stocks outperform those that do not pay dividends in both the short and the long term. Besides the obvious advantage of getting better returns over time, there are several “hidden advantages” to investing in dividend paying companies.

An investor focused on putting his or her money into top dividend stocks needs to do a sufficient amount of research. They should make sure that the company is profitable, that the dividend yield is significant [over 2%], that the dividend has been increased over time, and that the company is poised to grow and become more profitable each and every year. After the initial purchase however, things should be on autopilot for the most part.

Dividend investing is not about trading and trying to make a quick buck; it is about buying and holding for as long as you can. You should still monitor your investments and make sure that the companies you are investing in are still doing well, but the work involved in dividend investing does not even compare to other types of investing. When you are investing in dividend paying companies and you plan on buying and holding for the long term, you only need to be correct once, in which company/companies you buy. When you are trading or at least more active in trading, you need to be right three different times to be profitable. You need to be correct in your assumptions of what company to buy, when to buy it, and when to sell it. I do not know about you but it is hard enough for me to be correct once, let alone three different times. If professionals have a hard time profiting from rapidly buying and selling companies with little rhyme or reason, what makes you think that you would be successful in doing so? Warren Buffet did not make 40+ billion dollars from investing in companies he knew little about and then quickly selling them. Buffet buys a stake in a company and expects to hold the company for decades, not days, weeks, months, or even years.

There are less low points in dividend investing. This is a documented fact. You will not completely avoid recessions, depressions, or simple downturns in the market by investing in dividend paying companies, but you will experience higher and less “lows”. Dividend paying companies are much more stable then companies that do not pay out dividends for several reasons. Dividend paying companies tend to be profitable and they tend to trade at lower valuations. Also investors do not put their money into dividend paying companies with the intention of selling the next day, they buy and hold these companies for the most part.

There is simply much less risk involved in dividend investing. Not only will you get better returns in the long run, your portfolio will be more stable and you will not have to do nearly as much work. It’s a no brainer

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Joining A Stock Market Forum

Editors note: Guest post written by Richard Lauder, who also guest posts at Beating The Stock Market

A few years ago, I joined a free online stock market forum whose recommendations and “tips” never really yielded any significant profits. Most of them use the “Pump and Dump” attack, where several sites send out mass alerts on a particular small cap stock and cause a bit of buying spree on that stock. You will sometimes see a large percentage increase in value, but usually a very short term rise in these stocks which amounts to just a few cents per share. Be aware that it usually falls again just as fast as it went up, so you need to be ready to get out fast. That’s the “dump” part of the equation. If you have the time and patience to closely watch and trade these stocks often, and at large volumes, you can make some profits.

I usually stick with one of the “big house” sites for research, news and stock market 101 type of information. These guys spend a lot of time, money, and resources to come up with their data, and I can access all of it just by paying to trade on that site. Most of these sites will offer options in membership to where the more you pay, the more of these tools you will be able to access. The old saying still holds true, “you get what you pay for.” While there may be some sleeper sites out there that occasionally hit on some fast risers, you will pay for them, if you can find them in the crowd with all of the others.

As you have always heard, do the research, follow the leaders, and stay in it for the long run. Most of the recognized large trading firms now offer online trading for from four dollars up to twelve dollars for each basic market trade. Some of them will require a minimum starting balance of several hundred dollars. There are a couple of really good sites that have no minimum balance requirements, and actually offer some pretty impressive research and tracking tools. My recommendation is to study the difference in the types of charts, graphs, history, and tracking tools that are most commonly used, and learn how to use them before you buy stocks. Once you find which method works best for you, and become comfortable spotting trends and patterns, then find the site that offers these along with your basic trading platform. Check for a stock market course in your local area. You can pick up some good stock market tips and information there.

You also need to decide what kind of trader that you want to be. A day trader has to have a lot of knowledge and resources, and must be in the position to study and trade pretty much 24/7. A commodities trader, and especially short sell traders need to be even more in tune with what they are doing and pay even closer attention. At this stage, you are most likely just diving into stock trading and will be an occasional trader. My advice is to start small and take your time learning the ropes until you have a good understanding and good “gut feel” for what you are doing. If you are interested in only being an “investment trader,” where you want to put some money into something and not have to deal with the details day in and day out, then you will most likely not be the stock market forum type.”

These forums are more for traders who pay attention to the market every day, and trade at least several time per week. As with everything online, there is some junk out there, there are a lot of scams out there, but then there are some real jewels to be found. You just have to take the time to dig them out.

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Stock Market 101

Learning and investing in the stock market can be both very rewarding and risky. The more one studies and learns about the stock market before investing the better prepared and more successful they are likely to be. So where should one begin their personal stock market 101 learning experience? It is best to start with either reputable sites or the business section of the newspaper for stock market tips and advice. The stock market like any market goes up and down, prices of individual stocks rise and fall.

To best follow the market, choose top stocks of companies that are familiar such as Disney or Coca Cola. Every stock has a “ticker symbol” this is the symbol you will need to enter to see the stock price. Disney is DIS and Coca Cola is KO. Follow the stock on a daily basis and you will notice that the price will rise and fall. Try and understand why the prices are rising or falling. Is there a piece of company specific news that is positive or negative? Is the stock trading higher or lower because of some general economic news. Understanding the underlying companies business is critical to learning about how to invest in the market. Learn the mechanics of the market.

Companies on the stock market have their “shares” traded. Follow the number of shares traded on a daily basis, this is called the “volume.” Try and figure out why volume may be heavy or light? Notice the trading range of a stock, or how high or low the price has been over the last 52 weeks. Study companies in similar businesses to the companies you are following. So if you like and follow Coca Cola also look at Pepsi Cola and try to understand why one company may be doing better than another. Read the market summary before you buy stocks because it’s important to understand why and individual company rises or falls, but equally important to understand why the whole market moves in one direction or another.

Very often macroeconomic trends move the market. Data such as unemployment numbers or consumer confidence numbers. To truly become a wise investor get a calendar of when all the relevant economic numbers are announced and follow those number to see if they were as expected, better than expected or worse than expected. See how the market reacts to each of these scenarios.

Follow the Stock Markets around the globe. The US stock markets are the largest in the world but almost all countries have stock markets. Of particular importance are the markets in London, Tokyo and Hong Kong. Markets influence one another if it is a good day on the New York exchanges, international markets will tend to respond positively. News in one part of the globe affects the rest of the globe and the same holds true for foreign and US markets there are all interconnected.

The primary rule of thumb is, don’t invest a penny unless you really understand how the market works and why a particular investment is attractive. Also always be aware of the relationship between risk and reward. The riskier the investment the greater the potential reward and the greater the potential loss. The less risky an investment the lesser the gain or loss. Finally, have fun, the stock market is never static it is always changing and moving. Good luck.

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