Dividends are the best. They are a great way to earn a return from the safest stocks. Frankly, even the safest stock out there is subject to a beating like the one we had in 2008. Think of dividends like your risk premium. You take the risk of your capital, and the company pays you for that. Capital appreciation is really the goal, but it is not too bad to earn a dividend while you hold on.
Dividend stocks tend to be safer and move slower than other stocks. Companies that pay a dividend are considered mature, at least in the tech sector. In other sectors dividends might be a more common way to return value to shareholders. Still a company must be at a certain level to pay a regular dividend. Remember it is cash given out, which reduces the cash on the balance sheet. It would be really hard to pay a dividend if you are losing money nonstop.
If you’re young, take your dividends and stick them into something else. You can even roll them back into the stock that paid them. Just keep rolling them back in, and you get a fatter and fatter dividend. Then when you do retire maybe you can just live off those dividend. A safe bit of your portfolio should use this mechanism. I know everyone likes to chase growth stocks, but you should always have some safe ones. I would use a greater percentage of my portfolio on dividends, and I think if I could I would roll dividends back into dividend stocks. I would keep it a closed system, and only stop once I felt I had enough. I am not into the waiting for retirement thing, because I do like to spend but I’d want a massive dividend return per quarter.
Things to watch out for with dividends are a deteriorating free cash flow. Obviously losses are a red flag, but maybe you can spot trouble early. Look for revenue decline, and free cash flow shrinking. Also, of special concern is shrinking margins. These are all signs to lock in any capital gains that you have and find another high yielding beauty.
Like I mentioned dividend stocks can be boring and not move as fast as we like. Well I recommend writing covered calls. Choose good strikes that probably won’t get hit. You might not generate massive returns, but as long as you are making something it is fine. Take those gains and reinvest them, you’ll build your covered call returns by having more shares. Just be careful with the strike. Calls for dividend strikes have a smaller premium, because when a stock goes ex-div it declines in value by the amount of the dividend. I leave choosing a strike for another day, but trust in the power of dividends. I will talk about them more later. For now here is a list of dividend stocks that come to mind:
NLY – a REIT, has high dividends, but watch out when interest rates increase
CSCO – just upped its dividend. It is nothing special, but CSCO also has some capital appreciation to do.
SSW – I haven’t looked at this one in a while. Don’t know if it still has a dividend, but when I owned it I remember it being a good one. Might be good for covered calls. I know I wrote those and did well.
That is enough for now I can do a dividend list another day.
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