Boring Terms We Need To Know: Dividend Payout Ratio

The second term in our "Boring Terms We Need to Know" series is dividend payout ratio. Dividend payout ratio is an important statistic that we need to be aware of and use when analyzing a dividend stock.  If you found Yield on Cost to be fairly easy to grasp, then you'll have no problems understanding dividend payout ratio.

Dividend payout ratio is simply the percentage of a company's earnings that is paid out to its investors in the form of dividends.  The ratio is easy to find on Yahoo Finance.  Just go to the a stock's quote page, click on "Key Statistics" link and search for "Payout Ratio".  Here is an easy example if you want to figure out the ratio on your own.

Banking Stocks Presenting Dividend Values

Four years ago you would be hard pressed to put together a dividend portfolio without owning a few banks. In fact, the financial sector of the S&P 500 Index paid $51 billion in dividends to shareholders in 2007. Everyone is well aware of the major financial meltdown that occurred soon after causing many banks to cut or even suspend their dividends. By 2010, the financial sector was only responsible for about $19 billion in dividends, a drop of 62%.

Despite the dark cloud that still resides over banks today, there are positive signs that would lead one to believe a rebound could be near. 

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Roth IRA + Dividend Stocks = Awesome!

How many of you are aware of what a Roth IRA is all about?  How many of you are actively investing and maxing out your Roth IRA?  My guess is very, very few... and if that is the case well, pardon me, but you're crazy!  Perhaps you think taxes won't be as high when you retire as they are now (ha!).  Maybe you enjoy paying taxes and feel the government will spend your tax dollars efficiently and intelligently (Commie!).  

Ok, most likely you don't fully understand the benefits and you'd rather spend your money on other things you feel are more important today.  Well hopefully a recent article that I had published on Seeking Alpha will change your mind... Read On

What Einstein Would Invest In Today

From time-to-time I plan to repost articles I find on the web that apply to our investment strategy. Below is one of those I found enjoyable and applicable.

Albert Einstein wasn’t famous as an investor. He was a genius who revolutionized theoretical physics. But if he were alive today, it’s pretty clear what he would be doing with his money. And you should be doing it, too. Let me explain… It’s a truism that when times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk. This is exactly the opposite of what they should be doing, of course.

But today you have a great opportunity to both limit risk and generate superb returns in your stock portfolio with – stifle that yawn – stodgy, old dividend-paying stocks. These investments aren’t nearly as boring as you may think. And in the decade ahead, their returns are likely to be outstanding. Dividend stocks alone won’t generate a mouth-watering return. But dividends will rise over time – and surprising things happen when you reinvest them. Picture a snowball rolling down hill. Albert Einstein understood this. As he observed, money compounding “is the most powerful force in the universe.”  Read More

Boring Terms We Need To Know: Yield On Cost

In order to analyze dividend stocks we need to understand some boring statistical terms. Since I'm going to use these terms a lot, I thought it would be best for me to explain them one at a time.  Although these terms initially may sound complicated, I think you'll find they're not that difficult at all to comprehend.

The first term we'll discuss is one that you'll hear me talk about quite a bit when referring to my own portfolio, Yield on Cost (YOC).

Stock Sale

Its been a brutal week for stocks with the S&P 500 down more than 6% as of Friday afternoon.  It's weeks like this that make me realize I'm not a typical trader.  Despite all the doom and gloom headlines about the market, I find myself getting excited.  It's not because I'm shorting stocks (making money when stocks go down), it's because these are the absolute best times to buy high-quality dividend stocks at a discount.  It's time to put some cash in my brokerage account because the market is having a Stock Sale!

KA-CHING! I just got a 25% raise

You probably think today was a bad day for the market with the DOW dropping nearly 2.5%, but I could care less.  Why, because Microsoft (MSFT) raised its dividend by 25% today from $0.64 to $0.80 a year.  At its current price of around $26, that translates to a yield of 3%.

MSFT started paying a dividend in 2003 at which time they paid $0.32 a year in dividends.  When they began paying a dividend you could have bought them for about the same price they sell for today.  Most people would think that's a horrible return, but I think that's pretty darn good considering that is over one of the worst recessions our country has seen.  But the thing we should focus on is not the price over that period, no we care about the fact that MFST has raised its dividend 150% in the past 8 years.  

Dividend Stock Analysis: Intel (INTC)

Ok, so we've covered why we should be investing in dividend stocks and how to get started. so now its time to have some (nerdy) fun and analyze a specific dividend stock.

Intel (INTC) represents the largest holding in my portfolio.  I have been allocating it for several years now and will continue to do so while the price, in my opinion, is undervalued.  What I really love about Intel is that it is paying around a 4% dividend yield, which is unheard of for a technology company.  I plan to analyze the Technology sector and their growing popularity as viable dividend stocks in later posts, but lets focus just on Intel for now.

Getting Started in Dividend Investing

Getting started in dividend investing is fairly simple these days. With a few clicks of your mouse and some cash you can be up and running in no time.  The following is what you'll need to begin:

1. A way to purchase stock
2. A dedication to periodic investment
3. Research tools to choose our stocks
4. Time (yeah, that one again)

A fun example to prove my point

So you've heard me talk about how great dividend stocks are and how they can build serious wealth over time, but I haven't really proven this with a real-world example.  I thought about putting together an example of if your great-great-grandparents bought $100 of Colgate-Palmolive back in 1885 when they first started (and have never stopped since) paying a dividend and how it would be worth millions today... but that's hard to relate too.

Instead I'd like to give an example of a company that has paid a dividend since the mid 90's.  Its a company I have owned for several years now in my Roth IRA. Of course this is still an extraordinary example, but it truly demonstrates the power of dividend investing. The stock is Realty Income (O), a real estate investment trust (REIT).