In part 2, we examined some ways to go about researching the markets and making well thought-out, educated buys.  Now, I want to talk a little about dividend-paying stocks and how they can bolster your portfolio’s bottom line.  In the past it was often those people who were about retirement age who  were interested in income investing, as they are concerned with the risks at their age.  This attitude is changing with the ups and downs  becoming the norm in the markets.  Every  investor should utilize dividends as a wealth builder in both bull and bear markets.

    The concept of dividends is simple; a company sharing it’s revenue with shareholders in the form of dividend payments, usually once per quarter.  Usually more established companies or less aggressive companies will pay out larger dividends than those who are investing for a lot of growth.  It comes down to whether they think the money would be more beneficial in their own hands or as a larger dividend payout to their shareholders. 

    There are a few ways to calculate approximately how much you can expect to receive from payouts.  I like to take the amount of money that I plan to invest in the stock and multiply it by the percentage yield, giving me a dollar amount that I will receive in one year at the current yield.  If I divide by 4, I can see how much I will get every quarter.  Investing $1,500 in a stock that pays 5% a year will yield roughly $75 a year, or $18.75 a quarter.  That doesn’t sound like a lot of money, but steady dividends will add up or time, regardless of what the market is doing. 

    A few things to consider, though.  Don’t buy simply because of a large dividends.  Oftentimes an unnaturally high dividend can be a sign of trouble for a company.  Do your homework; read up on it, check it out on CAPS, etc… Google Finance is an excellent resource to see the history of dividend payouts.  Every payout is listed on the chart, and it can be seen easily whether the dividend is new for this company, steady, or increasing.   The second thing to keep in mind is that you will have to pay tax on your dividends as Uncle Sam takes his cut.  The current tax rate on distributions is something like 15%. 

    Don’t sacrifice growth possibilities by basing your investments solely on yield, but don’t neglect it either.  I feel much more at ease with the volatility of the market knowing that I am guaranteed at least some income.  I just let the cash from my payouts grow, and when the market is down I add to some of my positions or make new buys.  In part 4, we will look into the process of maintaining and keeping up on your portfolio.