A secure future and worry-free retirement is a universal desire. So how can you achieve this goal? There are more than enough people on Wall Street who will give you their advice on how to optimize your portfolio and invest your money. The problem, of course, is that much of this advice is contradictory, unproven and logically unsound.
The secrets of personal wealth don’t have to be complicated; rather, they can be simple and easy to implement, tailored to your specific situation – whether you’re a novice, have some experience in the stock market or you’re a seasoned pro who has seen all types of market conditions.
Now the Wall Street companies will no doubt try to convince you that you’re not smart enough to pick your own stocks or invest successfully for yourself. They’ll bombard you with advertisements touting their success in managing money and they’ll cherry pick numbers to make it look like they constantly out-perform the markets.
None of this is true.
Wall Street’s strategy is to scare you into handing over your money to them so they can skim a piece off the top, regardless of whether you make money or not, and continue to pile up outrageous profits and pay out handsome bonuses so their managing directors and executives can live in big homes in the Hamptons and buy expensive automobiles.
But none of this is necessary.
Most people can learn to pick their own stocks, diversify, allocate their money and rebalance for themselves. What’s more, they can significantly outperform the Wall Street banks and mutual fund companies while lowering their risk.
Stick to large, historically profitable, dividend paying companies.”
If you’re just starting out, sticking to large, historically profitable, dividend paying companies is the way to go. These companies tend to be stable, have little chance of going bankrupt, provide a steady stream of cash flow via their dividend payments and are forgiving if you make mistakes.
That’s not to say you can’t or won’t lose money buying these companies, but you’re apt to lose less and will probably make more in the long run than if you invest in small or medium-sized, non-dividend paying companies.
Plus you’ll receive a healthy dose of cash flow. Most investors attempt to make their money solely from capital gains (that is, when a stock’s price goes up), however it makes sense to not only position your portfolio to profit from capital gains, but also from dividends.
A regular injection of cash flow can act as a buffer when markets fall and provide cash for you to purchase stocks that are selling for less than they’re worth.
Dividend Paying Stocks
In addition, studies have shown that focusing on dividend-paying stocks can help you outperform the overall market. In an August 2011 study, RBC Capital Markets found that since 1986, Canadian dividend stocks returned an additional 3.5 percent annually compared to the market. That’s a huge difference. But it gets even better. Stocks that increased their dividends over that period outperformed the market by an astounding 5.2 percent annually. Studies in the U.S. show similar results.
Now don’t get me wrong, I’m not saying you shouldn’t invest in non-dividend paying stocks if their characteristics are right, but a healthy dollop of dividend-paying stocks (especially those with consistent dividend growth) can do wonders for your returns – and lower your risk at the same time.
Be Wary of Ultra-High Dividend Yields
Keep in mind you shouldn’t chase dividend yield. Ultra-high yields are usually a bad sign. Since dividend yield is simply the annual dividend per share divided by the stock’s current price, a very high yield generally indicates a very low price.
And very low stock prices usually foreshadow trouble. And trouble means the company will most likely have to cut or eliminate its dividend. On the other hand there can be very rare times when stellar companies fall so much their dividend yields become irresistible. This happened during the global economic crisis when Canadian bank stocks, which are among the best in the world and at the top of the blue-chip heap, saw their prices plummet as investors ran screaming away from the stock market in general, and bank stocks specifically.
At that time the Bank of Montreal had a yield of more than 11%. That was the time to back up the truck and load up. However these instances are extremely rare and far between. The more usual case is to target dividend yields between 3 and 5 percent.
Finally you should always check to see how much of its profit a company is paying out in dividends. This is called the payout ratio. If the payout ratio is too high, it might indicate the company won’t be able to sustain its dividends at that level in the future.
Similarly, a very low payout ratio might mean the company is not giving back excess cash to its shareholders. If the company is putting this cash to good use, such as investing in assets that provide above-average returns or buying back its shares at relatively low prices, then there is no problem. Otherwise, steer clear and look for a better dividend-paying company in which to invest.
Creating a strong, well-diversified portfolio that throws off a healthy cash flow is well within your reach.
You don’t have to blindly turn your money over to Wall Street or the big mutual fund companies based on their scary tales of gloom and doom. You can do much better by learning how to invest properly and then implementing what you’ve learned in a logical, methodical and consistent manner.