My job involves talking one on one with clients about their finances.Â When it comes to investing, most feel their savings accounts and CD’s are investments.Â I tell them they are losing money every day to inflation.Â When I tell them they need to invest a portion of their assets into investments that can at least beat inflation, they want nothing to do with it.Â The most common reason is because they previously lost money with an adviser and they’d rather get nothing in interest than lose money.
Then I have the smaller percentage of clients, generally the more wealthy that have a large portion of their money invested.Â These clients understand the importance of investing, and are prepared for the risks.Â My favorite client is a 92-year-old man who invests in individual stocks that pay higher dividends.Â I don’t recommend this for most, but he is willing to take the risks.Â He doesn’t invest all of his money in these stocks, but enough to ensure he is sent a hefty dividend check every quarter.Â The stocks he invests in are high paying dividend stocks.
What are Dividend Stocks
Dividend stocks (I am going toÂ simply call high dividend stocks Dividend stocks)Â are individual stocks that pay high yields just for holding their stock.Â Â I consider high yields anything above 3.5%.
Why Do Companies Pay Dividends
When aÂ companyÂ gives a portion of its profitsÂ to its shareholders it is a sign that they are financially healthy.
How to CalculateÂ Dividends
In order to calculate how much you will receive in dividends, you need to know 2 things.Â First, you need to know how many shares of stock you own.Â Next, you need to know the annual yield or the dividend percentage the stock pays.Â To make things simple, I will calculate the dividend for a stock that pays on a quarterly basis.
Let’s assume that you invest $10,000 in a high dividend stock.Â Â We will say the stock cost $20 a share, so your $10,000 bought you 500 shares.Â TheÂ dividend that this imaginary stock pays is $1 per share, which equates to 5% APY (that 5% will adjust as the stock price rises and falls).Â Divide that $1 by 4, in order to find your quarterly dividend.Â That equates to $.025 per quarter.Â Now times that $.025 by 500 shares, and you get $150.Â That is how much you will make quarterly.Â For the year, you will make $500.
That whole calculation assumes that the company doesn’t change the dividend, that you didn’t reinvest your dividends, and that you held the 500 shares all year-long.Â $500 a year isn’t bad, considering CD’s would have made you around$40 andÂ most savings accounts would have resulted in $20.
The Future for Interest Rates
Dividends will pay higher yields than savings and CD’s for at least the next 3-5 years.Â The federal reserve recently announced plans to maintain the current rate on the federalÂ funds rate until the end of 2014.Â What does that mean? It means savings and CD rates will remain low for a while.
The federal funds rate is the rate at which banks and lending institutions lend money to each other.Â Banks are required to keep a percentage ofÂ customer funds on reserve, where they banks make no interest on that money (they can’t loan it out).Â Banks keep their reserves very close to the percentage needed, without going under.Â If they go under, they are required to borrow from one another in order to meet the reserve.
When banks can borrow from one another at a low rate, there isn’t a need to offer customers high interest rates in order to build reserves.Â The current federal funds rate is %.25.Â With a rate that low, banks don’t need to offer a much higher rate.
The stock market can be a very scary place.Â There doesn’t seem to be a method for its madness, and you can make or lose large sums of money very quickly.Â You shouldn’t invest all of your money in dividend stocks.Â Dividends should be a nice supplement in your diversified portfolio.Â Make sure to do your due diligence before investing in any dividend stock.Â Here are a few dividend stocks to take a look at.
How do you feel about dividend stocks? What percentage of your portfolio is invested in them?