Investing in Dividends 101

How to put together a "forever portfolio"

Written by Jimmy Mengel
Posted November 14, 2019

What else do you people want?

The stock market is at all-time highs, employment numbers are steady, and consumer spending has pushed the GDP to better-than-expected levels. Everything is looking peachy. So, why do I continue to hear everyone crowing about a major market correction?

Investors are generally a freaked-out bunch... at least the ones I've been running into at dinner parties, family gatherings, the gym, the grocery store, the DMV — you know, pretty much everywhere I go.

When someone finds out I'm a financial writer, they immediately ask two questions: when is the next market crash going to happen, and what stocks should I invest in that will never go down?

Now, if I knew the answer to either of those questions, I'd already be sailing around the world in a yacht without a care in the world. Nobody can accurately predict the next crash, and there isn't a stock on Earth that has never gone down — at least in the short term.

So what do investors want? Certainty.

"Never fear," I tell the scared, huddled masses. Even if stocks go up and down there is one sure thing in the stock market: dividends.

You make money either way...

While dividend stocks are well known to most, many investors write them off.

They aren't sexy. They aren't interesting to talk about at parties. Nobody is bragging about the 95% they made over the last five years with Lowe's (NYSE: LOW) stock. (Unless you're a Crow's Nest reader, where we banked 60% on the company in under two years.)

But if you're looking for safe, profitable retirement stocks, look no further than the mighty dividend.

Dividends are a pretty simple concept: you buy shares of a stock, and that company sends you money. It’s pretty simple and very effective. Dividends are the single best and safest way to safely grow your money. In fact, you can thank dividends for a massive chunk of the long-term total return of the S&P 500.

According to a report by the Guinness Atkinson Funds, dividends and dividend reinvestment made up a whopping 90% of returns from 1940 to 2011!

 

It goes on to note that “if you had invested $100 at the end of 1940, this would have been worth approximately $174,000 at the end of 2011 if you had reinvested dividends, versus $12,000 if dividends were not included.”

That, my friend, is the difference between retiring in luxury, or having some extra lunch money.

Here is everything you need to know to set up a dividend portfolio that will continue showering you with income for years to come...

TERMS YOU NEED TO KNOW

Here are answers to a few common questions new investors will have about dividends. It’s easy to buy shares and collect cash, but you should know how all of the moving parts work. You should know when you have to buy a stock, when to expect that check, and how much money you can expect to receive.

Here is a quick glossary of terms you should know…

CASH DIVIDEND

These are the cash payments made to stockholders of a company. These are paid out of the company’s earnings, or profits, per share. Say you own 100 shares of General Electric…

At the end of a quarter, GE would declare a dividend based on performance. Say it declares a $0.90 dividend and you own 100 shares.

You could expect $90 a quarter. If you choose a few stocks, you could give yourself quite a nice income stream.

DIVIDEND YIELD

This is a percent of the dividend payout, measured by the current price of the stock. Since stock prices fluctuate all the time, you can calculate the yield by dividing the annual dividend per share by the current stock price.

DECLARATION DATE

This is the actual date a company announces a dividend.

DIVIDEND

The portion of a company’s profits that is distributed to shareholders of record. Dividends are paid in cash or as additional shares of stock.

DRIP

A DRIP is a “dividend reinvestment plan.” It is offered by many dividend-paying companies. It is perhaps my favorite way to grow your wealth — the dividends compound like crazy over time and you accumulate more shares and more dividend payouts.

EX-DIVIDEND DATE

The date on or after which a stock trades without its dividend. You need to buy your stock before that date to qualify for the dividend. The ex-dividend date is one business day before the record date.

ONE-TIME DIVIDEND

Also called a “special dividend”, this is a fun bonus dividend paid in addition to your regular cash dividends.

PAYMENT DATE

This one is pretty obvious: it’s the day a dividend is scheduled to be paid.

RECORD DATE

The date the company uses to determine its shareholders or “holders of record.” You must own the stock by this date in order to qualify.

Now — like the dividend stocks themselves — that little lesson wasn't much fun to read (or to write, for that matter). But it is crucially important that you have that basic foundation before you jump into a dividend portfolio. So while that's a good primer for this week, next week I'll bring you a look into the four different kinds of dividend stocks that you can use to bolster that portfolio: Dividend Aristocrats, REITs, MLPs, and Utilities.

I'll even toss in a stock pick in each sector.

In the meantime, you can also check out my free book, The Big Black Book of Income. My Black Book outlines each and every kind of dividend stock, and lays out 27 sources of guaranteed retirement income.

Oh yeah, and it's free.

If you're ready for a "forever portfolio", the deals — like the stocks inside — don't get much better than that.

Godspeed,
jimmy-mengel-signature-fixed

Jimmy Mengel

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Jimmy is a managing editor for Outsider Club and the investment director of the personal finance advisory, The Crow's Nest, and cannabis stocks advisory, The Marijuana Manifesto. For more on Jimmy, check out his editor's page.

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