Investing in stocks, options and futures.


Today the U.S. stock market is more accessible to the average person than ever before in the history of the exchanges. Information about the companies who's stocks are traded on the New York and NASDAQ abounds. In some ways the information is too extensive. You need to narrow down the information to pertinent data on a few stocks to get to a manageable workload.

In the current market there is an unusual amount of volatility. One way to make it through the ups and downs while waiting for your stock to make the anticipated gain in price is to collect dividends and automatically buy more stock with those dividends. This allows dollar cost averaging automatically. As the stock fluctuates up and down the dividend back fills some of the losses and enhances the gains. Thus, on average you may be able to out perform the general market. Most companies that pay dividends participate in a Dividend Reinvestment Program also known as a DRIP. This allows you dividends to be automatically invested back into the same stock. Effectively compounding the income without having to pay a broker fee to purchase the additional shares with the cash from the dividend. Also, when the market falls the companies paying dividends tend to fall less because as the price of the stock goes down the dividend staying the same produces a higher percentage return. 

Once you are determined to follow this strategy you must find companies that have a good dividend but don't borrow money to pay a suspiciously high dividend. Usually the companies that can afford to continue to pay the same or greater dividend over time pay less than 10% per year. There are notable exceptions. REITS and Limited Partnerships may pass through almost all the gains to the shareholders or members. These are special situations. The dividend may vary from very high to very low. These sometimes yield as high at 17% safely. Keep in mind though a 3% or 4% dividend may not sound like a lot but if the stock rises in price every year and the dividend amount goes up every year the return on investment (ROI) can be very large because your cost basis comes from the original price you paid for the shares. So, the dividend payout percentage on your cost basis could be 15% per year after you have remained invested for several years. On top of that the compounding may account for another 5%.

Look at the balance sheet's of companies you are interested in. This information is available on many web sites such as Yahoo finance, Etrade, TDAmeritrade and many others. Make sure the free cash flow is at least 2 times as much as the dividend. In the case of REIT's only about 10% above the dividend is OK.

Look for the company that is the most profitable in the sector. The companies playing catch up will usually be more risky. For instance, in the retail drugstore space CVS is executing best of the largest companies. Walgreen's is second best. Rite Aid is a distant third. Rite Aid is much more risky and currently pays no dividend.





Educational

Financial
Books