INVESTING MOTLEY FOOL
If you’re thinking that dividends are chiefly for retirees, think again. They’re powerful portfolio builders for investors of all ages. Consider this: Between January 1926 and December 2014, fully 43 percent of the S&P 500’s total return was due not to the increase in the prices of the stocks in the index, but to the dividends those companies paid out. Here are some tips to help you be a successful dividend investor:
Don’t go just for the highest dividend yields you can find. They’re sometimes tied to struggling companies. (Yields rise when stock prices fall, and vice versa.) Seek healthy and growing companies.
Check out a candidate’s payout ratio, which reflects the percentage of its earnings paid out in dividends. If a company is paying out 95 percent or 150 percent of its income, the dividend might not be sustainable and might get reduced. High payout ratios can be just a temporary glitch or a sign of a significant problem. Favor lower ratios, such as below 60 percent.
Seek strong dividend growth. A company paying a 3 percent yield today with a record of hiking its dividends by about 10 percent annually can be more attractive than a company paying 4 per- cent with a 2 percent growth rate.
A long track record is a plus, too, instilling confidence. Procter & Gamble and General Mills, respectively, have been paying them since 1890 and 1899!
Ask the Fool
Question: Should I invest in savings bonds or CDs for my kids?
Answer:
It depends. Less-volatile investments such as savings bonds, money market accounts and CDs can seem “safer,” and thus best. But with many of them yielding only 1 or 2 percent, money in them will likely lose purchasing power over time just due to inflation. In the long run, stocks have generally outperformed those safer investments. We can’t know how the stock market will fare in the next few years, but the longer you leave your money in healthy and growing companies, the more likely you’ll be to do well.
With stocks, it’s best to invest only money you won’t need for at least five years (or 10, to be more conservative). If your child is 16, it can be risky to put college money in stocks. But if she’s 6, it’s a good choice. Perhaps start with an inexpensive index fund, such as one based on the S&P 500.