If you think that investing in bonds or CDs is the only way to navigate the ups and downs of the stock market, think again! Charles Carlson shows that dividends, the age-old benefit of owning stocks, can provide a steady income stream and offer some protection against market changes.
Wondering what a dividend is? Then this book is perfect for you. “The Little Book of Big Dividends” serves as a great introduction to dividends and their connection to stocks. The material is straightforward, not bogged down with equations (except in the Appendix), and avoids pushing risky investments. Carlson’s advice is reasonable and aligns well with conventional financial teachings.
So, what makes dividend-paying stocks so special? A dividend is a payment you get as a stockholder from the company’s profits. It’s somewhat like interest from a bank account but isn’t guaranteed and can be stopped at any time. Dividends are typically paid four times a year and their amounts can change.
Carlson notes that nearly half of the stock market’s long-term returns come from dividends. Historically, dividend-paying stocks have outperformed their non-dividend counterparts.
There are also tax benefits. Most “qualified” dividends are taxed at 15% instead of the higher ordinary income rates.
Want to save on broker fees? Some dividend stocks can be bought directly from the company, often cheaper than through a broker. This usually involves signing up for a Dividend Reinvestment Plan (DRIP), where dividends are used to buy more stock. You’ll pay fewer fees and can own fractions of stocks this way, but you’ll need to manage your own tax-related transactions.
A word of caution: You can’t just buy a stock before the ex-dividend date to get the dividend, sell it, and profit. Stock prices typically drop after dividends are paid out, nullifying this strategy.
Also, not all dividend-paying stocks are good investments. Carlson advises against stocks with very high dividend yields (those 3 points above peers or 5 times the S&P 500 yield), as they could be risky. If a company isn’t profitable, it won’t continue paying dividends for long.
Additionally, some dividend-paying investments, like REITs and MLPs, don’t get the same favorable tax treatment. You should consider tax implications before investing in these.
How does Carlson suggest finding the best dividend-paying stocks? Through his Big Safe Dividend (BSD) formula, which comes in basic and advanced forms.
The Basic BSD Formula:
– Payout Ratio = (Current Annualized Dividend per Share / Earnings Estimate for the Fiscal Year) should be less than 0.6.
– The Overall Quadrix Score, which is a rating based on factors like Momentum, Quality, Value, Financial Strength, Earnings Estimates, and Performance.
The Advanced BSD Formula, detailed in the book’s Appendix, includes ten different factors.
If researching dividend stocks isn’t your thing, Carlson recommends his website, which provides scores for various companies and lists those offering DRIP programs. The advice on the site is free.
In conclusion, if you’re new to stocks and looking into different investment strategies, this book offers a simple and beneficial introduction to dividend investing. I plan to explore Carlson’s BSD formula and recommendations on his website further. Expect a follow-up post!
