It’s frustrating when the year starts on a high note for us investors, only to be disrupted by concerns like those surrounding Greece and the Euro. If you’ve been following conventional wisdom and putting your money in Index Funds, you’ve probably seen about a 6% loss in May, especially if you track the S&P 500.
But don’t get too down—this is exactly the kind of situation where you need to reflect on how you’re protecting your investments. If buying stocks is playing offense, then ask yourself, “What am I doing to play defense?”
According to Paul R. La Monica, a writer I follow on CNN Money, one of the smart moves before this financial situation would have been to invest in strong dividend-paying stocks. These stocks pay a small percentage of the company’s earnings to the stockholders, not only potentially making money through stock value increases but also providing a steady income as you hold them.
Investing in dividend stocks is a well-established strategy. Companies that can share their earnings with shareholders are usually considered strong and stable. The CNN Money article even highlighted the success of AT&T (T) and Verizon (VZ), which were yielding around 5%, much higher than bank CDs or savings bonds.
After reading “The Little Book of Big Dividends” by Charles B. Carlson last year, I was eager to add dividend-paying stocks to my portfolio. This year, I finally did. My portfolio now includes Johnson & Johnson (JNJ), McDonald’s (MCD), Chevron (CVX), and Eaton (ETN). Although my portfolio’s value is down overall because these stocks generally move with the major indices, they should still provide a dividend yield of about 3.0 to 3.5% for the year.
Think you’ve missed the boat? Not so fast. Buying any of these stocks or others of your choice looks more appealing now than it did two months ago. For instance, when I bought JNJ, the yield was around 3.6 to 3.7%. Today, you could be looking at a yield closer to 3.9%.
Just a heads-up: don’t invest in something just because I did. Make sure you thoroughly research any investment before committing your money.
Before you dive into dividend stocks, here are a few things to consider:
– All stocks come with risks. Unlike bank CDs or treasury bonds, there’s a greater chance you could lose your principal investment.
– Look for companies with a history of increasing their dividend payments year over year; this suggests the company has a healthy future.
– Extremely high dividends may be a red flag that the company is trying to attract investors too eagerly. Always check the financial health of the company to understand why they might need you so badly.
Make informed decisions and happy investing!
