One Guy’s Journey to Passive Income Through Dividend Investing

I know that it is always interesting to get a full throughout analysis on a high dividend paying stock but I thought of searching through the highest paying dividend stocks of the S&P 500.

I have used the following filters to produce this dividend stock list:

- Dividend yield over 3%

- Stock price over $10.00

- Payout Ratio under 60%

While you could do this kind of filter with financial websites, it’s always handy to have the list done for you . Please note that price, dividend yield and dividend payout ratio are as of August 11th 2010.

Is there any other filters you would like me to apply and post a new chart later on?

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This guest post was written by Go Banking Rates, bringing you informative personal finance content and helpful tools, as well as the best interest rates on financial services nationwide.

After a scorching run from the March 2009 low, there was a lot of uncertainty about the United States stock market heading into 2010. Could it sustain the remarkable recovery or would the myriad of economic maladies finally catch up with stock prices? The fact of the matter is, it’s impossible to tell with 100 percent accuracy and conviction where today’s stocks will end up tomorrow, much less weeks, months or even years from now. The best thing you can do is separate objective information from opinion. Develop a sound investment strategy and stick to it. One of the worst things beginning investors–and even seasoned ones–can do is to be capricious with their portfolio.

The Case for the Bulls

We’re probably not going to enter a new bull market any time soon, but that doesn’t mean that stock prices still can’t close out the year on a high note. While optimists may not have too many indicators on their side to make their case, behind the scenes there’s actually a lot more business activity going on than in recent past. Consumers might not be doing any buying, but companies are definitely in the mood to shop. For example, look at the string of multi-billion-dollar deals in August alone:

• Software-giant Intel Corp. buys security software-maker McAfee for $7.7 billion.
• BHP Billiton, one of the largest companies in the world, is attempting a hostile takeover of Canadian fertilizer giant Potash for $40 billion.
• CenturyLink, the fifth-largest telephone company in the nation, buys Qwest Communications Intl. for $10.6 billion.
• IPO news from popular video site Hulu at about $2 billion, and General Motors Co. at roughly $15 billion to $20 billion.

According to the DealBook.com, the business blog of The New York Times, there have been nearly $200 billion worth of deals done around the world year-to-date. How that translates to the market is another matter. Ironically, another positive for the bulls is the growing fear in the market. Like Warren Buffett, widely considered the greatest investor alive, is known to have said, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Of course, that only works if you know what you’re doing.

The Case for the Bear

Speaking of fear… If you’ve been paying attention to the news, you’d know that the stock market isn’t doing too hot right now. Stock prices have been on quite a rocky slide downward. What’s worse, it doesn’t look to be getting better any time soon. September has historically been the worst month for stocks, and after the pounding the market has taken since May, that’s downright scary. Then there are these goodies:

• Threat of a “double-dip” recession
• Continued weakness in the housing market
• Unemployment is still hovering around 10 percent
• Alternative investments like gold, treasuries and even stocks in foreign markets like China and Brazil are seen as more attractive

These are just some of the contributing factors that are scaring investors out of the stock market. The uncertainty of where the U.S. economy is heading makes it hard for many investors to develop their strategy. So instead, many put their money to work elsewhere, or even just keep it in cash while they wait it out for better opportunities. There’s absolutely nothing wrong with that.

What To Do Now

If you don’t know what to do with your stock portfolio, fear not because you’re not alone. You shouldn’t feel pressured to buy or own anything that you aren’t sure about, or worse, don’t even want. Being in the market for the sake of being in the market is a huge mistake. You’re better off taking that money and putting it in a safe certificate of deposit or high-yield savings account. Although, if you aren’t quite sure where the market is heading but still want to be in the game, you could always hold on to stocks that pay you to wait–dividend stocks. Don’t just look at the ones that pay the highest rate, though. Do your due diligence and look for the right ones for you. Whatever you do, remember it’s your money, so make it work for you and make sure you’re always aware of how it’s performing.

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Last Wednesday (August 11^th), I was taking a day off with my family and while we were having fun in the sun, the market took another hit on Fed’s concern over the American economy. The US indices dropped by 2-3% while the Bloomberg app on my BlackBerry was beet red on the international markets too. We are in the midst of very “interesting” times for investors.

After the huge crash in 2008 followed by an important surge in 2009, we are now dancing on a thin wire between 2 buildings. Government debts are at their highest in history, the unemployment rate is becoming the curse of the decade and investors’ worries are heightened.

So what do you do when the market is off?

I see 2 possibilities; one for the long term and determined investors and another for the soft hearted. Mind you, there is nothing wrong being soft hearted; actually, the best investing strategy is the one that lets you sleep at night .

#1 Search for growth dividend stocks

As the stock market goes down, it creates several opportunities. The best of both worlds is certainly picking undervalued stocks that pay high dividends. The most interesting example I saw back in December 2008 were Canadian banks that lost more than 50% of their stock value and were offering double digit dividends. Only 6 months after their lowest level in years, they went almost back to pre-crisis levels.

This means that you could have bought a stock paying a 10% dividend yield and also be sitting on a potential capital gain of 100%. Not bad for taking the risk, huh? I really wish I had more nerve back then to buy those stocks!

If you are using this strategy, you must be willing to take the ride and see your portfolio move up and down. Stocks that are losing value don’t necessarily stop going down the day you buy them. In the meantime, you can always appreciate a good dividend yield and wait until it is fit to sell the stock.

As for an idea for a stock pick, I like Microsoft (MSFT, 2.14%) which lost about 20% of its value in the last 6 months but is still expected to raise its dividend in the upcoming quarters:

Investing in undervalued stocks is always appealing but you have to remain careful with your stock picks. One thing is for sure, I would stay away from the oil companies for now. With the recent spill disaster, chances are that the cost to follow stricter regulations will definitely affect current and future oil production. It may also stall the exploration of new sites.

#2 Look at the consumer, non-cyclical sector

Why consider the non-cyclical consumer sector? Regardless if the economy goes boom or bust, people have to buy goods. These companies are generally well diversified (in term of products and geography as well), have a steady income flow and several of them pay a good dividend.

The fact that they are well diversified and that they are less likely to lose their customers during a recession makes their stock more stable. You can look at the following charts that show JNJ compared to the Dow Jones and S&P 500 from beginning of 2007 to August 2010:

More importantly, the consumer, non-cyclical sector raised their dividends by a higher amount than normal. JNJ for example raised their dividend by $0.05 (largest increase in over 12 years). Among the other big dividend increases we found:

Dr. Pepper Snapple Group     $0.15 (67%)

Mckesson Corp                    $0.18 (50%)

In this sector, I must admit that I really like JNJ with a dividend yield of 3.57%. And if you don’t mind vice stocks, Lorillard (LO, 5.34%) and Philip Morris International (PM, 4.76%) should increase their dividend yields in the next quarters.

So what do you do when the markets tumble?

Are you going to search for undervalued stocks and take the dividends while you wait for the appreciation or are you going to stick with “sure values”?

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1. The Financial Blogger discusses Creating a Digital Product For Online Profit. Who would have thought that you can create your own ebook in 5 easy steps?
2. The pros and cons of adding a sovereign debt ETF to your passive income/dividend portfolio is written by Intelligent Speculator. This is helpful for that that have or are interested in single country ETFs.
3. The top 13 cheap stocks that pay well are listed on The Div Guy’s Dividend Stock Screen.
4. The Dividend Growth Investor posts about the Six Notable Dividend Increases for the week. There are few companies that are able to raise their dividends for several years in a row, but here the top 6 notable companies that were able to increase their dividends over the past week.
5. Which Canadian Bank be the first to start raising its dividend again? Any guesses among the Big Five? Money Energy posts what the top contenders, and why.
6. Everyone would want to save on costs and fees, most especially bank fees. Good news posted from the Canadian Capitalist is that there is a new no-fee chequing account from ING Direct.
7. Who says ING Direct is the only one offering no-fee chequing accounts? Check out this post from Million Dollar Journey titled “ING Direct Thrive vs PC Financial — Battle of Free Chequing Accounts” to see a comparison of both.
8. What are the companies on your list of top performers? Well, this list on Dividends Value’s top 6 performing dividend stocks just might surprise you.
9. Familiar with the “skirt length stock market theory”? If you are, you might find this an interesting thought to think about: Fake See-Through Skirts: What Does It Mean For The Stock Market?
10. The Dividend Monk talks about Reliable Dividend Portfolio. I’m sure we all want to know the dividend-paying companies.
11. Investing will not be a smooth ride, and there will always be bumps along the way. The most important thing is not to panic. The Oblivious Investor tells us about Dealing with Investment Confusion when things aren’t going the way you expect them to be.
12. Not sure whether to invest in stocks or bonds? Dividends 4 Life clarifies this through the post Stocks vs Bonds, What’s Better?
13. Some investors may or may not find value investing in banks. Is there a value investing in these financial institutions? Barel Karsan tells us.
14. Finding the best dividend stocks takes a lot of research. For those investors who wants generate income in their retirement years, this may come in pretty handy: Eight Dividend Stocks Yielding More Than Fixed Income by The Dividend Growth Investor.
15. Stock Trading to Go shares with us 8 Great Stocks to Watch. These stocks are basing out and showing strong potential as they hold up in price even as the market sells off.
Carnival of Personal Finance #270 the Elvis is Dead Edition is now up and live!

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Today this blog will be participating in a fun little writing promotion based on “education and wealth” initiated by Go Banking Rates I hope that you enjoy the change of pace for one day.

Education and wealth. Two deep topics with a discussion that could go in many directions. I was going to go the technical route. Instead I’ve decided to indulge in the creative nature of this little promotion and have some fun! I started looking through popular movies and books based on making money. I then figured that most of the classic movies on earning money would be far too predictable. This is why I decided to look at a different type of movie about making money…

Let’s look at what the hip hop movie, Get Rich or Die Tryin’ (yes the movie with Rapper 50 Cent) can teach us about education and wealth:

It’s easy to get distracted.

Whether you’re chasing the big money or attempting to get the grades needed to get accepted into a reputable graduate school program, a plethora of distractions will come your way. Distractions will come in all shapes and sizes. Some  distractions will temporarily affect your focus (dispute with a friend), while others will drastically alter the way you operate (a rough break up or death of a close one). There will also be time-consuming distractions that will become a roadblock on your road to wealth. You’ll find yourself spending your time on activities that do nothing but take away from your main focus. You also might even get distracted by all of the hype.

It’s also extremely easy to get caught up in the various thoughts that will enter you mind regarding how you’ll spend this wealth that you’re planning on accumulating. Many young people will see education and wealth as a means for living the ultimate lavish lifestyle. There’s nothing inherently wrong with this type of thinking. Unfortunately, in many cases this type of thinking will just steer you off your path. Your energy will shift towards planning the dream lifestyle, as opposed to focusing on what is needed to obtain the wealth and education that you fantasize about. In the movie, the characters become very distracted by the easy women and the fast party culture. The main character is always there to remind the group of what’s really important.

When pursuing an education it can get challenging to remain focused. The parties will always be there, the FaceBook invites and photo tags will never stop, there will always be a new band performing at the bar, and yet somehow you’ll still need to perform exceptionally well if you want to reach your goals when it comes to education.

You need to work harder than everyone else.

Marcus (50 Cent) follows the philosophy that no matter what kind of lifestyle you choose to live or whatever endeavor you decide to follow, you need to be willing to work harder than everyone else out there. This thinking implies that those that have surpassed rich and percolated towards wealthy, were the ones that weren’t afraid to put in the long hours or to work when everyone else was playing. The funny thing about the whole MTV culture is that shows like Cribs only showcase the toys that the rich people have purchased. It fails to mention the insane amount of work that was needed to get to the level that you can install a bowling alley in your own home.

As ridiculously flawed as this movie can be at times, I appreciate the fact that it clearly indicates that pursuing your dreams to become a music star is not easy by any means. You will encounter competition and issues from all angles. Just like with attempting to get into that prestigious graduate program, there will always be a line up of people aiming to take your spot. Nobody will ever give anything to you. You must be willing to take charge of your destiny when it comes to education and wealth.

There are different types of education.

When brainstorming thoughts for this piece I thought about the traditional forms of education. Then I started thinking about wealthy people. I was then reminded of all of the truly wealthy people (Bill Gates, Richard Branson, etc.) that followed the path to wealth, without obtaining the maximum amount of education. This is an important realization that many of us need to understand. There isn’t just one type of education. Some will learn from others, some will learn through trial and error, and others will learn in a classroom setting. Either way, it needs to be emphasized more that a college degree is not the only education in this world that matters.

What do you think? Will you get rich or die tryin’? What do you feel are the other traits needed to hit massive wealth, aside from education?

I remember the first time I opened my brokerage account online to start trading. I had $19,500 that I just transferred from a line of credit and I felt like a kid in a candy store with $1M in my pocket . Even though I had a solid background in finance and had friends working close to the stock market, I still felt the urge to buying stocks. This motivation was fuelled by greed and the possibility of making a profit and being a winner on the stock market battlefield.

Starting to invest is quite motivating but as a young investor, you must put greed and hype aside and start by looking for sound investments.  As I previously mentioned, I think that one of the best ways to start for a young investor is to look at ETFs and mutual funds. Later on, I’ll explain when and how to pick individual dividend stocks. It’s not only a matter of dollars but it is also a matter of knowledge. Buying ETFs or mutual funds will protect most beginner investors from making big mistakes (such as chasing high yields without looking at the payout ratio). However, buying such investment vehicles doesn’t mean that you will necessarily make good moves. This is why there are several things to look at before picking the right ETF or mutual fund.

Fees, fees and fees

The very first thing to look at and the most discussed is definitely the fees. They can be obvious (trading fees, Management fees) but they can also be hidden (back end fees). Let’s take a quick look at the different types of fees so you can understand them:

#1 Trading fees;

This is the commission fee required by your investment broker to process your transaction. Commission fees apply at the purchase and sale of an investment. They are usually charged on stocks and ETFs while they may not when buying bonds or mutual funds (mind you, it doesn’t mean that your transaction is free either!).

The best way to avoid this type of fee is either trading mutual funds (with no transaction fees) or to select a broker with low commission rates (such as Zecco which offers transactions as low as $5 in the USA and Questrade with trades between $4.95 and $9.95 for Canadian).

#2 Management fees;

This is the cost to manage your investment. Whether you buy an ETF or a mutual fund, you do not control what is inside. Therefore, you have to pay a portfolio manager to do the job for you. ETF fees are around 0.40% to 0.60% while dividend mutual funds can charge between 1.5% and 3% (and sometimes higher). While I will discuss the importance of management in another post, let just say that paying 3% for any type of investment is very expensive.

#3 Back-end fees;

This type of fee will usually show up with mutual funds. If you don’t stay in the same product (or family of fund) for X number of years, there is a fee attached to exit fund. If you are about to purchase any type of mutual funds, make sure you can sell them whenever you want.

Trading Options

Since we are talking dividend strategies for investors, I would suggest looking at the following trading options before making any choices.

First off, I think you are better off choosing to reinvest the dividends and any profits generated by your investment product. It is a similar system to the DRIP for individual stocks. This allows you to increase the amount of units (with no transaction fees) by using the profit (interest, dividends or capital gains) generated by your holdings.

The second trading option is periodic investments. This is usually allowed for most mutual funds and some ETFs offer it as well. Periodic investing is a great way to continue to build your portfolio and using dollar cost averaging at the same time. This will help you build a great saving habit and before you notice, you will have $5,000 or more invested in the market.

Diversification

As a young investor, you might be tempted to look at the best performing ETFs or funds for the past 5 years and pick among them. However, it is important that you also account for diversification in your choices. One fund that performed really well in the past 5 years might be heavily invested in a specific sector or commodity. You don’t want to be concentrated since you don’t know what will be the “next big thing” on the market. Going for diversification among sectors and also geography may be a good idea. For example, the dividend world is pretty concentrated in financials on the Canadian market. Adding US dividend companies could be a really good idea.

Don’t hesitate to ask for help

There is something very useful that most people don’t do because they are afraid to get fooled; talk to a financial advisor. You want to invest on your own and you don’t want to be fooled by a commission based advisor? You can still talk to him, ask him why you should invest in his portfolio, ask him to compare it to another type of portfolio and then, you have more information for free . It doesn’t meant that you have to invest with this guy, but at least you are able to gather more information .

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1. Intelligent Speculator asks, Which is more mental: Trading or Golf? I’d say both. What do you think?
2. Next Bubble to Collapse: The Canadian Housing Market is discussed by The Financial Blogger. Do you agree that there is a housing bubble in Canada?
3. The Procter and Gamble Company Dividend Stock Analysis 2010 is posted by the Dividend Monk.
4. If we were to invest a large chunk of our money, we better make sure that we are sure of what we’re doing. If we’re new, we have to learn from the experience and avoid making mistakes. Canadian Capitalist lets us in on the Top Three Investing Mistakes which we should avoid making. 
5. Dividend Growth Investor posts about the Cardinal Health Dividend Stock Analysis.
6. One tool in building a trading and an investment strategy is the stop-loss order. Building a strategy with the help of stop-loss orders can help you implement safe guards that will protect your portfolio.
7. Dividends Value lists down 16 Confident and Secure Companies Boosting Dividends. This is a list of companies that have increased their dividends.
8. Money Energy gives us the Top 10 Places That You Absolutely Need to Save Your Leftover Coins For. Getting rid of those coins can be quite tiresome, can’t they?
9. Dividend Stocks for a Fat Payday looks really attractive. But what are these dividend stocks with big yields and big annual paydays? Check out Dividends for Life.
10. Market Inefficiencies Explained posted by Barel Karsan definitely opened up my mind more about why a stock’s price may differ from it’s actual value.
11. Blogging Stocks reports that Nordstrom Shares Sink on Full Year Guidance. The high-end retailer is currently trading down 4.3%/
12. U.S. second quarter growth going down according to the Globe and Mail Markets Blog. Third quarter looks even worse.
13. The Oblivious Investor posts about Benjamin Graham on Asset Allocation. What does the author behind The Intelligent Investor have to say about this? Read on.
14. Many investors believe there is some sort of cause-and-effect between the stock market and the economy. Million Dollar Journey explains why the economy is not relevant to investing.
15. Stock Trading to go posts about Speed Market Analysis — S&P 500 Rising Wedge Breakdown. He says that this breakdown came today as worries about deflation and the economy caused the S&P to sell off and close down almost 3% on higher volume.