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Money Girl
119 MG Delight in Dividend-Paying Stocks
Hey, Fidelity. What's it cost to invest with the Fidelity app? Start with as little as $1 with no account fees or trade commissions on US stocks and ETFs. Hmm, that's music to my ears. I can only talk. Investing involves risk, including risk of loss. Zero account fees apply to retail brokerage accounts only. Sell or assessment fee not included. A limited number of ETFs are subject to a transaction-based service fee of $100. See full list at Fidelity.com/commissions. Fidelity brokerage services LLC member NYSE SIPC. When you hear a good idea, it's natural to do a double take. That's what you might do when you hear "discover" while automatically double the cashback you've earned on your credit card at the end of your first year with cashback match. Wait, what? Yup. Double the cashback is something so good you might do a triple take. It pays to discover. See terms at discover.com/creditcard. Hello, and welcome to Money Girl's Quick and Dirty Tips for A Richer Life. I'm your host, Laura Adams. In this show, I'll discuss some relatively stable and less stressful investments, dividend-paying stocks. Now on to stock dividends. Stock dividends are a way that some companies share profit with their shareholders. Companies usually send out a quarterly cash dividend payment to each investor based on the number of shares owned. As you might guess, the companies that can pull this off are usually not young or still struggling for dominance in their marketplace. They don't need to retain and reinvest every penny of profit back into the business, like a fledgling company usually does. No dividend-paying companies tend to be much more established and stable, such as DuPont or Procter & Gamble. Contrast these stalwarts to successful but less mature non-dividend-paying stocks, such as Netflix or Amazon. Dividend payers have already achieved a measure of success, but don't attract new investors with lofty visions of double-digit growth. Their allure to investors is the security of some immediate fixed income, as well as a stock price that should be less volatile than non-dividend-paying alternatives. During bear markets, these more stable investments can help investors offset losses. It's not uncommon to see dividend yields in the neighborhood of 3-6 percent. Right now, Coca-Cola's dividend yield is 3.65 percent and 3Ms is 3.97 percent. A dividend yield is simply a year's worth of dividends expressed as a percentage of the current stock price. The formula is annual dividends per share divided by price per share. To give you an example with really simple math, consider a company that expects to pay $1.25 or $4 a year per share in dividends. If the stock is trading at $100 per share, then $4 divided by $100 equals a dividend yield of 4 percent. The yield tells you how much income you get for each dollar you invest, or in layman's terms, the bang for your buck. But here's a tip. If a dividend is too high, it may be suspicious. For example, the failed investment bank Lehman Brothers had a 13 percent dividend in early 2008. In hindsight, this was a payout to its shareholders that the company certainly couldn't afford. A stellar dividend yield can also be the result of plummeting share prices. Remember the formula for dividend yield? Annual dividends per share divided by price per share? If the price per share drops but the company doesn't reduce the dividend per share, the yield percentage actually increases even though the company may be in trouble. A really high dividend yield should make investors consider whether it's sustainable, especially in a difficult economy. Sometimes companies will do everything possible not to cut dividends even when they can't afford them. That's because they fear that reducing dividends may be a signal of weakness to investors and competitors. Some companies would rather lay off employees, sell assets, or even borrow money to find the cash to continue to pay dividends. That could be a bad decision that will ultimately hurt the company and cause the share price to decline over the long term. And eventually a struggling company will be forced to cut its dividend payment anyway. September is a great month for planning. We start thinking about the rest of the year, whether it's back to school, big year-end work projects, holiday plans or travel, planning ahead is crucial in life, especially when it comes to what happens when you're gone. Getting life insurance may sound daunting, but Policy Genius makes the process a breeze. With Policy Genius, you can find insurance policies that start at just $292 a year for a million dollars of coverage. Some options offer same-day approval and avoid unnecessary medical exams. 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LED headlights, spoilers, whatever you need. eBay Motors has it at affordable prices. And with eBay guaranteed fit, it's guaranteed to fit your ride every time. Keep your ride or die alive at ebaymotors.com. Eligible items only, exclusions apply. So even though dividend stocks sound like they dish out free money to investors, choosing the right ones is important. They need to be well managed with a sensible plan regarding dividend payments. Stocks with a solid dividend history, like Kellogg or Johnson & Johnson, which are paying 3.47% and 3.58% right now, may be able to maintain or even raise their payouts to keep pace with inflation. You can research good dividend stocks for free at sites that have a stock screener, such as MSN money or Google finance. There are also many services and publications that will spoon feed them to you for a monthly subscription fee. Consider Morningstar.com, investorsdailyedge.com, and dividend.com for well researched and timely dividend advice. Another way to take advantage of dividend stocks is to reinvest the dividends by buying more stock shares. That allows you to systematically increase your holdings without having to invest money out of pocket. But remember that there is no guarantee that a dividend paying stock will be able to maintain its payout indefinitely, in order to grow earnings a company may have to reduce or eliminate dividends during challenging times. And one final tip about dividend stocks. Since dividends are taxable income, a great way to buy dividend stocks is within a tax advantage to count, such as an IRA. A traditional IRA doesn't eliminate taxes, but it does defer them until you retire or make other qualified withdrawals from the account. As with all things in life, moderation is usually the key to success. If you gravitate toward risky investments with huge upside potential, consider buying some less risky dividend stocks for balance. Even if income investing sounds too old fashioned or conservative for you, adding them to your portfolio can help to smooth out market volatility. I'm glad you're listening. Send your thoughts and money questions to money at quickanddirtytips.com. Shaqing, that's all for now. Courtesy of MoneyGirl, your guide to a richer life. [MUSIC] Dave's your supply chain wizard. He also has diabetes. Maybe it's time for a group dental plan with support for chronic conditions. Grin from within, United Concordia Dental. Learn more at grin with ucd.com products under written by United Concordia Insurance Company. With the Wells Fargo Active Cash Credit Card, you can earn unlimited 2% cash rewards on purchases you want and purchases you need. That means you earn 2% cash rewards on what you want, like season tickets to watch your favorite team, and 2% cash rewards on what you need, like paying for parking. That's the beauty of the Active Cash Credit Card. 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