Dividend Investing For Passive Income

One of the ways that you can earn passive income is through dividend investing. Companies that pay dividends actually pay out a portion of their profits to shareholders. If you invest in a company that pays dividends, you receive a dividend monthly, quarterly, semi-annually or yearly (depending on how the company does things). These dividends are paid out to shareholders, and are different from earnings from selling or trading stock in the company.

Dividends can be incorporated into a long-term plan for yielding wealth, as well as provide regular income. Indeed, there are some investors that invest solely in dividend paying stocks, watching their portfolios grow over time and receiving an income stream when dividends are paid out. There are some who manage this well enough that dividends provide a large portion of their income.

DRIPs


It is possible to compound the earnings you receive from dividends through programs known as dividend reinvestment plans (DRIPs). DRIPs are set up with some dividend paying companies who take your dividends and automatically reinvest with the company, buying more stock. I have some DRIPs in my Roth IRA. Every time a dividend is paid, it is automatically reinvested, allowing me to buy a couple extra shares of stock. It’s basically like getting free shares. And it’s a good way for me to automatically increase my investment.

For the most part, though, dividend investing isn’t going to result in immediate results. In this economy, you might disappointed (although there are some companies that have actually increased their dividends). Dividend investing — especially when you make use of DRIPs — are part of a long-term strategy. However, the cumulative effect can provide a reasonable passive income for those with the patience to make it work.

Companies Raising Dividends

There has been lots of news lately about the number of companies that are cutting dividends to preserve capital. In many cases, we believe these cuts make good economic sense when considering that capital and cash are kings and so hard to come by in the current economy.

And not all dividend news is bad. In fact in selected industry sectors there is a lot of good news. Those sectors with the most dividend hikes are in what we call the "essential services" sectors such as consumer staples, energy, health-care, and utilities. Companies in these sectors produce products that we use every day. In most cases, we don't have to borrow money to buy them. In many respects, these companies and their products have been woven into the fabric of our lives.

In recent weeks eight of the companies that we follow have hiked their dividends. In the consumer staples sector Coke (KO) raised its dividend 8%, Sysco (SYY) 9%, and Colgate (CL) surprised us with a 10% increase. In the energy sector, Kinder Morgan Energy Partners (KMP) recently hiked its dividend on a year-over-year basis by 11%. In the health-care sector, Abbott Labs (ABT) raised its dividend a greater-than-expected 11%, and FPL Group (FPL), a utility, also surprised us with a 6% increase.

In addition to these companies in the essential services sector, there were two additional recent hikes among our holdings. Financial giant Chubb (CB) raised its dividend over 6%, and Praxair (PX) in the materials sector raised its dividend nearly 7%.

You probably did not hear much about these hikes and that makes them even more significant. In this environment, dividend hikes are not being rewarded. Thus, these companies are raising their dividends for two very solid reasons: 1. Their earnings are growing and they are confident enough in their prospects, even in a slow economy, that they are free to increase their dividends; 2. Almost all of the companies mentioned here have long histories of increasing their dividends. It is in their culture.

These are the kinds of companies we prize. They are in solid businesses that produce free cash flows from which they can pay dividends if they choose; they possess a track record of being willing to share their financial successes with their shareholders; and they are confident enough with the unfolding events of the day to raise dividends, even if no one cares but their shareholders.

Canadian Oil Income Trusts

These Canadian Income Trusts, also known as Canadian Oil Income Trusts or Canadian Royalty Trusts pay a very high income. The trusts pass through all their earnings and deductions from oil and gas wells to the trust holders, similar to real estate investment trusts. There is no taxation at the corporate level since they are structured as trusts. Also, a portion of the dividends may be non-taxable due to depletion and depreciation deductions.

Harvest Energy HTE

Penn West Energy Trust PWE

Pengrowth Energy PGH

Provident Energy Trust PVX

Advantage Energy Income AAV

Enerplus Resources Fund ERF

Baytex Energy BTE

Precision Drilling PDS

Enterra Energy ENT

February 2009 Dividend Paying Stocks

One way that you can earn very high returns is utilizing a technique called 'buying dividends'. Buying dividends is the process of buying a stock just before it goes ex-dividend and selling it shortly after the ex-dividend date at the same [or at a higher] price as the cost price. The ex-dividend date is the date after which a buyer of the stock is no longer entitled to the dividend. In other words, if an investor purchases a stock on or after the ex-dividend date, the investor will not receive the dividend; however, if the stock is purchased prior to the ex-dividend date, the investor will receive the dividend on what is called the payment date.

Sometimes you can sell the stock on the ex-dividend date, sometimes you have to hold the stock for a few days, and sometimes you have to hold the stock for a few weeks in order to sell the stock at what you paid or higher. In other words, this technique doesn't always work. But if it is a stock worth holding for the long term, what do you have to lose?


AGN - 02-18 - .04

AIZ - 02-19 - .14

AXB - 02-11 - .32

CPLP - 02-06 - 1.05

CR - 02-25 - .20

GS - 02-20 - .47

HRZ - 02-25 - .11

IGTE - 02-25 - .11

JNJ - 02-20 - .46

MAIN - 02-18 - .13

MCO - 02-18 - .10

MHP - 02/23 - .23

MMLP - 02-04 - .75

NMM - 02-05 - .40

NSC - 02-04 - .34

PCAR - 02-17 - .18

PFE - 02-04 - .32

TDW - 02-27 - .25

TGT - 02-18 - .16

UHS - 02-26 - .08

Dividend-Paying Stocks – Creates Wealth and Meets Short Term Goals

Dividend-paying stocks are absolutely the fastest and most reliable way to achieve financial security and independence. Holding these stocks for a long period of time helps you realize the true power of compounding dividends. However, life offers too many problems to afford to sit on an investment for 30 years. When you are young and just getting started, you may not have $2,000 to set aside in an investment for 30 years. There are too many short term needs to pursue such extravagant long term goals.

Imagine, if the year was 1980 and you invested $2,000 in General Electric, it would be worth just under $160,000 today. You would have started with 41 shares ($48.78 per share). Today, thanks to stock splits and reinvesting dividends, you now would have more than 4,400 shares! This profit would have been made with you never adding another penny.

General Electric recently closed for $12.00 a share. This price is lower than it was in 1980 and you can now purchase 166.66 shares with a $2,000 investment. Jim Immelt, and his team at General Electric defended the dividend and insist that they will be paid in 2009. Such a move could jeopardize a credit rating already on “outlook negative” at Moody’s and Standard & Poor’s. In the grander scheme of things, Immelt & Co. also know deep down inside that this struggle is about far more than a quarterly dividend. Whether they like it or not, they are custodians of market confidence, and that confidence is woefully lacking right now. Failing to hold the line could put GE on the same trajectory as General Motors.

Immelt knows as well as anyone that if you want your logo on the Mount Rushmore of Corporate America, the dividend must stand. Failing to preserve this most basic tool of capitalism would ruin the company's Blue Chip reputation -- a reputation built on decades of steady returns to shareholders even when the chips were down.

But dividends are also designed to reflect a company's underlying health.

Having fended off pressure to cut the dividend this time is no guarantee it won’t happen. GE’s many business units are all feeling the same economic strains bearing down on the rest of the market. The company knows it and warned 2009 will be “extremely difficult.”

General Electric may be a great buy at $12 but a loss in its rating could cause the price to drop further. It does warrant being included on your Watch List and taking a look later. To potentially repeat the previous performance is certainly worth taking a chance. An investment amounting to $2,000 may not be much money to some people but it could be others life savings.

Investing in stocks is done differently when people have money and when they don’t have money. Although no one wants to loose, a person who has money can wait a longer period of time and allow the market to rebound. A person who has no money may have an emergency and need the money sooner.

It would not be a good idea to purchase 166 shares of GE and need your money the next week. If GE goes up a dollar in price you would make $166 but you will have to deduct the buy and sell commissions from these profits.

On the other hand, there are other good stocks in the market that would allow you to purchase a large quantity of stock. Investors choosing this approach will profit more in the long run. If you purchased 1,000 shares of a $2 stock that was paying dividends in February, not only do you stand to gain money from the stock increasing in value, but you will also gain money from dividends on 1,000 shares.

The dividends earned in February can be used to buy additional shares of the same stock or a different stock altogether. A decision can be made to purchase stocks that will be paying dividends in March. The dividends earned in March can be used to buy additional shares. The cycle continues and you would have successfully taken a little money and accrued a variety of dividend paying stocks.

Dividend paying stocks allow you to meet short term and long term investment objectives. Young people should capitalize on this type of investment because they have more short term and long term goals. Short-term debts incurred due to paying off college tuitions, buying a house, and children expenses can become manageable with the extra dividend income received monthly. In other words, you don’t have to reinvest the monies paid from dividends into more stock.

Parents can utilize dividend paying stocks to meet long term investment needs such as saving for college or creating wealth. Grandparents can use dividend paying stocks for long term investments for their grandchildren and could become a great gift for the holidays. Stocks that pay dividends are a great tool for generating wealth and meeting short-term needs.

Do You Want Passive Income?

List of 6 Stocks Paying Dividends

Add these stocks to your Watch List. The market is down and dividend stocks are at bargain prices.

City National (CYN) declared a quarterly cash dividend of 25 cents per share, down from 48 cents it had previously paid. This stock once sold for $71.50 and recently closed at $32.99.

Federated Investors Inc (FII) said it will pay a quarterly dividend of 24 cents per share next month to shareholders of record on Feb. 6th. Federated Investors paid a special dividend of $2.76 in September. This stock once sold for $45.01 and recently closed at $19.48.

Heritage financial (HBOS) declared a quarterly cash dividend of $.08 per share from $.07 per share paid last year. The dividend would be payable on February 20, 2009 to shareholders of record as of February 6, 2009. This stock once sold for $12.99 and recently closed at $8.40.

Southern Community Financial Corporation (SCMF) announced that its Board of Directors, at its regular meeting on January 21, 2009, declared a quarterly cash dividend of four cents (.04) per share on the Corporation's common stock. The dividend is payable on February 27, 2009 to shareholders of record as of the close of business on February 13, 2009. This is the Corporation's sixteenth consecutive quarterly dividend, following its former practice of annual cash dividends. This stock once sold for $7.89 and recently closed at $3.87.

Sun Trust (STI) said it has cut its quarterly dividend to 10 cents a share from 54 cents a share until the economic environment and earnings outlook improve. The back-to-back dividend cuts are the first in recent memory for the regional bank. This stock once sold for $70.00 and recently closed at $14.97.

Wells Financial Corp (WEFP) declared a $.26 per share cash dividend, payable on February 24, 2009 to shareholders of record on February 10, 2009. This is the thirteenth consecutive quarter that the Company has paid a $.26 dividend.

Personal Finance - What They Don't Teach You In School

Personal finance looks at how your money and future is managed.

Personal finance, by definition, is the application of the principles of finance to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, budget, save, and spend monetary resources over time, taking into account various financial risks and future life events.

The Principles of Finance defined:

Finance is the set of activities dealing with the management of funds. More specifically, it is the decision of collection and use of funds. It is a branch of economics that studies the management of money and other assets.

Finance is also the science and art of determining if the funds of an organization are being used properly.

In fact, when you get right down to it, there are three broad types of income you can generate:

1. Earned Income
2. Portfolio Income
3. Passive Income

Any money you ever make (other than maybe winning the lottery or receiving an inheritance) will fall into one of these income categories. And each income category has its own set of benefits and drawbacks.

Earned Income

Earned income is any income that is generated by working. Your salary or money made from hourly employment (regardless of whether that salary or hourly income came from working for someone else or from your own “consulting”) is considered earned income.

Some activities that generate earned income include:

* Working a job
* Owning a small business
* Consulting
* Gambling
* Any other activity that pays based on time/effort spent

While earned income is the most common mechanism for making money, its obvious downside is that once you stop working, you stop making money. Additionally, because the amount of money that is made through earned income is directly proportional to the time and effort you spend working, it’s difficult for someone to make more earned income without either learning a new (or more valuable) skill or working longer hours. Additionally, earned income is taxed at a higher rate than any other type of income.

One huge benefit of earned income over the other income types is that you generally don’t need any startup capital in order to make earned income, which explains why most people rely on earned income from the start of their working life. In fact, earned income is a great way to start your investing career, as it allows you to save up cash that will help you generate the other two types of income…

Portfolio Income

Portfolio income is any income generated by selling an investment at a higher price than you paid for it. Some people refer to portfolio income as “capital gains,” because that’s how the money is taxed by the federal government.

Some activities that generate portfolio income include:

* Trading (buying/selling) Paper Assets — Paper assets refer to things like stocks, bonds, mutual funds, ETFs, CDs, T-bills, currencies or other types of futures/derivatives. Stock market investing is the most common generator of portfolio income
* Buying and Selling Real Estate (specifically the profit from the sale)
* Buying and Selling of any other Assets — Antiques or cars, for example, or other types of collectibles that have appreciated in value

Portfolio income certainly has some advantages over earned income. Once you have the knowledge and experience to generate portfolio income on a consistent basis, you can continually reap the benefits (compound your return) by reinvesting after each sale. Additionally, any portfolio assets held long-term are generally taxed at a lower rate.

Passive Income

Passive income is money you get from assets you have purchased or created. For example, if you were to buy a house and rent it out for more money than it costs you to pay your mortgage and other expenses, the profit you make would be considered passive income.

Some activities that generate passive income include:

* Rental Income from Real Estate
* Business Income (assuming it’s not earned based on amount of time/effort spent — that would be Earned Income)
* Creating and Selling Intellectual Property — Books, Patents, Internet Content, etc
* Affiliate or Multi-Level Marketing
* Dividends

There are some major benefits to passive income over the other two types of income:

* Passive income is generally recurring income; once the investment is made, and assuming it is a good investment, the income will continue to come in month-after-month or year-after-year, with little additional work by you. This means that you can essentially “retire” and still continue to grow your net worth.

* Investments that generate passive income usually allow the owners active control over the investment. For example, if you owned an apartment building or a corporation, you would have say in the day-to-day operations that would ultimately impact the success of your investment.

* Passive income investments often allow for the most favorable tax treatment. Corporations can use profits to invest in other passive investments (real estate, for example), and take tax deductions in the process. And real estate can be “traded” for larger real estate, with taxes deferred indefinitely.

* Because it is generally possible to closely approximate the return (or at least the risk) you can expect from passive investments, these investments can often be funded using borrowed money. For example, a good business plan can attract angel funding or venture capital money. And real estate can often be acquired with a small down payment (20% or less in some cases) with the majority of the money borrowed

As you might suspect from the above overview, many people consider passive income the holy grail of investing, and the key to long-term wealth.