Trading penny stocks can make some traders a fortune, but it requires full attention.**
When you do it right, it can pay a lot better than flipping burgers or occupying a cubicle, but you’re still swapping time for money. You have to be there, in front of your computer -— thinking and strategizing. Buying and selling.
When you invest in dividend-paying stocks, you just leave them alone, and let the checks arrive automatically. It’s like taking money off the table from your trading account.
You worked hard for those trading profits. Now make that money work for you.
Dividends are great because they can keep hitting your bank account even if you’re traveling the world, sick with the flu, retired or just plain tired.
Table of Contents
- 1 What are Dividend Stocks?
- 2 Types of Dividend Stocks
- 3 How to Choose Dividend Paying Stocks
- 4 Bottom Line
What are Dividend Stocks?
Dividend stocks are the opposite of penny stocks.
You don’t trade them — you own them for life. Unless, that is, they stop paying you dividends. Dump any dividend stock if the checks stop arriving.
For American companies, that’s usually once every quarter.
Sometimes companies declare special one-time dividend payouts.
Usually, companies that pay dividends are older and more mature. They make more in profits than they can reinvest in their core businesses.
Therefore, they’re no longer growth stocks that attract traders eager for big, fast gains.
To make their stock attractive to investors who buy stocks for the long run, they pay dividends. So you begin getting an immediate return on your investment, and continue to collect checks … hopefully for the rest of your life. That’s the idea.
Dividends are also a form of protection against accounting fraud. Way back in the early 2000s, a lot of companies got caught cooking their books.
Those companies were fooling people with smoke and mirrors. Paying dividends requires real, cold hard cash in the bank to back up the checks.
What is Dividend Investing?
As they receive dividend checks every quarter or month, they reinvest that into more dividend paying shares of stock.
Sooner or later, the dividend income can grow high enough to live on.
Here’s a gruesome example: If you went into a coma the next day, that money would keep hitting your bank account every quarter.
The ability to pay all your living expenses with the dividends you receive? That, my friends, can be called “F-U” money.
Some say that If everybody in this country invested every dime they could in dividend stocks, we wouldn’t need Social Security … what do you think?
When It Happens
You also need to pay taxes on your capital gains and live a comfortable lifestyle.
Yet, there’s a limit to how much money you can use to trade penny stocks. And that’s good.
Because if there were profitable opportunities to trade penny stocks with billions of dollars, the hedge funds and Wall Street suits would be all over them. We’d be a rotting carcass by the side of the road.
Therefore, after you’ve grown your trading account as high as you can take it — perhaps you’ll choose to put the rest into dividend stocks. It’s your choice.
You could choose a side business. You could buy a restaurant franchise or a rental house or an ecommerce store selling trinkets.
With dividend stocks, you just buy them once, then (hopefully) collect checks for the rest of your life.
Advantages of Buying Dividend Stocks
Do they keep sending you dividends? If so, why not stick with them?
You’re an owner of the business, but you don’t have to lift a finger. You have a CEO, other C-Suite executives, a board of directors, and thousands of employees working for you.
You just collect your share of the profits every three months.
It’s much more effective than relying on a government check or union contract that uses the official cost-of-living figures.
But interest from bonds doesn’t go up. Twenty years later, a bond is still paying you the same amount — while your stock dividend has doubled or tripled.
Investing in Dividend Stocks
There are three ways to invest in dividend stocks.
- Buy shares directly in the company with a brokerage account.
A lot of good ones focus on indexes of stocks that pay dividends.
They include an ETF for dividend-paying stocks in the S&P 500. But it doesn’t have the S&P 500 stocks that don’t pay dividends. Therefore, the dividend yield is higher than the usual S&P 500 ETFs and index funds.
Some ETFs focus on utility stocks, which all pay dividends. And you can buy ETFs of foreign stocks that pay dividends, including foreign consumer stocks, utilities and real estate.
That’s an easy way to diversify your portfolio so you’re not dependent on the good ol’ United States dollar.
Many mature companies sponsor these plans to encourage people to buy and hold their stock. They keep your stock for you, like a brokerage would.
You can get started with small amounts of money, from $25–$200. That’s a big advantage over brokerages. If you can afford only a fraction of one share, that’s okay.
You earn the same dividends as every other shareholder. They’re automatically reinvested.
Types of Dividend Stocks
Many dividend stocks provide consumer goods and services. These range from Hershey and Wrigley to Bank of America.
Warren Buffett has always liked dividend stocks, even though Berkshire Hathaway itself doesn’t pay a dividend. Berkshire now owns 32 stocks that pay dividends, including Coca-Cola and WalMart. Obviously, Warren Buffett likes receiving dividends — he just doesn’t like to pay them.
Utility companies are a major type of dividend stock. Because they need so much capital and are so highly regulated, growth investors avoid them like crazy.
But that same regulation guarantees them a profit, a large chunk of which they pass on to investors.
In return for juicy tax breaks, the government requires real estate investment trusts (REITs), master limited partnerships (MLPs), business development companies and yieldcos to pay at least 90% of their profits to their investors.
Small Stock Dividends
So far, I’ve been telling you about cash stock dividends. However, companies also have the option to give shareholders stock dividends instead. In that case, everybody receives additional shares based on the number of shares they already own.
This usually happens when the company doesn’t have enough cash to pay shareholders. Therefore, they reward them with additional shares in the company.
Sometimes they’re also used in mergers and corporate restructuring deals.
Small stock dividends usually don’t affect the market price, so the company values the stock at its fair market value.
Large Stock Dividends
It might feel good to go from owning 1,000 shares to 1,500, but consider opting for the cash dividends — you can’t pay your bills with additional shares of stock.
Highest Dividend Yield
Therefore, it’s dependent on the stock’s fair market value, which changes constantly.
If you have $5,000 to invest in dividend paying stocks, you want the highest dividend yield — all other things being equal.
If you can find a stock or ETF with a 2% yield, that’s around average in this bull market.
You might find some yielding 4% or 5%, and that’s great. Yield is always based on current market values.
Another good thing about dividend stocks is, the companies keep paying the dividends as long as they’re profitable — no matter what the stock price is.
Say this current bull market crashes 50% next week. A company with a 2% dividend yield will suddenly have a 4% yield just because its price was cut in half.
However, all other things are rarely equal. A stock may have a higher dividend simply because it’s not in a sexy sector of the market, so analysts, brokers and most investors ignore it.
However, be suspicious of dividends so high they seem out of whack with the market, especially other companies in the same sector.
Sometimes a company’s stock is low for a good reason. Though it probably goes without saying, buying stock in a company on the verge of bankruptcy isn’t a good idea.
That’s like putting your cash into a savings account in Argentina because it pays 60% interest! That’s not enough to reward you for the risk you’re taking.
Highest Dividend Paying Stocks
So, if a stock’s yield is too high, say above 8–10%, be cautious. The company is trying too hard to “buy” investors. Or maybe the entire sector is too risky.
REITs, MLPs, business development companies and yieldcos must all pay out 90% of profits in dividends, according to the law, and that forces them to keep borrowing and raising money.
In a bear market or other financial catastrophe, they not be able to raise the cash they need to remain in business.
MLP prices are affected by the price of energy even though most of them simply transport it.
Many REITs own indoor and strip shopping malls. Thanks to ecommerce, that’s a declining business. Mortgage REITs are vulnerable to changes in interest rates.
However, there are many types of REITs. Some of them invest in luxury apartments. Some of them in housing for the poor. Some rent out work space to government agencies, biotech startups and small technology firms. One owns a large number of self-storage units.
Business development companies lend money to new businesses, so they’re potentially quite profitable — but risky.
Yieldcos purchase and generate “clean” energy generated by such renewable sources as wind, solar and hydroelectric. They are a new form of business entity, so they’re still unproven. However, renewable sources of energy are undoubtedly a hot trend.
Fossil fuels probably aren’t going away for a few decades, but that’s well within our lifetimes. If solar power supplies all the energy we need, we’ll stop drilling for oil and natural gas. That means MLPs will go out of business.
So yieldcos can be a good way to balance out that risk.
Utilities and telecoms are often dependable sources of high dividends. So are well-established consumer brands.
How to Choose Dividend Paying Stocks
Thinking of diving in? You might consider buying individual stocks or ETFs. Using ETFs can be a good way to diversify your investments within a sector.
When you buy shares in an ETF, you eliminate the risk of buying just one or a few companies. Because even if their sector booms, the companies you bought could be the failures. They could be the companies run by incompetent managers.
Buying an ETF which consists of all the major companies in a sector, can help you benefit from the sector’s success.
(However, for complicated legal reasons, MLPs can’t be in an ETF. To invest in a lot of them at once, you must buy a closed-end fund, but we’re not going there in this post.)
Finding High Dividend Stocks
A good selection of companies that have increased their dividends for the past 10 or more years.
International stocks that have increased their dividends for the past seven or more years.
All U.S. stocks that have increased their dividends at least once a year every year for 10 or more years.
Stock Dividend Growth
Dividend growth is why many people think stocks are much better long-term investment than bonds.
Bonds have a limited life. And the interest they pay every six months remains fixed.
Stocks hold their value as long as the company remains in business … and many companies raise their dividends year after year.
Of course, past results don’t guarantee future results — yada, yada — but a company that’s grown its profits every year for the past 10–25 years is more likely to keep growing them than a company without such a track record.
Examples of Affordable Stocks that Pay Dividends
Large, established, and powerful oil company.
The leading soft drink company around the world for over 100 years.
Verizon Communications (VZ)
They’re the largest wireless service in the United States, and dominate the 4G market here.
Formed from a merger of Philip Morris and Kraft Food, they have a large and loyal base of cigarette smokers and convenience-food eaters.
Realty Income (O)
They manage thousands of properties around the United States, and have a long history of paying ever-increasing monthly dividends.
Examples of Long Term Dividend Stocks
Here are some of the ETFs that buy the Nasdaq Income Achievers Indexes:
- The Nasdaq Dividend Achievers Select Index trades as the Vanguard Dividend Appreciation ETF (VIG).
- The Nasdaq International Dividend Achievers Select Index trades as the Vanguard International Dividend Appreciation ETF (VIGI).
- The Nasdaq US Broad Dividend Achievers Index trades as the PowerShares Dividend Achievers Portfolio ETF (PFM).
ETFs for other sectors that pay dividends include:
- Vanguard Real Estate ETF (VNQ)
- Vanguard Global ex-US Real Estate ETF (VNQI)
- Vanguard Utilities ETF (VPU)
- Nuveen Energy MLP Total Return Fund (JMF) (closed-end fund)
- Vanguard Telecommunication Services ETF (NYSEARCA:VOX)
- The Global X YieldCo Index ETF (YLCO)
Always Improve Your Knowledge
What you don’t know can bite you in the ass …
That’s a hard lesson I’ve learned many time in the 20 years I’ve been trading.
Because, just when I think I’ve learned it all, some new problem sneaks up behind me and whacks me upside the head with a two-by-four.
You’re either learning more, or you’re sliding backward. Standing still is falling behind.
That’s why I teach as well as trade, because I learn more every time I teach.
Before you can invest in dividend paying stocks, you need to generate more income than you need to live on.
That’s what trading penny stocks is for. You can’t invest for the future until you know how to make money in the present.
If you’re interested in learning from people — me as well as my top students — consider joining my Trading Challenge. It’s the ultimate way to communicate with other investors, get tips, share your plays, and learn from others’ successes and failures.
You’ll get access to tons of resources, including my every trade, so you can learn how to make trades for yourself. It’s also a great way to hold yourself accountable to your goals and to keep your ego in check.
When you go it alone, you risk making small but critical mistakes that deplete your profits.
If you’re into getting in, diving for profits, then getting out — consider trading penny stocks.
Dividends stocks are for getting in, then — hopefully — receiving regular checks for the rest of your life.
I plan to trade penny stocks ‘til I can’t trade any longer. They’ve been good to me, and I love them. But I’m as vulnerable to illness and injury as anyone else.
And sometimes I just need to relax.
Dividend-paying stocks have the potential to keep on paying and paying — whether you’re watching them or not.
What are your thoughts on dividend stocks? Share your comments!