Top 8 Ways to Create Passive Income

Wouldn't it be great if you could have a continuous stream of income deposited into your savings and/or checking account? Think about it. You wouldn't have to worry about paying the bills on time or having money to buy groceries for your family. An extra $500, $1,000 or more in your bank account will reduce your money worries and stress.

While having multiple streams of income is ideal, you need to choose the right one for you. For example, if you want to earn money from a blog, you need to pay for web hosting, choose the right niche, design your website (or have someone design it for you), create a blogging schedule, share your posts, develop a community, guest blog, and choose the best affiliates for your blog niche. Blogging is work, but it is fun!

If you want to earn additional monthly income and start saving for retirement (or add to a fund), college, vacation, etc., check out the top eight ways to create passive income listed below. Some require more work than others. But all of them will put extra cash into your pocket.

8 Ways to Create Passive Income

1. Affiliate marketing.

Affiliate marketing means you sign up with a company and/or entrepreneur and sell their products. For example, if you start a tech website, you could become an affiliate of a web hosting or anti-virus software company. You can earn hundreds or even thousands of dollars each month if your website receives a decent amount of web traffic and you have thousands of email subscribers. Being an affiliate marketer takes dedication and time. You need to build traffic via your website, email marketing and social media. Is this for you? You be the judge.

2. Start a freelance business.

Have you always wanted to own your own business? You could start a side business while you work a full-time or part-time job. For example, if you're a graphic or web designer, you could start your own graphic or web design business on the side. If you like to make jewelry, you could sell at craft fairs and online. Starting a business may be daunting, but if you believe in you and your work, you could earn a decent living, maybe even quit your day job. Search out those who are doing what you want to do and interview them. Find out the mistakes they made and ask for guidance.

3 Big, Safe Dividend Stocks for the Beginning Investor

Whether you're new to investing or have been at it for a lifetime, you need to understand the business models of the companies you invest in, because understanding how a company makes money will significantly reduce your overall investing risk.

In that spirit, today we'll look at three companies with straightforward business models, strong dividends, and a knack for longevity. Because what good is a great dividend if the company's not going to be around long enough to pay it out?

Without further ado, then, here are three big, safe dividend stocks for the beginning investor, along with the reasons for my personal favorite at the end:

1. Boeing (NYSE: BA  )
727. 737. 747. 787. At first glance, they're just numbers, but upon reflection they're so much more. You've heard them uttered or read about them your whole life. They represent what Boeing is all about: airliners. Boeing is the most successful company in the history of aviation, and indeed is the very essence of American aviation. This is a company that has endured its share of economic ups and downs, just like any other big company that's been around for nearly 100 years, but is still at the top of its game.

From a dividend investor's perspective:

• I normally look for dividend yields of around 3% -- an arbitrary threshold, but one I feel separates the wheat from the chaff. Boeing pays 2.5% -- under our threshold, but close enough to enjoy consideration as one of our dividend stocks, especially given what a rock-solid industrial giant it is.
• I like to see dividend-payout ratios of 50% or less: As a rule of thumb, the lower the percentage, the more sustainable it is. At 30%, Boeing's falls well below our 50% mark, which argues well for its longevity.

Boeing's five-year average dividend yield is 2.7%, which bodes well for the longevity of the current 2.5%. But most critically, the orders for aircraft just keep coming, with airlines around the world placing orders in record numbers. On Sept. 6, the company reached a milestone: order No. 500 for its next-generation 737 aircraft, the workhorse of the fleet in airlines everywhere.

2. Johnson & Johnson (NYSE: JNJ  )
Johnson's Baby Shampoo. Tylenol. Band-Aid. Listerine. Brands that are burned into your memory from childhood, and likely still have a significant presence in your life. J&J has been around since 1886, and just like Boeing, has seen its share of ups and downs, including an embarrassing string of product recalls lately. But the company has a new CEO, Alex Gorsky, who is tasked with turning the company around with a strategy focusing on the rehabilitation of the consumer-products division. Given J&J's stable of iconic brands, it's a good one.

From a dividend investor's perspective:

• I said I look for a 3% yield on our dividend stocks. At 3.6%, J&J easily makes the grade, as does, to its credit, rival Pfizer (NYSE: PFE  ) , which pays out an identical 3.6%.
• At 74%, J&J's payout ratio is steeper than I like, but not frighteningly so. Pfizer comes in at a better, but not game-changing, 62% on this metric.

J&J has a five-year average dividend yield of 3.1%, which argues fairly well for the sustainability of the current 3.6%. While having a rough go of it right now, this company will be rehabilitated. In the end, J&J has too much brand strength and too much money in the bank -- $16.9 billion -- to go away anytime soon. And its wide-ranging consumer and medical-professional product lines make it a safer bet in the long run than strictly pharmaceutical-focused Pfizer.

The World's Most Powerful Hedge Fund Manager Tells Investors How They Should Set Up Their Portfolios

Hedge fund god Ray Dalio, who runs Bridgewater Associates, is widely considered to be the most successful hedge fund manager in the world.

He recently sat down with CNBC's Maria Bartiromo to discuss a variety of topics at the Council on Foreign Relations and he had some advice for the average investor. 

During the hour-long discussion, Bartiromo asked Dalio about portfolio allocation in terms of gold versus equity versus real estate and other asset classes.

Here's his advice that we've transcribed: (emphasis ours) 

First, Dalio explains what you need to think about when setting up a portfolio.  The key here is asset allocation. 

"So I think I'm going to answer it in the following way that I think that is the right way for people to look at it. It's the way I look at it. I think that the first thing is you should have a strategic asset allocation mix that assumes that you don't know what the future is going to hold.  And I think most people should..." 

In other words, if you're thinking of "beating" the market, as though it's a game, you're probably going to lose.

"In other words, let's say, I play the game of betting against others. So it's like I'm going on the poker table and if I'm smarter, and I know how difficult that game is, so very few winners.  And like if I'm not engrossed in it and if we're not engrossed in it, I'd be worrying about it and I do worry about it when I am engrossed in it.  So the average investor and most people should not be playing that game.  They're going to lose at the poker table."

This is why Dalio emphasizes the importance of a balanced portfolio, especially in terms of risk.  

"So what that means, they should have a properly balanced portfolio.  Now the most important thing is that is that they balance... They make a mistake in terms of dollars invested and with a bias with what's done well in the past and they don't realize that risk.  They should balance it in terms of risk.  

"Let's say stocks have twice the volatility, more than twice the volatility, of bonds and when they own a portfolio and structure a portfolio that way they tend to have concentrated risks. And I think what they need to do.  I would recommend reading, read, on the subject of risk parity, read on our website, we have an explanation on how to balance risk, but they key thing is that there are basically four economic environments.  There are two main drivers of asset class returns-- inflation and growth." 

Here simplifies how inflation and growth affect the prices of asset classes based. 

"Assets all price based on, you could look at the pricing of asset classes and calculate what the discounted growth rate is and what the discounted inflation rate is. And what causes assets to move is surprises to that.  So when growth is faster-than-expected, stocks go up.  When growth is slower-than-expected, stocks go down.  When inflation is higher-than-expected, bonds go down.  When inflation is lower-than-expected, bonds go up.  OK. 

Dalio says it's important for the average investor to understand inflation and growth and their effects.  That's why he suggests having four different portfolios to achieve balance.  

"What I'm trying to say is that for the average investor, what I would encourage them to do is to understand that there's inflation and growth. It can go higher and lower and to have four different portfolios essentially that make up your entire portfolio that gets you balanced.  Because in every generation, there is some period of time, there's a ruinous asset class, that will destroy wealth and you don't know which one that will be in your life time. So the best thing you can do is have a portfolio that is immune, that is well diversified.  That is what we call an all-weather portfolio.  That means you don't have a concentration in that asset class that's going to annihilate you and you don't know which one it is...

Again, the reason you should have a balanced portfolio is you don't know what the future holds, says Dalio.  

"Well, I'm saying based on the notion that you don't know which one it is. And therefore,..when you say 'which should it be today?' It should be balanced today like it is in the future and it should have that mix of assets.  And now you get into a whole conversation...But you need to achieve balance..."

From businessinsider.com

Younger retirees need some risk in their portfolios

Just as the baby boomers brought us free love and rock ’n’ roll, they’re also leading the way into pension-less retirement. Those who are near or just into retirement are in a tough spot. They have a long time horizon and need investment returns that are well in excess of inflation. And yet, low-risk investments provide minimal return (negative after inflation), and owning higher risk securities has been harrowing and less-than-rewarding over the last five years.

While most people entering retirement feel some level of anxiety, it is those who don’t have a defined benefit pension plan and don’t know if they’ll have enough to fund their retirement who experience the most stress. What they want more than anything is certainty, but that’s hard to come by in today’s low interest rate environment.

There are no easy answers to the no-DB dilemma, although any solution should start with a financial plan. Rather than wondering and worrying, some work up front with an adviser or fee-for-service planner will bring clarity to the issues, if not peace of mind. And as devoted followers of the column below this one know, a proper plan will likely recommend a combination of strategies.

Work longer

It’s not what people want to hear, but the best way to set up the next 30 years may be to work the first two or three. Every year adding to the nest egg, as opposed to drawing on it, improves the retirement calculations significantly.

Spend less

There are three variables in the calculation – life span, investment return and spending. Everyone wants to maximize the first, so the conversation is most often focused on the second. “How can I get a better return?” As Andrew Rice of the financial planning firm, Stewart and Kett, reminded me, however, the least considered variable – spending – has the most impact on what the numbers look like.

Increasingly, I’m seeing our clients build flexibility into their spending patterns. They make adjustments based on how their portfolio is doing. When their capital base is temporarily depleted due to weak markets, they dial down their spending and postpone the new car, kitchen renovation or world cruise.

Take more risk

The most common response to the no-DB dilemma is to reach for a higher yield by owning riskier securities. Instead of getting regular income from guaranteed investment certificates and government bonds as investors did 10 years ago, corporate bonds, income-oriented stocks and structured products are now playing a bigger role.

Most of the time, the income flow from these higher octane securities feels the same as the GICs and government bonds of the past, but there will most assuredly be market-related jolts from time to time. The corporate bond market is known to shut down at inconvenient times (2002 and 2008 being prime examples), which means corporate bond prices will experience significant price declines. And even the most conservative stocks will be taken down in a bear market.

Taking more risk should be a core strategy, but young retirees need to be careful not to focus too much on acquiring current income such that they put future income at risk. Higher-yielding investments don’t necessarily produce a better return (Yellow Media being an extreme example), especially when the yield entices investors to pay more than what a company is worth.

Warren Buffett Earning 39% Dividend Yield From Coca-Cola?

Warren Buffett is currently earning a 39% dividend yield on his shares of Coca-Cola (NYSE: KO).

It seems impossible. If you or I were to buy the shares today, we'd earn a yield of just 1.3%.

But Buffett first added the shares to Berkshire Hathaway's (NYSE: BRK-B) portfolio back in 1988. Despite being a mature business even back then, the stock has earned roughly 1,800% on Berkshire's original investment. Meanwhile, Berkshire's yield on cost (the amount of dividends earned as a percentage of the original investment) is 39% per year thanks to Coke's steady dividend growth.

What's behind this? After all, Coke had been around for more than a century before Buffett invested. How is it that some companies can continue to grow -- and raise dividends -- seemingly forever?

It's an advantage that I call a "legal monopoly."

The few businesses that have this advantage are among the richest companies in the world. And they only seem to get richer with every passing year -- much to the enjoyment of their investors.

Many companies have operated with this advantage for decades, without a peep from the government.

That's because this isn't a monopoly in the traditional sense. Most monopolies attract attention (and regulation) because they keep other businesses from competing. They tilt the odds so far in favor of one company that no one else can even do business.

But the legal monopoly I'm talking about doesn't keep other businesses from competing -- it simply helps a company to continue growing and generating billions in profits for its investors... almost no matter what.

Take a look at what Coke has done during the past decade. And remember, the company was founded in the 1880s. The results below come after more than a century in business.

3 Key Measures To Improve Your Portfolio With Every Purchase

Everytime I make a new investment I am looking to improve my overall portfolio. There are 3 key measures that I look at in which a dividend growth stock purchase may improve my investment portfolio. A new buy may improve my portfolio by increasing overall diversification, increasing my current dividend yield or by increasing my dividend growth rate. Every single time I make an investment I look to improve the portfolio by at least one of these metrics. If a purchase helps me in more then one metric then it is even better. 

Increase Portfolio Diversification

Diversification involves reducing risk by investing in a variety of assets. For your overall financial picture this will involve investing in different assets such as stocks, bonds and real estate. For dividend growth stock investing, diversification involves investing in companies from different industries. You may want to invest in companies from the oil industry, retail industry or restaurant industry. There are many industries available to invest in which will aide us in our attempt to diversify our dividend growth stock portfolio.

When I look to make an investment I always look to see what industry the company operates in. Then I look over my portfolio to determine if I already have investments in that particular industry. If I do, how much of my portfolio does that industry make up. I don’t want to have all my stock investments be from one or two particular industries. For me the more industries I can invest in the more diverse my portfolio is. With higher diversification my portfolio will have less risk. This is because not all industries will be affected the same way by different market conditions. If the oil industry is really suffering, my oil stocks may be going down. However, my stocks from other industries may still be doing alright or even wonderful.

Increase Portfolio Dividend Yield

Another way I may look to improve my portfolio is by investing in stocks that will help increase my portfolio dividend yield. One of the goals of dividend growth stock investing involves bringing in dividend income. If I can increase my overall portfolio dividend yield then I am increasing the income that I am being paid by my companies.

For example, if I have a portfolio of dividend growth stocks that is worth $10,000 and I expect to receive about $350 in dividend income this year then my portfolio dividend yield is 3.5% (350 divided by 10,000). Now when I am looking at new investments I know that if I invest in any stock currently yielding higher then 3.5% it will raise my overall portfolio yield. If I decide to invest in a company that is currently yielding 5% then I will increase my portfolio yield. Let’s say I invest $1,000 in a company yielding 5%. I will expect this company to pay me $50 in dividend income this year. My new portfolio dividend yield will increase to 3.64% (400 income dividend by 11,000 portfolio). This is good because on the whole my portfolio is earning me more income for each dollar invested.

Rich Man, Poor Man (The Power of Compounding)

MAKING MONEY: The most popular piece I've published in 40 years of writing these Letters was entitled, "Rich Man, Poor Man." I have had dozens of requests to run this piece again or for permission to reprint it for various business organizations.

Making money entails a lot more than predicting which way the stock or bond markets are heading or trying to figure which stock or fund will double over the next few years. For the great majority of investors, making money requires a plan, self-discipline and desire. I say, "for the great majority of people" because if you're a Steven Spielberg or a Bill Gates you don't have to know about the Dow or the markets or about yields or price/earnings ratios. You're a phenomenon in your own field, and you're going to make big money as a by-product of your talent and ability. But this kind of genius is rare.

For the average investor, you and me, we're not geniuses so we have to have a financial plan. In view of this, I offer below a few items that we must be aware of if we are serious about making money.

Rule 1: Compounding: One of the most important lessons for living in the modern world is that to survive you've got to have money. But to live (survive) happily, you must have love, health (mental and physical), freedom, intellectual stimulation -- and money. When I taught my kids about money, the first thing I taught them was the use of the "money bible." What's the money bible? Simple, it's a volume of the compounding interest tables.

Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately, anybody can do it. To compound successfully you need the following: perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. And you need a knowledge of the mathematics tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, time to allow the power of compounding to work for you. Remember, compounding only works through time.

But there are two catches in the compounding process. The first is obvious -- compounding may involve sacrifice (you can't spend it and still save it). Second, compounding is boring -- b-o-r-i-n-g. Or I should say it's boring until (after seven or eight years) the money starts to pour in. Then, believe me, compounding becomes very interesting. In fact, it becomes downright fascinating!

In order to emphasize the power of compounding, I am including this extraordinary study, courtesy of Market Logic, of Ft. Lauderdale, FL 33306. In this study we assume that investor (B) opens an IRA at age 19. For seven consecutive periods he puts $2,000 in his IRA at an average growth rate of 10% (7% interest plus growth). After seven years this fellow makes NO MORE contributions -- he's finished.

A second investor (A) makes no contributions until age 26 (this is the age when investor B was finished with his contributions). Then A continues faithfully to contribute $2,000 every year until he's 65 (at the same theoretical 10% rate).

Now study the incredible results. B, who made his contributions earlier and who made only seven contributions, ends up with MORE money than A, who made 40 contributions but at a LATER TIME. The difference in the two is that B had seven more early years of compounding than A. Those seven early years were worth more than all of A's 33 additional contributions.

This is a study that I suggest you show to your kids. It's a study I've lived by, and I can tell you, "It works." You can work your compounding with muni-bonds, with a good money market fund, with T-bills or say with five-year T-notes.

7 Higher-Yielding Consumer Stocks To Build Your Yield

An investment strategy based on Dividend Growth Stocks focuses on companies that produce predictable results and thus are able to consistently raise their dividends. Demand for household and personal care products is generally stable and not affected by changes in the economy or other factors. If you lose your job, you probably won’t stop bathing, washing your clothes, brushing your teeth or stop buying toilet paper. That's why companies in the Consumer Defensive sector are sought after as desirable dividend growth investments.

For many of these companies, raw material costs is a primary driver of profitability, and the larger more established companies are in a better position to negotiate better terms. Growth comes from a growing population and expanding into emerging markets where the people are starting to earn a wage they can not only life on, but begin to buy things we consider necessities.

The Consumer Defensive sector has been a steady performer over the years for both yield and growth. Given the relatively low price of most consumer goods, people often prefer to pay a few pennies more for a name brand that they are confident with. Investments in the Consumer Defensive sector brings yield stability and potential dividend growth to an income portfolio.

This week week, I screened my dividend growth stocks database for Consumer Defensive companies with a yield above 3.00% and that have increased their dividends for at least 8 consecutive years. The results are presented below:

General Mills, Inc. (GIS) is a major producer of packaged consumer food products, including Big G cereals and Betty Crocker desserts/baking mixes. The company has paid a cash dividend to shareholders every year since 1898 and has increased its dividend payments for 8 consecutive years. Yield: 3.2%

PepsiCo, Inc. (PEP) is a major international producer of branded beverage and snack food products. The company has paid a cash dividend to shareholders every year since 1952 and has increased its dividend payments for 40 consecutive years. Yield: 3.1%

The Procter & Gamble Company (PG) is a leading consumer products company the markets household and personal care products in more than 180 countries. The company has paid a cash dividend to shareholders every year since 1891 and has increased its dividend payments for 55 consecutive years. Yield: 3.5%

The Clorox Company (CLX) is a diversified producer of household cleaning, grocery and specialty food products is also a leading producer of natural personal care products.The company has paid a cash dividend to shareholders every year since 1968 and has increased its dividend payments for 36 consecutive years. Yield: 3.6%

Kimberly Clark Corp. (KMB) is a leading consumer products company's global tissue, personal care and health care brands include Huggies, Pull-Ups, Kotex, Depend, Kleenex and Scott. The company has paid a cash dividend to shareholders every year since 1935 and has increased its dividend payments for 16 consecutive years. Yield: 3.8%

The H.J. Heinz Company (HNZ) produces a wide variety of food products worldwide, primarily condiments, convenience meals and snacks. The company has paid a cash dividend to shareholders every year since 1911 and has increased its dividend payments for 8 consecutive years. Yield: 3.6%

Sysco Corporation (SYY) is a large distributor of food and related products, primarily to the foodservice or food-away-from-home industry. The company has paid a cash dividend to shareholders every year since 1970 and has increased its dividend payments for 41 consecutive years. Yield: 3.9%

As with past screens, the data presented above is in its raw form. Some of the the companies would be disqualified for poor dividend fundamentals. However some of the others may be worth additional due diligence.

My database, D4L-Data, is an Open Office spreadsheet containing more than 20 columns of information on the 210+ companies that I track. The data is sortable and has built-in buttons and macros to make it easy to use. Companies included in the list are those that have had a history of dividend growth. The D4L-Data spreadsheet is a part of D4L-Premium Services and is updated each Saturday for subscribers.

From dividend-growth-stocks.com

Related Books

The 100 Best Dividend-Paying Stocks to Own in America

Dividends Still Don't Lie: The Truth About Investing in Blue Chip Stocks and Winning in the Stock Market

The Dividend Growth Investment Strategy: How to Keep Your Retirement Income Doubling Every Five Years

Five Reasons to Love Dividend Growth Investing

Regular readers of this column know that I’m a big fan of dividend growth investing. It’s a subject very close to my heart – and my wallet.

Having invested in dividend stocks for more than a decade, I can tell you I’m very pleased with the results. I’ve also heard from scores of readers – many of whom have been at it much longer than I have – who can attest to the merits of this simple but powerful strategy.

For my next two columns, I’m going to step back from the company and fund analysis that usually appears in this space and talk more generally about dividend investing. Today, I’ll explain why, in my opinion, it’s an appropriate strategy for many do-it-yourself investors. Next week, in the interest of providing a balanced picture, I’ll discuss some dividend investing myths.

Here are five reasons to love dividend growth investing.

1. It’s easy to understand

Many people find investing too daunting to try on their own. But the idea behind dividend growth investing couldn’t be simpler: If you invest in a diversified basket of companies with a track record of raising their dividends, your income will grow over time and so should the share prices. So you win two ways.

I’ve heard the argument that this amounts to “rear-view mirror” analysis. While it’s true that a history of dividend increases doesn’t guarantee that hikes will continue, a strong dividend growth record is a shorthand way to identify companies that generate lots of free cash flow, have a competitive advantage and are focused on generating wealth for shareholders.

2. It discourages trading

The prospect of receiving a dividend is a powerful incentive to stay invested. This is important because numerous studies have shown that frequent trading – with its high commissions, taxes and emotionally driven decisions – is harmful to your financial health.

Every dividend rewards the patience of the investor, and every dividend increase is confirmation that the strategy is working. In my own portfolio of 21 stocks, all but two have raised their dividends in the past 12 months. If I’d sold any of those stocks, I would have missed out – which is one reason I do very little trading.

3. It’s well-suited to lazy people

I admire entrepreneurs – people who take risks, work gruelling hours and create jobs for others. Unfortunately, I don’t have an entrepreneurial bone in my body. But thanks to dividend stocks, I can own a piece of a great business and draw a quarterly “salary” for doing jack squat.

This week alone, I’m getting paid by Johnson & Johnson, Canadian REIT, McDonald’s, Inter Pipeline Fund and Pembina Pipeline for sitting on my fanny. It’s tough work but somebody’s got to do it.

4. It protects you from inflation

Bonds and guaranteed investment certificates are a great way to provide stability to your portfolio. Everyone should own some. The problem is that the income they throw off doesn’t grow over time, so you’re exposed to the wealth-destroying effects of inflation. Many fixed-income investments currently yield less than the inflation rate, so you’re losing money on a real basis.

Dividend growth stocks, on the other hand, pay you a rising income that counters the effects of inflation. McDonald’s, for example, can raise menu prices to cope with higher input costs, and Canadian REIT can charge higher rents to its retail and office tenants. So your income grows on an after-inflation basis.

5. It works

Studies have shown that dividend-paying stocks outperform non-dividend-payers, and that dividend growers perform best of all. RBC Dominion Securities examined the period from 1986 to 2011 and found that dividend growth companies produced an average annual total return of 12.7 per cent, compared with 7.3 per cent for the S&P/TSX composite index and 2.4 per cent for stocks that paid no dividends.

What’s more, other studies have shown that dividends account for more than half of the stock market’s total return over long periods. In fact, the contribution from dividends may be as high as 90 per cent. (See Daniel Peris’s book, The Strategic Dividend Investor: Why Slow and Steady Wins the Race). That’s why, when I buy a stock, I demand a dividend.

From theglobeandmail.com

Related Books

The Strategic Dividend Investor

Dividends Still Don't Lie: The Truth About Investing in Blue Chip Stocks and Winning in the Stock Market

Income Investing Secrets: How to Receive Ever-Growing Dividend and Interest Checks, Safeguard Your Portfolio and Retire Wealthy

6 Rules to Build Your Own 'Lazy Portfolio!'

Build Your Own 'Lazy Portfolio!' 6 Rules

Yes, you can build a million dollar nestegg, its simple, you can do it

ARROYO GRANDE, CA. (MarketWatch) – “Investing should be dull,” says Nobel Economist Paul Samuelson, “investing should be more like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas” or Wall Street. Investing really is simple and easy, anyone can do it. You can. Here’s how.

Several years ago I started tracking the best portfolios I could find in America, simple portfolios being used by Nobel Prize winners, millionaires, conservative portfolio managers, neuroeconomists as well as average Main Street investors. We even found some in books like Investing for Dummies and The Idiot’s Guide to Investing.

We discovered something amazing. They were all saying the exact same thing: All you need is a simple, well-diversified portfolio of just three-to-eleven funds, low-cost, no-load index funds that will create a long-term winner through bull and bear markets. And you do it with no market timing, no active trading and no commissions. “Lazy Portfolios” are that simple. So what about the other thousands of stocks, bonds and mutual funds being hustled by brokers? Forget them!

But don’t you need help? Personal finance legend Jane Bryant Quinn put that issue to rest in her classic, Making the Most of Your Money: “Most of us don’t need professional planners. We don’t even need a full-scale plan. Conservative money management isn’t hard. To be your own guru, you need only a list of objectives, a few simple financial products, realistic investment expectations, a time frame that gives your investments time to work out, and a well-tempered humbug detector, to keep you for falling for rascally sales pitches. Don’t put off decisions for fear you’re not making the best choice in every circumstance. Often, there isn’t a ‘best’ choice. Any one of several will work.”

If you’re ready to start, here’s how: Get to know the eight “Lazy Portfolios.” It won’t take long. Then use your own judgment and customize a portfolio that fits your needs, your age, your lifestyle. Trust yourself. Many readers simply start with one of the eight. Then over time they fine-tune their portfolios as they add new money from savings. It’s really that simple. This strategy is being used successfully by boomers and multi-millionaires, young families with modest savings, college students just starting out, even grade-school kids.

Here’s what people tell us works: Six simple rules guaranteed to help you diversify, lower risk, level out bull/bear cycles and generate returns that beat market benchmarks without having to waste your time playing the market. Build your own “Lazy Portfolio” following these six rules, you’ll win, and more important, you’ll have lots of time left to enjoy what really counts, your family, friends, career, sports, hobbies, living. So here’s why and how this “Lazy Portfolios” strategy works:

1. Swing For Singles & Bet on Every Horse

Lazy investors win by being average. No-Load Stocks guru Charles Carlson uses a baseball analogy: Swing for singles.” Forget the homerun superstars. In Ordinary People, Extraordinary Wealth money manager Ric Edelman has another metaphor:“You’re not in a horse race. You’re playing horseshoes ... merely being close is good enough to win … If successful investors know they can’t pick the right horse, what do they do? Simple: They pick every horse.” Here’s why: Even if you’re starting with a small portfolio of three low-cost no-load index funds, for example, one diversified across the Wilshire 5000 stock index, one across the global stock market index and one across the total bond market index, your “bets” will be spread across more than ten thousand specific stocks and bonds in these three index funds

2. Two. Buy “Quality” and Never Sell

Warren Buffett was once asked about his favorite holding period. “Forever,” said the Sage of Omaha, the best time to sell is “never!” Index funds are the perfect long-term hold. If you buy quality companies and index funds with proven long-term track records, you won’t be tempted to sell when the market dips and talking heads on cable news freak out. Trust yourself, just do it. Remember, your most important decision is the up-front buy decision: So pick funds and stocks on the assumption you will never sell! One of our “Lazy Portfolios” was built by a guy who bought the first index fund in 1976 and still has it. If you had invested $10,000 in that fund back then it’d be worth over $200,000 today.

3. No Market Timing, No Active Trading

Markets are random and unpredictable says Wharton economist Jeremy Siegel in his classic, Stocks for The Long-Run. Siegel researched the stock market’s 120 biggest up and biggest down days between 1801 and 2001. He concluded that only 25% had any rational explanation. In an earlier study of 66,400 investors, behavioral finance professors Terry Odean and Brad Barber concluded: “The more you trade the less you earn.” Buy-and-hold investors beat traders by substantial margins. The most active traders turned over their entire portfolios 258% annually, but their after-tax returns were only 11.4%. The reason: Active traders lose large sums paying higher expenses, transaction costs and taxes. In contrast, buy-and-hold investors turned their portfolios over a mere 2% annually, generating 18.5% returns. That’s 50% higher.

4. Trust the Explosive Power of Compounding

Albert Einstein put it very simple: “There is no greater power known to man than compounding interest.” Compounding is more powerful than nuclear energy. A 25-year-old can put roughly $3,000 in an IRA every year and with ten percent average returns retire a millionaire at 65. A 45-year-old can do it by maxing out their 401(k) with $1,250 a month. Notice the explosive power: At 65 most of your million dollar retirement portfolio will be in the growth of your savings. For example, the 25-year-old will have invested only $120,000 over 40 years, the rest is compounded interest and appreciation!

5. If You’re Not Saving 10%, You’re Spending Too Much

In The Millionaire Next Door, Tom Stanley and Bill Danko tell us of the one habit all millionaires share: “Frugality: They live well below their means … The opposite of frugal is wasteful. We define wasteful as a lifestyle marked by lavish spending and hyper-consumption. … Being frugal is the cornerstone of wealth-building.” The math is so simple: Nothing saved, equals nothing invested, equals nothing for retirement. Start saving at least 10% if you want to retire a millionaire.

6. Keep Investing Very Simple, Then Enjoy Doing What You Love

As the legendary investor Peter Lynch once put it: “If you spend more than 15 minutes a year worrying about the market, you’ve wasted 12 minutes.” In researching 5,000 millionaires for Ordinary People, Extraordinary Wealth, Edelman discovered that they spend an average of about six minutes a day on personal finance. They don’t waste time watching cable news, reading brokerage reports, attending seminars, studying stocks tables, subscribing to financial newsletters, and reading financial newspapers. Six minutes a day, that leaves them 23 hours, 54 minutes every day to do what they really love!

So when you’re ready, step up to the plate and play ball! Or pitch horseshoes. Whichever you prefer. Learn how America’s laziest investors can get on the road to a million dollar nestegg. And remember, have fun along the way and don’t spend a lot of time on investing. There are far more important things in life, not just a career that turns you on, but your loved ones, family, socializing, hobbies, movies, sports, making the world a better place … you know, ordinary, everyday living stuff.

And if you want more details, check our book, The Lazy Person’s Guide to Investing.

From marketwatch.com

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3 Reasons You Must Invest In Dividend Stocks

As a dividend growth investor, I am frequently asked why I don’t invest in high growth stocks and, more importantly, why I believe investing for dividends is a more appropriate strategy.

In bear markets there are great buying opportunities for dividend growth stocks that are offering yields above their historical averages. Opportunities to buy great dividend growth stocks at above average yields is a great way to finance your retirement and increase the compounding effect of your future income from these stocks.

Here are the 3 most essential reasons that I prefer dividend investing: 

1.) Dividends offer investors fantastic flexibility

Dividends give you tremendous financial flexibility throughout your investing life. While you’ve got an income from working, you can reinvest those payments to speed the process of compounding your wealth. Once you’ve decided to retire, the cash thrown off by dividends spends just as well as any other source of money!

What is even better, a rising dividend payment can help you fight inflation by providing you more cash every single year.

2.) You can’t fake money in your pocket

Dividends also have the added bonus of being exceptionally difficult for companies to fake. After all, it’s difficult to convince lenders to loan money to a company if that company is going to turn around and hand it over to its shareholders.

As a result, to sustainably make and increase those dividends, the business needs to generate serious cash on both a regular and repeatable basis.

3.) Dividends are paid from the company’s cash flow

Perhaps most important, a company’s dividend payment comes from its operational success and not from the panic, hype, or analyst interpretations that influence its stock price. Throughout these rocky market periods, dividend payments allow us to make money even when the stock price moves lower.

Why Invest In Dividend Paying Stocks?

Quicker compounding.

Increased financial flexibility.

Cash in your pocket without selling.

A hedge against inflation.

An check on the company’s accounting.

Cash Flow in a down market.

With all of the benefits of dividends, it’s obvious why they can be an integral component of one’s portfolio.

From dividendmoney.com

Four Key Characteristics To Look For In Dividend Stocks

Written by Hank Coleman

There is a lot of talk about great dividend stocks to purchase for the long-term. But, how do you weed out the great dividend paying stocks from the hundreds of good or mediocre ones? There are a few key metrics that dividend investors need to consider before purchasing their first share. Here are a few of the biggest metrics to consider.

Dividend Yield

Dividend yield is simply the annual amount of dividends per year per share dividend by the price per share of the company’s stock. For example, Apple recently announced that it was issuing a quarterly dividend of $2.65 per share or $10.60 per share annually. With Apple’s share price currently hovering around $600 per share, its dividend yield is 1.76%. A company’s dividend yield provides investors with a way to visually see how much of their investment is being returned to them each year in the form of dividends issued by the company.

Dividend Growth Rate

Another key dividend metric that investors should consider before purchasing shares is the company’s dividend growth rate. Just as you would imagine, a stock’s dividend growth rate shows investors in percentage terms exactly how much the company is increasing their dividends over a period of time, typically annually. For example, McDonalds Corporation (Stock Symbol: MCD) has a 2.8% dividend yield and a history of increasing its dividend by an average of about 19% each year for the past five years. Whether a dividend growth rate is sustainable at these levels for the long-term is debatable, but showing a steady dividend growth rate over the course of several years is one factor that investors should consider. It is also a large factor in valuation models such as the dividend discount model (DDM) which allows investors a fairly simple way to value stock based on dividend growth at a stable rate.

Dividend Payout Ratio

The Dividend Payout Ratio is the percentage of earnings that are distributed annually as dividends. A company who has a Dividend Payout Ratio of 40% distributes 40% of its earnings back to shareholders in the form of a dividend. The other 60% can be used for things such as increasing the company’s retained earnings, buying back shares of its stock, and other financial transactions. Most investors consider 30% to 60% as the ideal Dividend Payout Ratio for a company to have. Comparing dividends against earnings instead of other financial numbers like revenue or free cash flow often give investors a smoother and more stable look at how financially secure a company is and whether or not they will be able to continue issuing a dividend at their current rate.

Free Cash Flow Payout Ratio

The Free Cash Flow Payout Ratio shows a company’s annual dividend payout as a percentage of its free cash flow. This is another ratio that can show you trends with respect to a company’s earnings and dividends. For example, while McDonald’s Corporation has increased its dividend growth rate by almost 19% annually over the past five years, McDonald’s dividends have also grown as a portion of their free cash flow as well. In 2008, dividend payouts accounted for 48% of McDonald’s free cash flow. This past year the ratio was just over 59%. This increase in the Free Cash Flow Payout Ratio may indicate that a company like McDonald’s could face increased trouble in the future continuing to grow its dividend at such a fast rate.

Conclusion

Another great way to find stocks with good dividend metrics is to use a stock screener. Google Stock Screener allows you to screen out stocks to meet certain criteria and show only certain companies. You can search for companies with a dividend yield in a certain range, and you can even screen stocks using a range for the Free Cash Flow Payout Ratio in the Google Stock Screener as well.

While these metrics are simple calculations in most cases to show investors potential undervalued dividend paying stocks, these are just a few methods for stock valuation. They will not replace investors’ need to further conduct their own research when deciding which stocks to invest in, but these metrics provide a good starting point for any dividend investor in search of good values in share prices.

Readers, are there other key dividend metrics that I missed that you use to help value dividend paying stocks? What is your favorite source for stock screening data?

From dividendninja.com

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When to Sell a Dividend Paying Stock

If you watched one of your investments drop 10% in value, would you sell it?

What about 20% in one year?

What about over 50% since 2008?

Dividend stocks have lots of appealing factors. Some stocks have a great dividend yield, providing steady income in good markets and in bad. It’s a big reason why I’m growing my portfolio with them. Some of those same stocks have a great dividend history. Their history has been so strong there is no reason to think the future for these companies will be any different. Other companies still, the best of the best, increase their dividends year after year after year. There are many reasons to dividend paying stocks. What about reasons to sell them?

If your nerves are shot, here are some reasons for selling your dividend paying stock:

The company has changed (too much)

The market share has bottomed out or revenue has declined beyond repair. These are just a couple of outcomes from poor management and could be a few reasons to “get out” of a dividend paying stock. Businesses need to change with time but it needs measured and calculated. A key question to ask: is anything wrong with the company?

The company is overvalued

If a stock has become overvalued because of a market run-up, it might be time to take some profits off the table. Recognize if you do this, in some accounts, you will incur a capital gain. Markets are largely efficient in my opinion but valuations do get out of whack now and again. So, another key question to ask: if I take some profits, are there better opportunities available to invest the cash?

The dividend has been reduced or eliminated

If the dividend is held static, at $0.29 per share per quarter, it could be sign that management does not acknowledge the dividend payment is at an unsustainable level. On the flipside, if management cuts the dividend, the stock price will rise over time and more importantly maybe the company will be back in favour sooner than later. Lowell Miller, author of The Single Best Investment says “dividend cuts are the kiss of death for stock pricing generally” but I don’t necessary subscribe to this theory. I never want a company I own to continue to pay a dividend just for the sake of doing so – it can be a healthy decision to make the haircut. The final key question to ask: what are the long-term prospects of this company? If in the short-term, a dividend cut is required to get the company through a rough patch, I can stomach and would applaud management for that. Dividend elimination – that would likely be my trigger to sell the company.

What would you do? Would you sell a stock that went down 20%?

From myownadvisor.ca

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The Top 5 Things You Need to Know About Dividend Paying Stocks

Dividends are cash payments made to shareholders. As a shareholder you are part owner of the company and therefore are entitled to share in the profits. Dividends can also help you determine when a share is undervalued, and priced right for purchase.

There are a number of other additional benefits to owning dividend paying shares, and I discuss my top five in this article.

1. Dividends provide an immediate return

Dividends provide an immediate return on your investment. Suppose you buy shares in company XYZ, where the dividend is $1 per share per year, and the share price is $20. $1 dividend divided by $20 gives you a 5% return. This means that if you bought $2000 worth of shares in company XYZ you would receive $100 in dividends (in cash) every year for as long as you own those shares, and as long as the company continues to pay the dividend. The dividend is paid regardless of the share price. The share price could go up or go down (in fact share prices fluctuate every day) but you will continue to earn 5% each year on your initial investment of $2000. The dividends are yours to keep, you can choose to spend the money or reinvest it into buying more shares. Without dividends you solely rely on share price appreciation, the gains are only made if you sell the stock for a profit, without dividends there is no immediate return on your investment.

2. Your safety buffer against the worst case scenario

Dividends provide a safety buffer against share price fluctuations or even the worst case scenario, where the company goes bankrupt and the shares become worthless. Remember once dividends are paid to you, they cannot be recalled or taken back; the dividends (money) are yours to keep. So even if a company goes bankrupt, the dividends you have received to date provide you with some cushion to help minimize your losses. If you owned shares in a company that did not pay dividends, and the company went bankrupt you would lose 100% of your money. 

In a personal example I purchased $2479 worth of TRP (TransCanada) shares in 2000. Since then I have received $2475.26 in dividends, which almost equals my initial investment. By next year I expect to have earned over $2479 in dividends. TRP shares trade at around $43 today, but even if the share price dropped to $35 or $20, I’d still be making money because the dividends have provided me with a margin of safety against any losses.

What are dividends? Why should you care?

Dividends aren’t just something rich people talk about, or a Community Chest card in Monopoly. They are the most consistent and easiest way to gain passive income as an investor. When most people think about investing in the stock market they think about movies where young men with slick hair invest in little-known companies and then profit hugely when these companies suddenly explode. The phrase, “Buy low, sell high,” rolls off of most peoples’ tongues. The fact is that this not how most people get rich, and it doesn’t really do the stock market justice. Over the past 40 years almost 60% of the overall yield of the entire stock market was produced by dividends as opposed to capital gains (capital gains refer to the money you make as a difference between what you bought your stock at, and what you sold it for). That’s an amazing statistic when think about it. Investing with a focus on companies that have a strong record of producing consistent dividends has many advantages over other, more risky styles of investing. 

The actual definition of a dividend is cash that is distributed to shareholders from a company’s earnings. The amount of your dividend is determined by the number of shares you own, and the dividend that the company is paying out. The dividend is usually listed as the amount per share (so you simply multiple this number by the number of shares you own in order to get your overall payout). The dividend is paid for with after-tax money from the company. Some companies pay their dividends quarterly (the most common), while others payout bi-annually, monthly, or annually. Regardless, the number you are most likely to read is the dividend prorated over a year. In order to determine a company’s dividend ratio, you divide its annual dividend, by the current cost per share. These two metrics are the most important ones to look at when doing dividend investing. The higher the dividend ratio, the more money you will receive back as a percentage of your principle investment.

I think all investors should look very hard at dividend investing, especially in today’s income-starved investing climate. There are several very strong dividend payers like AT&T for example, that are offering yields that are double, or even triple what the 10-year bond rates are on American Federal debt. By investing in these companies you are getting paid every year, and any value the company gains while you hold the stock is the “cherry on top” of your investing sundae. To stay consistent, if we keep AT&T as our example, their current dividend ratio is 6%. If you were to spend your dividends every year, you would have gained your principle back again in under 20 years (plus you would still own the shares you bought)! The real power of dividend investing occurs when you keep reinvesting them however. This allows compound growth to truly work wonders. If we think that AT&T might grow at an ultra-conservative rate of 3%, and keep their 6% dividend ratio, then we assume that all our dividends will be reinvested, your original principle will have doubled in only 8 years! In the long term, you could easily see your money double 4 or 5 times. Also keep in mind that great dividend paying companies typically increase their dividends over time. For example Coca-Cola has had 48 years of consecutive dividend increases. Procter & Gamble – 55 years of consecutive dividend increases.

Another reason why dividend investing is so attractive to many investors is because of the simple fact that if a company is paying a dividend, and has a strong history of paying/raising a dividend, these are two of the best indicators of the overall growth and maturity of a company. Think about the basic logic, if a company can afford to consistently pay shareholders, they have proven that they have sound management, and a pretty good business model. It is extremely rare that a company that has a good history of paying out dividends suddenly goes into bankruptcy. Instead, these are the companies that generally have the economic stability to withstand challenging conditions, and emerge with a stronger market position in spite of them. For example the Coca-Cola company has been paying dividends since 1893.

Dividend investing is a great way to give yourself a consistent stream of positive cash flow as an investor, and is a very useful way to screen out stocks that are too risky. They hold up very well during recessionary periods (like the present one) because their dividend payouts are so attractive to investors that need immediate money from their investments, and the capital gains they experience during a bull market provide a nice overall return for patient investors as well. These are some of the main reasons that dividend investing has always been, and assuredly will continue to be, one of the most solid long-term and short-term investing strategies in the marketplace.

From simplyinvesting.com

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