The Finance Blogger

Highly Effective Investing

July 21st, 2016 ernie Posted in Investing No Comments »

Highly Effective InvestingHighly effective investing characteristics are not usually the strengths portrayed by our politicians and yet many of us rely on our governments to provide us with a security blanket if we get laid off, get sick or get ourselves in trouble financially. Personally I would rather depend on myself to embrace the techniques of highly effective investing to make sure that my investments do well and  provide the quality of life I am most interested in for my retirement lifestyle. The following is our list of techniques to consider.

Highly Effective Investing

Develop your strategy and document – this strategy. Review it with your investment advisor, spouse and close family members.

Check your direction regularly – and make adjustments as needed based on equity changes, life events, emergencies and income requirements.

Diversify – never put all of your eggs in one basket. You will be disappointed. If you make the wrong decision, who knows what will happen. Diversify across companies, industries and investment vehicles such as equities, bonds and mutual funds.

Maintain balance – across industries. Investing everything in one area creates too much risk, especially if there is a downturn and you need the money.

Invest for long term – in high quality equities that pay good dividends, increase their dividends at least annually and have a history of growth.

Avoid buyers remorse – Sometimes you will make a bad decision. Or perhaps events beyond your control will mean that a single investment does not work out as you expected. Make whatever decisions you need to and move on. Focus on the future and what you can do to recover.

Keep your cool even if the market does not – the market will swing, sometimes as much as 10% or more. As long as your in good quality investments as we mentioned above, the market will recover and besides you will continue to collect interest and dividends.

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Year End Investment Review

December 14th, 2014 ernie Posted in Investing No Comments »

Year End Investment ReviewThe following are the steps you need to consider as part of your Year-End Investment Review.

Perform a financial Year End Investment Review

Once or twice a year perform a year-end investment review and evaluate your current goals. Identify new goals, assess your tolerance for risk and make sure that there’s an alignment between the two.

Review your approach

There will be short-term fluctuations in the market, for example, the current market is growing very strong. However, investors should focus on the long-term to ensure they meet their goals to meet their objectives. You may want to look at whether they have sufficient cash to meet unexpected or upcoming events. Will, there be a risk of a shortfall, do you have sufficient insurance coverage to meet your family’s needs and do you have the right mix of stocks bonds and cash to meet your objectives.

Write yourself a check

Complete your contribution to your Retirement savings plan, your tax-free savings account. Determine if you need to adjust your portfolio income to provide for sufficient income for the following year.

Do an inventory check

A diverse investment portfolio is the best way to manage your overall risk. Complete an inventory check to review that you have the right mix of stocks bonds and cash investments. As well as across different asset classes investment grade, international and asset classes. If you are overexposed in one area you may need to make some adjustments to keep to your strategy.

Prepare for choppier waters

Are you prepared 5%, 10% or more adjustments in the market? Volatility is a normal experience in the market. Do you have sufficient cash to invest or take advantage of these pullbacks? What will be the impact on your existing investment? Evaluate your exposure risk as appropriate.

Position for the next phase of growth

Interest rates have been forecasted to stay low for the last couple of years. Currently, they are expected to begin increasing in 2017, however, it is anyone’s guess. When they do rise, equities will be impacted. Do you have the right mix of equities, bonds, and cash to take a bandage of rising interest-rate?

Trim your heavyweights from the previous phase

Some of your investments may have risen significantly and are now overweight with respect to your other investments. This might be the time to sell and take advantage of profit-taking to invest in other opportunities.

These are areas that consumers should consider when evaluating and completing an annual investment review. Work with your investment visor to come up with a strategy that meets your needs, and you’re investing style.

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Are Mutual Funds too Expensive

November 21st, 2014 ernie Posted in Investing No Comments »

Are Mutual Finds too ExpensiveAre Mutual Funds too Expensive ? This chart would certainly appear to support the case that they are in fact expensive and can have a significant impact on your savings plan or your retirement over the long term. The chart on the left demonstrates that if you had $100,000 to invest and kept this investment in mutual funds over a 10 year period, your investment would be worth approximately $165,000. Sounds pretty good right! Note that this assumes average returns and does not reflect the ups and downs of the stock market. However consider that the mutual fund manager is deducting 2% every year regardless of how the mutual fund actually does in the market.

If you were invested in exactly the same investments that the mutual fund was your investments after 10 years would be worth approximately $195,000 or $30,000 more than they are. MER is taking $30,000 over 10 years as fee’s or an average of $3,000 a year of your money.

Why Are Mutual Funds too Expensive?

Most people use mutual funds because they want so called peace of mind. They do not want to worry about their investments. The sad reality is that most funds are managed by people who have huge portfolios and are relying on the averages. If the markets are down, so are the mutual funds and so is your investment. The manager still gets paid the 2% regardless. You lose in a down market because your investments are worth less. You still have to pay the MER! The answer to the question, Are Mutual Funds too Expensive, is yes!

There are funds that charge smaller MER’s, however you usually get what you pay for. If you are not interested in taking the time to manage your own investments, they you probably should stick with a well managed low risk mutual fund. An investment adviser can assist with selecting the correct one. If you do not want any risk and do not want to pay MER’s, then GIC’s are the oly way to go, however the income level on GIC’s is very low, so again you lose from an income perspective.

Invest in Blue Chip Companies

We  believe that investing in blue chip companies with a long record of paying dividends is the way to go. You receive the dividend income and over time the stocks usually appreciate in value as well. At least you will not pay MER’s.

Take a look at a well performing dividend income mutual fund and invest directly in the same stocks. You probably will not go wrong over the long term. Make sure you are diverse. Monitor your investments on a regular basis to take any corrective action that may be required.

For more information about common sense investing, click here.

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Manage Investment Volatility

September 21st, 2014 ernie Posted in Investing No Comments »

Manage Investment VolatilityMany investors find that stock market volatility gives them a great deal of concern. But there is an approach to manage investment volatility that will not keep you awake at night. It will still protect your investments from the worst swings in the market. The most recent example of market volatility is what happens in 2008, 2011, and 2018. The markets lost over 50% and many people bailed out of the stock market at that time.

Essentially locking in their losses. Many of those people and many others who were not in the markets stayed out of the equity markets. As a result, they did not participate in the huge run-up that has taken place over the past years. In fact, if you stayed in the market and did not sell your investments they have recovered. In many cases, they have also doubled from the original investment levels. Consumers and investors meed to manage investment volatility from the perspective of knowing when to hold onto them and when not to.

Manage Investment Volatility

It can be pretty scary for many people watching your investments swing, particularly if they are large swings. However, if you are well invested in blue-chip stocks, diversified, and earning decent dividends, there is less likelihood that you would be hurt over the long term with investment volatility.  In addition, we suggest that you talk to several investment advisers, assess the markets, assess the long term impacts on companies, etc to make your own decisions. Above all avoid making emotional decisions and decisions which will simply line the pockets of your investment advisers.

In other words, get involved, and do the work needed to manage investment volatility impacts on your own investments so that you can make intelligent decisions. If there is one thing we have learned, no one and that includes the investment advisers has a crystal ball that accurately tells us where the markets will go. The advisers make their money selling and trading stocks, so before you take their advice, check it out yourself.

For more posts about investing advice, click here.

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Managing your investments for the long-term

March 30th, 2014 ernie Posted in Investing No Comments »

Managing your investmentsWe recently came across these guidelines for managing your investments which are pretty straightforward and simple with regards to investing and building a retirement plan.

These guidelines made sense to us and are easy to remember, however for many people are very hard to implement.

The Managing your investments guidelines are as follows:

Invest in long-term stock; it is a marathon, not a sprint. Start early and treat it as a marathon investment plan.

Invest based on factual information that you can collect from your financial adviser, as well as reading news, the news items, and following information released from companies you’re investing in.

Keep your emotions out of your decisions. Greed, envy, and following the crowd are strange ways of influencing your decisions. Stick to the facts.

Focus on quality stocks that pay dividends regularly and also that have a history of increasing their dividends year-over-year.

If you can start early investing for retirement, plan in a conservative manner, follow diverse investing and using several financial advisers there is an excellent chance that you will save sufficient money to provide for your retirement and the quality-of-life level that you prefer. Start early and it is much easier to achieve these objectives

Keep your emotion Out of Managing your investments

This is one of the most difficult things to do overall. Imagine you have been saving a nice nest egg of investments. Everything is going well, and it is growing as fast if not faster than the market. Suddenly the market decides to take a correction, which it does every few years. Suddenly your investment value drops by 30% to 40%, and you are overwhelmed by the loss in your savings.

The first thing to remember is that it is only a loss if you sell now at a loss. The market has gone through many corrections over the years and then recovered. Even in 1929, which was the most significant correction we have ever had, the market recovered and far surpassed that loss. Keeping your emotions out of the decision is hard to do, but one of the most important things to do when managing your investments.

For more posts about investing, click here.

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Biggest financial Mistakes – A Bad Investment

July 29th, 2013 ernie Posted in Investing No Comments »

Biggest financial Mistakes We are doing a series on the biggest financial mistakes that consumers make over their lifetimes. This post is about bad investments that we all make from time to time. Some are very difficult to avoid. We may have done all of our homework, investigated whatever it is we are investing in and then made the plunge only to find out that the information we had, was not accurate or some of the assumptions did not turn out the way we thought they would.

Even the pros make these bad financial mistakes from time to time and make bad investments. The question is how to increase the odds of preventing these mistakes. You probably cannot totally eliminate the chances of finding out that an investment you have made has turned bad, but you can increase the odds of not finding yourself in a situation with a bad investment.

Biggest financial Mistakes

Avoiding Bad Investments

Leave your emotions out of the decision making process. It may be excitement or it may be greed, either way these emotions will never allow you to make an informed unbiased decision regarding your investment.

Talk to other people who are not emotionally involved and ask for their opinion. It should be someone you trust and it should be someone you respect for their smarts and common sense. Listen carefully to the pros and cons of what they have to say about the investment.

Taking risk is the cornerstone of many people who have gotten rich. But taking risk and taking educated risks are two different things altogether. You will never be able to predict a sure thing, but at least if you evaluate all of the risks then you will be able to make an educated decision.

Never place all of your savings in one investment. Spread it around. If an investment does go bad, then at least you have not lost everything. Investment advisers will call this diversity in your investment portfolio and this is a really smart thing to do.

Invest commensurate with your age. If you are young, you have lots of time to make up for mistakes and losses. If you are near retirement, you probably want to invest in relatively secure investments that pay a reasonable return. Taking high risk investments and investing your life savings in them, really puts your entire life and quality of life at risk.

Summary – Avoiding Bad Investments

One of the best pieces of advice that the writer every received was to review and investment and then walk away for 24 hours. This gives time to think about it, to allow the emotions to settle down and to avoid the pressure that a sales person might be trying to place on you to make a decision. Use your head and not your emotions to avoid making bad investments.

For more details about investing, click here.

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Celebs take safe road to investments

July 11th, 2013 ernie Posted in Investing No Comments »

safe road to investmentsCelebs are taking the safe road to investments to protect themselves when income is not coming in. They work on a variety of films and movies. Their income can vary a great deal over the months and even years. Since their income is so irregular, taking the safe road will help them ensure that they still have cash when they are not working or are between projects. When a TV show that has been running for several years suddenly is terminated they are out of a job. It can take some time to line up another show or film, or even to do advertising. They need to make sure they have cash to get them through the slow periods.

Safe Road to Investments – Variable Income

When they are working the money is fantastic; when they are not working it can be pretty scary! They may be still spending as if they are working and the money is flowing out. Many people, the writer included get a little excited when the big money is flowing in. It is easy to forget that this is a temporary situation. Suddenly you are spending money like crazy. Before you know it you are living from pay check to pay check. Spending huge sums on cars and homes, vacations that are over the top expensive and many more. When the pay checks stop coming, there is a scary dose of reality. Unless you have invested carefully and planned for this situation.

Many have learned to invest wisely and conservatively to make sure there is money to carry them through the dry periods. By investing in conservative funds and even bonds and GIC’s, there will always be funds available to help them through these situations. Diversity is also important as well. Never place everything in one investment , spread it around in conservative investments. Even some real estate can do well, but real estate is not very liquid, especially if you own an expensive home. It may take as long as six months to sell a home that is listed in the seven figure rate.

Safe Road to Investments – Going Broke

We have all heard of a few stars and celebs who have made a lot, spent a lot and are now broke. The same can happen to the average consumer unless they take control and manage their spending! The same situation applies to consumers who work at companies and suddenly find themselves laid off. If you have been spending pay check to pay check, then you may not have any savings that can get you through the period between jobs. If Celebs can plan for the future, why can’t the average consumer also plan for the future?

All it takes is to set aside 10% of your income every week for a rainy day to use a popular expression. When the time comes that you have a cash flow emergency due to job loss or major medical emergency, the money will be there for you. Rainy day funds should not be used for vacations, buying cars or other such items. This money is there to help you get through those times when there is no money coming in to buy groceries and pay the rent or the mortgage payment.

While 10% may seem like a lot, once you get started and get used to living on 90%, it actually becomes quite easy and most people after awhile do not even miss the money. They really get used to living on 90%, stretching their pay checks rather than spending the entire amount every week. Sure you may have to do without some things, but that is really part of budgeting and planning for the future.

Follow the lead of the Celebs, we think that many of them have it right! For more investing information, click here.


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Don’t Take a Vacation from Investing

August 9th, 2012 ernie Posted in Investing 2 Comments »

Don't Take a Vacation from InvestingThe following narrative came in a flyer from my investment adviser at Edward Jones. I decided to add it to this post since it is actually very good advice, although they try to add caveats to protect themselves based on the advice they are providing. Although this advice is pretty general it is good advice and it actually does work if you stick to their tried and true methods. The message – Don’t Take a Vacation from Investing. Take this information as additional data to assist with help to your investing strategies and planning.

Don’t Take a Vacation from Investing

Most people either never look at their investments or they spend too much time watching them and adjusting them If you are the average consumer with average investments that well investment in good quality relatively low-risk investments, then once a week is fine. High-risk investments are going to take more time and effort. If you lie awake at night thinking about your investments, then you are probably in investments that are considered too high risk. Talk to your financial advisor at least once per month after you have first reviewed your accounts. Get his or her opinion on current and near term market conditions and review any decisions that may need to be made.

Be Patient and Invest for the Long Term

Sometimes you need to be patient, but so far the markets have responded over the long term and that is what is important when you are thinking about retirement. For our part we buy into this overall strategy, however, we are now also focusing on dividend stocks who have a long history of paying their dividends on a regular basis as well as increasing their dividends every year. For many retired people this is a raise every year for them with the dividends increasing. There is no guarantee, but dividend-paying stocks with a great record are not a bad way to go.

Read on and we hope that is helpful to some of our readers.

From Edward Jones – Don’t Take a Vacation from Investing

Summer is here, which means a vacation most likely isn’t far away. Whether you are hitting the road, jumping on a plane, or even enjoying a stat at home vacation at home, you are probably looking forward to some downtime with your family. But not every aspect of your life should be relaxed. Specifically, you do not want to take a vacation from investing, which means you need to become a diligent year-round investor!

Here are a few suggestions to help:

Keep on investing

Don’t head to the investment sidelines when the financial markets experience volatility. Historically the early stage of any market rally is generally when the biggest gains occur. Keep in mind that the past performance of the market is not a guarantee of future results.

Keep Learning

The more you know about the forces that affect the performance of your investments will help. Understand why you own the investments you do. You will make the right moves and the less likely you will be to make hasty and unwise decisions.

Keep your focus on the long term

Think about what you want your financial picture to look like in 10 or 20 years or even 30 years and take the appropriate steps to help make that picture materialize.

Keep looking for growth opportunities

To achieve your long term goals, such as a comfortable retirement, you will want a portfolio that is designed to help you meet your investment goals.

Enjoy your vacation this summer or any other time of the year you go on vacation. No matter what time of the year, no matter what season, don’t take a break from investing. Your efforts may pay off nicely in the future.

Edward Jones has a long term investment strategy. It is almost a buy and holds unless you need to rebalance your investments to maintain your investment goals and risks. Too much investment in one sector may not be appropriate. Don’t Take a Vacation from Investing. You may need to be rebalanced for your long term investment strategy.


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Smart Financial Moves to Consider before Year End

December 18th, 2011 ernie Posted in Investing 1 Comment »

Smart Financial Moves to Consider before Year EndThe year is almost over and you still have time to make some financial moves before year end to minimize your taxes and position your investments for next year. We have compiled a short list of smart financial moves to consider before year end for this purpose. Here we go with our list:

  • Make a retirement investment – RRSP for Canada , 401k for the US
  • Contribute to an Education Fund
  • Complete tax Savings Transactions
  • Take advantage of Tax Free Savings Accounts ( Canada )
  • Consider Income splitting
  • Plan your Charitable giving
  • Review your Plans with your financial Adviser or Tax Adviser

Smart Financial Moves to Consider before Year End

A few more words about each of these ideas. Note, some apply to Canada, although most countries have something similar, so check with your adviser for suggestions in your country.

Make a retirement investment – RRSP for Canada , 401k for the US

There are lots of reasons to save for retirement, however one of them is that you need to do this every year and if you have not set aside some money this year, now is the time to do it. Don’t wait until after year end, do it now so that you can take advantage of any tax savings in the current year.

Contribute to an Education Fund

If you have kids and you want them to go beyond high school, it is a good idea to set aside money now to pay for their education. Education has become particularly expensive and families who start early can provide the best opportunities for their children. It is easy to do do when it is spread over many years rather than in one lump sum.

Complete tax Savings Transactions

If there are transactions such as selling stocks at a loss, now is the time to do it at year end. There are several things to remember – there is a 3 day settlement rule so you cannot wait until the last day; also there is a wait time before you can repurchase the stock if that is your intent. Governments realize that this is what many people and fund managers do every year. Understand what the rules are and then proceed. Your investment adviser can assist with this decision.

Take advantage of Tax Free Savings Accounts ( Canada )

This is something available in Canada and may be available in other countries. basically the government is encouraging people to save money and allows Canadians to save money and not pay tax on the income until it is withdrawn from the plan. It is a great way of hiding income until such time that you want to utilize it, usually in a year where you have smaller income than normal.

Consider Income splitting

If you can transfer income to a spouse who has a lower tax rate, some times you can decrease the total tax paid by a married couple. Consult with your tax adviser on this one.

Plan your Charitable Giving

It is always good to give and in most countries this is a tax deduction. Give money before year end to ensure that you minimize the total tax you pay.

Review your Plans with your financial Adviser or Tax Adviser

Regardless of what you do, it is a good idea to meet with your adviser prior to year end to review all of these financial strategies and others to ensure that your taxes are minimized and your investments are maximized for growth. You may also want to re balance your investment portfolio particularly if some stocks have gained while others may have not. As you near retirement, some investors will shift more towards income oriented investments and less on growth oriented investments.

Smart Financial Moves to Consider before Year End

Your adviser can help with all of these assessments and decisions.This is a good time to schedule an appointment with your adviser and take action on these smart financial moves to consider before year end. In fact you should meet with your advisor once every six months to discuss your investment portfolio and your retirement plan. Let your advisor know when you plan to retire so that he can make the appropriate recommendations

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Interest income – GIC’s, Bonds

November 21st, 2011 ernie Posted in Investing 1 Comment »

Interest income - GIC's, BondsThere is another huge market that many people participate in. The fixed income market such as GIC’s and bonds issued by government and corporations. These typically are a little more secure and pay a specified interest rate on a monthly, quarterly or semi annual basis to the holder of the investment. These investments are rated as are other investments. Triple A bonds are the best investment and typically pay a slightly lower interest rate due to their perceived security. Bonds that are generally referred as junk bonds must pay a higher interest rate to attract investors and are  inherently more risky as well. The bond market is actually larger than the stock market is!

GIC’s or Guaranteed Investment Certificates

These typically are for a specified term at a specified interest rate and you cannot cash them in ahead of time. They are the most secure investment that you can invest in and as a result they also have the lowest interest rates as well. Many people use these types of investments to park money in for a short period of time. While other investors who do not tolerate risk very well will place their money into these types of investments.

Interest Income – Government and Corporate Bonds.

Companies and governments at all levels will issue bonds again at a specified interest rate and term. Basically you purchase a bond and hold it until it matures at which time you receive your original investment back.  They pay interest income to you on a monthly or quarterly basis typically.

Call Options are tied to bonds. If a bond has a call option, it means the company can recall the bond at a specified time. Typically they will do this if interest rates have fallen and they feel they can borrow money more cheaply.

Selling bonds can be accomplished at any time with most bonds. However you will not necessarily receive the value of the bond. If the interest rate the bond is paying is higher than the prevailing interest rate, the price of the bond will be at a higher level than the maturity value. Correspondingly if the interest rate is lower than the prevailing rate, the price of the bond will fall as well. This is a risk you must take if you are planning to sell early!

Bond Ladders and Diversity

As with all investments, diversity is a mandatory rule that all inverters try to follow.  Never put all of your money into one bond or company. Spread your money over multiple bonds, company’s and industries while all the time maintaining your investments in blue chip type companies.

Interest rates vary over the years and the worst thing you can have happen is for all of your money to mature when interest rates are low. Inverters typically will invest in bonds with maturities that vary across many years. For example, if you have $100,000 you might purchase 10 bonds of $10,000 each with maturity dates spread over 10 or 15 years. So in this example, you would have only $10,000 to reinvest every year and if one year interest rates are really low, you do not have your entire investment portfolio to invest at low rates.

What Happens to Bonds you Have When Interest Rates are on the Rise?

If you hold bonds that are currently at competitive interest rates and the government decides to raise rates, the value of your bonds is going to decrease to reflect this new higher market interest rate. This is only an issue for people who plan to sell their bonds prior to maturity. If you plan to hold your bond until it matures, collect the interest that comes with the bond, then you need not be concerned about this decline. When your bond matures, you will receive your original investment amount back at that time.

Interest income – To summarize:

  • Bond ladders
  • Diversify
  • Blue chip
  • Low risk

That’s why bonds and GIC’s appeal to many people who do not want the risk of stocks keeping them up a night. They can go about their daily lives without having to be concerned about whether their investments are at risk or not. Well at least the risk is reduced, although there is always some risk.

For more information about investing, click here.


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Dividend Income

November 7th, 2011 ernie Posted in Investing 1 Comment »

Grow dividend IncomeIn our last post we talked a little bit about dividend income vs. interest income. This post is going to focus on why dividend paying stocks are a really good buy right now and probably offer the best opportunity over the long term to find financial appreciation. Although there are never any guarantees, sometimes the slow steady approach is the best bet, especially if you invest wisely in good quality stocks.  This means stay away from get rich quick growth only speculative stocks! And definitely do not put all of your money into one stock, mutual fund or bond. It is just too risky. But back to dividend stocks and why we like them so much.

The assumption is that you invest in a AA or AAA blue chip kind of stock that is paying reasonable dividend rates. Right now the yield for these types of stocks appears to be around 3% to 5% depending on the price of the stock on any given day. While this is not a fantastic yield it is reasonable compared to current interest rates on bonds and certainly better than treasury bills. If you also purchase a stock that has a history of increasing their dividends on a regular basis, even better. You have built in growth into your income stream.

How Dividend Income Works

So if you own a $100 stock that has a yield of 4%, this means you are getting $4 in dividends every year which you can take as cash to reinvest, take as income or participate in a stock reinvestment plan if that is offered. The stock is going to vary a great deal depending on the volatility of the market. It could be $110 one day and two weeks later down to $80, but the important thing is that you still get your $4 dividend unless the company finds itself in trouble and has to stop paying dividends.

Opportunities for Growth

Some stocks never move to much. They will be the same value year after year, paying out their dividends to their investors.  On the other hand if you have a dividend growth stock, on average the stock is going to appreciate based on how investors evaluate the company. While you never make money until you sell, your investment can increase over time. All the while you are receiving dividends from the stock. Some people will hold the stock for a long time preferring to receive the dividends as income.

Dividend Growth

As stocks appreciate , the yield will go down since the dividend remains the same yet the money that the stock is worth goes up. Investors will sell the stock to reinvest in something else that pays a better yield. As a result a company is forced to increase their annual dividend to bring the yield up, retain investors and anyone who is looking for income.

The net result is that you can gain from dividends. The dividends may increase over time and the stock itself can also increase over time providing three ways to make money. However there is always a caution. Stocks also go down in price for a whole variety or reasons and you must evaluate every situation and not panic. I was told by one adviser that one of his clients portfolio is all dividend paying stocks. The portfolio lost over $100,000 during the 2008 depression. She did not panic, just continued to collect her dividends from her blue chip stocks. Today her portfolio has not only recovered what she lost, it has also grown a great deal as well!

As interest rates rise, you may see the value of your stocks decline. Unless they raise their dividends to increase the yield. While you may not like the value of your stocks going down, your main focus is on income generation. Increasing dividends will improve your income level considerably.

If you are planning to invest in stocks, aim for blue chip dividend paying stocks. Diversify and monitor on a regular basis. Avoid the quick money schemes. If a company does get into serious trouble, bail out before you lose it all!

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Dividend Income vs. Interest Income

October 21st, 2011 ernie Posted in Investing 1 Comment »

Dividend Income vs. Interest IncomeIt is really tough to find good investments these days from interest oriented income. Iy is really tough to find investments that pay 4 to 6%  unless you are going with higher risk investments. Triple B rated bonds and stocks sometimes offer this kind of yield. But then they are higher risk than many other companies that have a triple A rating. You have to trade high yield for high risk stocks and bonds.

Be prepared to accept the volatility of some of these investments. It is really quite simple. High yield and high risk vs. low yield and low risk. Each investor must decide what level of risk they can tolerate and how much money they want to risk. Can you afford to deal with volatility and worse, partial permanent loss  in your capital? Remember if you sell on a down day, you have locked in your losses.

Dividend Income vs. Interest Income – Buying Commercial Bonds

The bond market is apparently much larger than the stock market and yet it seems to get much less press than the stocks do. Bonds can be purchased any day from most companies at various rates and terms. Bonds are all rated based on the company that is selling them and depending on the coupon rate and term, may sell at par value, higher or lower to provide a yield rate that you can compare to other interest bearing certificates.

The yield rate is a very important number since it indicates the real return that you should expect to receive based on what you are actually paying for a bond. For example a bond that is priced at $110 per unit of $100 means that you will pay $5500 for a bond that has a value of only $5000. If the coupon rate is 5% then you will receive 5% of $5000 every year or $250 in income. Since you paid $5500, the real yield is $250 / $5500 or 4.54%

It is very important to understand this concept, since the yield reflects the real return you will receive on your money. Bonds vary in price based on the coupon rate they carry, the term to maturity, whether there is a call allowance on them and what the prevailing interest rate is for interest bearing investments. Once you know the price of the bond and the coupon rate, you can calculate the yield you will receive on the money you make available for investment.

Dividend Income vs. Interest Income – Dividend Income

If you focus on dividend paying stocks, they can be measured using yield rates as well. If a stock is worth a $100 and they pay an annual dividend of $4, then the yield at that time is 4%. However the value of stocks vary a great deal since they are traded daily on the stock market. A $100 stock might be $95 one day and a$105 the next day with corresponding changes in the yield rate.

If the stock appreciates in value over time, then not only do you still get the dividend for as long as you hold the stock, you may also make a profit if you sell the stock at a higher value than what you paid for it.

When you calculate yield on stocks for both growth as well as dividends, you must also take into account the commission charge from your broker. Some people use discount brokers were others use full service brokers. Regardless which one you use, you should take this cost into account. Especially when calculating the overall yield rate for growth and income related to stocks.

Should I Buy Dividend Paying Stocks or Bonds?

The answer is probably yes to both. You want to be diversified and stay conservative in terms of going with high quality investments that are invested for the long term. Bonds have slightly less risk associated with them. However there is no growth potential if you keep the bond until it matures. Stocks on the other hand may appreciate in value over time, however there are no guarantees. The stock market varies a great deal almost every day.

This post should be considered a brief high level discussion on the subject of dividend income vs. interest income. We will discuss additional issues associated with each in future posts. Comments are welcome about either that will assist our readers in understanding the benefits of either.

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