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Answer:
Dear
George,
Yes.
There certainly are advantages to stocks that pay
dividends. It means that you will receive a check,
typically four times a year, for money that is known
as "dividend income." You can either put this money
in your bank account or, with many companies you can
opt not to receive the check and instead have it automatically
reinvested in additional shares of the company's stock.
That type of arrangement, officially called a "dividend
reinvestment plan," provides a painless way to increase
the number of shares you own.
Here
at BuyandHold, you can automatically reinvest your
dividends. Simply login and access your account. Then
there is a "Dividend Reinvestment" link that can be
found under the "Account Features" heading.
However,
don't pick a stock only because it has a high dividend.
You want to make certain the company can continue
to cover its dividend with its earnings and not have
to reduce or cut its payout during tough times. Therefore
it is important to select a company whose "fundamentals"
are very solid -- that means one that has increasing
revenues and is not burdened by too much debt.
Pay
particular attention to earnings and select a company
that can easily afford to make its quarterly dividend
payments to shareholders from earnings. A good rule
of thumb: the dividend should be less than 1/3 of
earnings per share.
Dividend
Paying Industries
Certain
sectors of the stock market pay higher dividends than
other industry groups. According to Standard & Poor's,
the market average as of the end of 2002 was 1.8%.
On that same date, here's how the various industries
looked:
| INDUSTRY |
YIELD |
| Utilities |
4.8% |
| Telecommunications |
3.1%
|
| Energy |
2.6% |
| Materials |
2.6% |
| Consumer
staples |
2.4% |
| Financials |
2.3% |
| Industrials
|
1.9% |
| Health
care |
1.6%
|
| Information
technology |
0.3% |
Finding Specific Companies
I
recommend that when looking at stocks within these
industries, you select those that currently have a
high ranking from Value Line Investment Survey.
Value Line, published weekly and available at many
libraries, has independent analysts reports on over
1,500 stocks, arranged by industry sectors. It also
rates each stock on a scale of 1 to 5 in terms of
"timeliness" and "safety." (One being very timely
or safe and 5 being troublesome.)
And,
good news for you -- the Weekly Index lists stocks
according to dividend payout, starting with the highest
yielding companies.
Dividends
Are Not The End All
Although
it's nice to receive dividends, it's not the only
consideration in picking a stock. Smaller companies,
which offer the possibility of impressive price appreciation,
tend to keep earnings and use them to help grow the
company. And there are plenty of large, cash-rich
companies that have never paid a dividend, such as
Cisco, Microsoft and Oracle.
President
Bush's Plan
Earlier
this week, Bush proposed a plan to abolish taxes on
dividends. Should this become law, owning dividend-paying
stocks would become even more appealing. And, it's
possible some companies that are not paying dividends
are likely to start doing so.
Stay
Tuned...
Next
week I plan to answer your question in further depth
by discussing preferred stocks and real
estate investment trusts -- two additional ways
to reap above-average dividends.
BUYandHOLD does not recommend any securities. The
securities mentioned above are being used for illustrative
purposes only and should not be regarded as an offer
to sell or as a solicitation of an offer to buy.
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