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BlogEric SnaellJune

Stacking Dividends

Dividend-paying stocks

Every company has a life cycle. You can invest in a start-up and wait until the company eventually, and inevitably, goes out of business. If the company's life cycle is shorter than yours, you will end up broke. Unless, there's a regular dividend.

Logically, a profitable company would pay a dividend while an unprofitable company wouldn't. This is not always the case, but a re-occuring dividend is generally a good health indicator.(Most companies that go bankrupt do so because they run out of cash.) Unsurprisingly, a lot of investors invest solely in dividend-paying stocks. Personally, dividend-paying blue chips are my choice of investment when I'm investing borrowed money. Whether it's a loan, a credit or an overdraft facility, I want to avoid volatile stocks in this case. But a simple bond would probably not be profitable enough. This is with the reasoning that the dividend should cover at least the interest expense. Any increase in the stock price is just a bonus. This could perhaps be compared to financing an apartment with future rent income.

The share price of a blue chip stock goes steadily up and down, so the timing of the initial investment is crucial. The cost to split the initial investments in two parts is usually zero. To cut the market timing risk, you can buy for instance half of the stocks today and the rest after six months. To cut the stock specific risk, you can buy several stocks. Usually this will not increase the initial cost of the purchase. But if you pay a custody fee per line, your monthly costs will increase.





It's worth noting that dividends are not paid in the same manner in all stock markets. The majority of companies that pay dividends, only do it once a year. An exception is the US stock market. There are actually four reasons why we'll pick this market this week for our dividend stocks:

1. Low trading costs

2. Dividends are paid quarterly

3. Weak dollar

4. Up-going market trend



Examples

Here are 3 stocks that can serve as examples. You can get a overview of the stocks for instance on www.msn.com. Bear in mind that graphic displays of stock price performances do not take into account the re-investment of dividends by default.

Nike (NKE)

Procter & Gamble Company (PG)

Domino's Pizza Inc (DPZ)



Taxes

The default 15% with-holding tax on US dividends has to be taken into account. Depending on nationality, residence and company form, this may not be for you. Dividends do for instance not appeal to investment vehicles, such as fund companies, that can buy and sell securities tax free.



Why is Explosive Mode publishing financial articles?

Athletes are usually paid in lump sums, whether it's prize money, sponsorships or for commercial appearances. Professional athletes tend to earn considerable amounts of money during their active careers and have to learn how to manage it in order to survive after their sports careers are over. Explosive Mode featured athlete Eric Snaell (the Fit Businessman) writes about financial topics that cater to these athletes. His experience in banking, equity investments and entreneurship provides valuable information that is not taught at schools. You can find out more about these investment strategies in his upcoming book Independent Mode (Resign Anytime).



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