Learn the basics of investing with 2 short posts per week

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Dividend stocks are any stocks that pay some form of dividend.  However, most investors refer to companies that have a long history of paying out dividends and increasing those dividends over time as “dividend stocks” - Dividend aristocrats is another term used for these companies.

Some examples of dividend stocks are Johnson and Johnson, Proctor and Gamble.

Are solid dividend stocks a good investment?

Sometimes investors pay too much attention to the long history of companies - Bear Stearns (which was not a dividend stock) was a huge success story for many years until it went bankrupt.

It’s tempting to fall in love with the idea of buying a stock and collecting the steadily increasing dividends every year - it seems like free money but in actual fact the company is just giving some of its cash away to its investors.  This leaves the company with less money to grow the business.  This isn’t a bad thing but it’s also not magic money.

Benefits of dividend stocks

The taxation of dividends is less than interest earned on bonds or certificates of deposit so that is one very good reason why dividends are attractive to an investor in a taxable investment account.

Traditionally companies don’t pay meaningful dividends until they are more mature and financially stable.  An investor looking for less risk and a steady income stream would probably be interested in dividend stocks for this reason.

Index funds and mutual funds are also good choices

It’s hard to diversify with individual stocks but you can buy index funds, mutual funds and etfs that specialize in dividend stocks.  These products are a better way for most investors to own dividend stocks rather than buy them directly.  You can also have part of your portfolio in index funds and another portion in dividend stocks if you wish.

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Welcome to ABCs of Investing! If you're new here, please read the "About" page to find out more about this site. If you would like to receive updates in your email then sign up here or you can subscribe to the RSS feed. Thanks for visiting!

Debt reduction is a key part of financial planning because you don’t want to be making those loan payments for the rest of your life.  However, what happens when you have your debts under controls or even…(gasp) completely eliminated?  Then you have to start investing for your retirement.

How do you invest for retirement?  And how much should you save?  Only you can answer those questions by learning more about investing and then applying the lessons learned to your own situation.  We’ll go over some of the basics steps in this carnival so that you will know where to start when your debts are gone.

Setting financial goals

It doesn’t matter whether you are digging out from a mountain of debt or planning your exact retirement date - you need to set some financial goals.  What exactly do you want your finances to look like in the future?  Short term, medium term….long term?  Are you willing to work longer and have more money in retirement?  Or would you rather get by with less money and retire at an earlier age?

Here are the top financial goal posts (aka the “editor’s picks”):

• Peter presents Don’t Let Your Emotions Cloud Your Good Judgement. Set Goals And Delay Gratification. posted at Bible Money Matters.
• PT presents 0 Interest Rate Credit Cards Balance Transfer Dangers | Prime Time Money posted at Prime Time Money.
• Pinyo presents Get Out Of Debt For Good posted at Moolanomy Personal Finance.
• Good Financial Cents submitted a post called Debt After College Graduation.
• Patrick @ Cash Money Life presents How to do a 0% Balance Transfer posted at Cash Money Life.
• Patrick @ Military Money presents Should you pay off debt, save or invest? posted at Military Finance Network.
• FFB presents Unbroke - What You Need To Know About Money: Recap posted at Free From Broke.
• FMF presents Seven Ways to Wreck Your Credit posted at Free Money Finance.

Measure your financial health

How much debt do you have?   How much are your current retirement savings?  Do you have any future financial obligations? (ie college education)  Will you be getting any pension income?  Social security?  How much can you save right now and in the future?   You have to set a starting point for your financial journey - whether it’s your declining debts or increasing retirement investments - you have to know what you own.

• Jim DeSantis presents Don’t Be A Sucker! Avoid These Debt Consolidation Scams! posted at The Money Matters Blog by Jim DeSantis.
• Money Saving Advice presents Payment Premium Insurance (PPI) to be axed by the big banks posted at Money Saving Advice.
• Tushar Mathur presents When It Pays To Use Cash For Purchases posted at Everything Finance.
• Wealth Pilgrim submitted a post called Overcome Your Fear Of Asking For Help.
• Finance Tips 101 presents Credit Repair Companies: Buyer Beware posted at Finance Tips 101.
• CashAholic submitted a post called Paying off debt.
• Four Pillars talks about how to save money with a zero percent balance transfer.

Set up a plan

This step could involve some complicated spreadsheets to determine to the penny how much you want to save for the next 30 years….or just an educated guess.  The reality is that if you have a long time to retirement then there are too many variable to plan accurately so just working at your financial health by paying off debts and saving money might be the best strategy.  Setting up an investment policy statement is usually a good idea.

• Improve the Quality submitted a post called How to Keep Momentum When it isn’t Fun Anymore.
• Fabulously Broke in the City submitted a post called Revisited: Faring on a $1000 Budget.
• Investing School presents A Great Inflation Indicator posted at Investing School.
• Stock Trading Brokers presents Zecco Zirens | Educational Trading Videos posted at Stock Trading Brokers.
• DR presents Best 0% Balance Transfer Credit Card posted at The Dough Roller.
• Christian Debt Help submitted a post called When should you say no to giving?.
• The Digerati Life submitted a post called How To Pay Off Credit Card Debt: A Success Story.

Withdrawal rates in retirement

The most common formula for safe withdrawal rates in retirement is the 4% rule.  This rule isn’t written in stone but it’s a good guideline.  Don’t forget that you will probably have income sources other than your investments.  Social security might undergo some changes over the next few decades but it’s unlikely to stop paying out completely.

• Four Pillars has zero percent balance transfer credit cards.
• MoneyNing presents Turbocharge Your Savings with Certificate of Deposits (CDs) posted at Personal Finance Blog by Money Ning.
• Madison presents Get Out of Emotional Debt posted at My Dollar Plan.
• Nckel presents How to Pay Off Your Mortgage Early posted at fivecentnickel.com.
  Mr Credit Card presents Struggling with business debt posted at Ask Mr Credit Card.
• Green Panda Treehouse submitted a post called Financial Guru Review: David Bach.

Asset allocation

Some people like to have all their money in stocks, others all in CDs.  I would suggest that your asset allocation should be somewhere in between.  Remember that the shorter your investment time horizon - the safer your investments have to be (ie less stocks).  Don’t put all your eggs in one basket!

• Debt Freedom Fighter presents 5 Effective Tactics for Dealing With Debt posted at Discover Debt Freedom.
  Savings Toolbox presents Saving Strategies to Put More Money In Your Pocket posted at SavingsToolbox.com.
• Ben presents Your Fico Score posted at Money Smart Life.
• The Smarter Wallet submitted a post called How To Manage Debt: Credit Management Tips For College Students.
• Manshu presents Will I be sued for credit card default? posted at OneMint.
• Sue presents Back to Square 1 posted at Motherhood101Aplus.
• The Happy Rock presents Get Out Of Jail Free Card - Visualize Yourself Without Debt posted at The Happy Rock.
• Kathryn presents Finding Affordable Health Insurance posted at Out of Debt - Christian Finances and Debt Help.

Photo credits:  Aussiegall,  Alex_Kuruz, Army_Arch, BLMurch

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Welcome to ABCs of Investing! If you're new here, please read the "About" page to find out more about this site. If you would like to receive updates in your email then sign up here or you can subscribe to the RSS feed. Thanks for visiting!

One of the biggest concerns for retirees is the fear of running out of money. How do you know how much of your investments you can withdraw every year without running out of money?

How much money can I safely withdraw from my retirement funds?

Simple - use the 4% rule. This will give you a great chance of not running out of your money and it’s valid for 25+ year periods. If you are at an advanced life stage where 25 years is a pipe dream then the 4% can be adjusted upwards.

The way the 4% rule works is that you start by taking 4% out of your portfolio in the first year - this includes dividends, interest and withdrawals. The next year you take out the same amount you took out the first year plus inflation. So if you start by taking $40,000 out in the first year and inflation is 3% then in the second year you take out $40,000 + 3% ($1200) = $41,200. Every year after that you adjust the previous year’s withdrawal amount by the inflation rate.  Keep in mind that this 4% figure will be your gross income before taxes.

The 4% rule is really a guideline rather than a hard and fast rule - If your equities perform better than expected then you can spend a bit more than the 4% rule amount however the opposite is also true, if you encounter a bear market and the value of your portfolio drops then you should be prepared to cut back on the withdrawals.

Photo Credit: Stella Artois News

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Welcome to ABCs of Investing! If you're new here, please read the "About" page to find out more about this site. If you would like to receive updates in your email then sign up here or you can subscribe to the RSS feed. Thanks for visiting!

Stocks trade for a wide variety of prices.  Penny stocks trade for prices less than a dollar, which is what their name suggests.  Some stocks buy and sell for very high prices such as shares of Berkshire Hathaway (BRK-A) which recently sold for $131,500!  Most stocks trade between a couple of dollars and a few hundred dollars per share.

One common misconception is that the stock price equates with the value of the company or the stock ie a stock that trades for $20 is cheaper than a stock that trades for $50.  This is NOT TRUE!  Different companies have different number of shares outstanding so a share in one company is not the same portion of ownership as a share in another company.

For example if company A was worth $1 million dollars and had 10,000 shares outstanding then each share would be worth $100.  Company B is worth $5 million dollars but has a million shares outstanding so each share is worth $5 each.  Clearly the stock price has no bearing on the value of the company since in our example – company A had a higher stock price than company B but the value of company A was much less than company B.

By the same logic - a stock that trades for $10 is not “cheaper” than a stock that trades for $500 - you have to look at how much of the company each stock represents.  Another factor is stock splits - a company with a $2 stock could do a 5:1 buyback and it should result in a $10 stock as a result.  Obviously in that case the value of the company or your stock ownership hasn’t changed.

Does the stock price matter when evaluating a company?

No, it doesn’t.  It should be ignored.

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