Saturday, October 20, 2007

The Importance Of A Good Dividend

While a lot of people are in the market just for growth stocks, there is a safer, less exciting way to build your fortune. Just look for stocks that pay a hefty dividend and that have consistently raised their dividend over the years.

A dividend is simply a payment that is issued to stockholders normally every three months. Most brokerages allow you to either take the dividend in cash or you can re-invest your dividends directly back into the stock. My favorite personally, is to re-invest those dividend payments. Think of it this way, you put $1000 into a stock that pays a 4% dividend. Three months or less later you get your first dividend of $40. As I stated above, you can take this in cash or simply re-invest it automatically.

This way you are technically buying stock every three months automatically without even raising your finger! As you can imagine this will really end up paying off in the long run. Plus, if a company is raising it's dividend it is always a sign that business is good so stocks like this tend to go up naturally as well! It is a win-win situation!

For me though, the idea is to eventually have so much stock that you can simply live off of the dividends as well. This way no matter if a stock goes up or down you still receive that dividend.

Yet another advantage of dividends is that in a market like we had on Friday, which was terrible in case you missed it, stocks that have high dividends tend to not be hit as bad as ones that do not. So while it is great to have growth stocks that shoot straight up there is nothing wrong with a good steady stock that pays a nice dividend. A couple that I would suggest looking at include Royal Bank of Canada (ry), Yum Brands (yum) or any other stock that has been increasing it's dividend consistently.

Find out more about why I like Yum brands here, or you can learn even more valuable information about the stock market here!

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