Key points that drove most of the conversation and questions included how to find a good stock, how dividend payments actually work and, of course, fees associated with trading.
Getting Started
Of primary importance for new DIY investors is the need to understand that dividend payments are a distribution of company profits back to their shareholders. Dividend payments are typical of more mature companies who hope to make up for less movement in their stock price with these quarterly payments whereas growth oriented companies will plow their profits back into company (in the form of research and development or new facilities) to drive their stock valuation higher.
For those heading into retirement, understanding how dividend payments work is essential because they can serve as fairly predictable cash flow generator that helps replace a former paycheck. People are often surprised - and glad - to learn that dividend payments are based on the number of shares they own, not the price of the stock. For example, owning 100 shares of ABC Company that declares a quarterly dividend payment of $.45 cents means receiving $45 no matter what the price per share is before or after the distribution. This feature proved helpful for people during the great recession when investors needed steady income but were faced with steep losses on their favorite stocks.
It’s also important for DIY dividend investors to realize at the outset that the price of a dividend-paying stock, and its yield (how much income it will pay), have an inverse relationship. If the price of a stock goes up, the yield goes down, and vice versa. Remember, dividend payments are based on the number of shares owned. Therefore, when the stock’s price is down more shares can be purchased, which can result in higher income. When stock prices are up, fewer shares can be bought, with lower dividend payments as the outcome.
Forget That Loving Feeling
One person in my class shared one of the stocks she owned, so I asked her why she had bought it. She summarized it with a common response and an unfounded prediction. “I’ve got a good feeling about what this company is doing. You watch, you’ll be buying it next week, too.” Having heard a similar argument back when
Fact is, there are plenty of tools to sort out healthy companies and the unhealthy ones, and feelings are not among those tools. Therefore, anyone acting as their own advisor needs to make sure they have data and research to support every stocks pick … and a process they can replicate as a way of developing a disciplined approach to investing.
Trading Fees Can Rob Profits
In the next article of this series I will reveal some basic strategies for comparing and selecting dividend-paying companies but, first, here’s some advice on buying and selling that I learned the hard and expensive way. When I first got into the business I opened an account with a company that allowed me to buy fractional shares at $4 per trade. Being new to the business I wasn’t exactly raking it in so I only had $1,000 to invest. I was anxious to put my new knowledge to the test and it seemed to be working like a charm. In less than three months I had picked up various share amounts in 12 different companies. My account was up $250 (25%) and I felt like I was on my way to becoming the next great investor. I decided not to be greedy and began selling my shares. What I didn’t realize is that, at the time, my trading company was charging $15 per trade to sell. As you can imagine, my $250 gain evaporated to less than $60 after trading fees … and I still had taxes to pay on my gains.
Too many new DIY investors want to plunk down $5,000 - $10,000 in cash to start their new account. Initially, it may sound like paying only $10 or less to buy and sell a stock is a bargain, but those costs can add up fast. So begin with the end in mind; don’t just buy up a bundle of popular names with no plan or cost analysis to exit.
Today, investors are more responsible for their retirement than ever before. That’s makes it important to become part of the investing process and understand how you’re going to replace your paycheck, while making the most of your time, energy, and money in retirement. DIY investors have a great opportunity to learn the ropes and do well provided they understand the basics about them, realize that they are their own advisor, have concrete reasons - not just feelings - to buy stocks, and be aware that trading costs play a role in overall return.
Follow Robert on Forbes.com or on Twitter @robertlaura: Click here for the 2nd article in the series Three Easy Ways To Select And Compare Dividend Stocks
Check out some of Robert Laura’s recent celebrity interviews about money, investing and retirement:
