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Dividend Paying Stocks

- Alan Lavine and Gail Liberman



Looking for income and some growth from your investments?

Who isn't?

The big problem: You typically can't have your cake and eat it too. The higher the return on an investment, the greater the risk.

Nevertheless, dividend-paying stocks may be a less risky way to invest in the stock market. You get income from dividends and some stock price appreciation.

Large company dividend-paying stocks registered an annual return of 13.4 percent over the past 15 years, according to a report by Al Frank Management, Laguna Beach, Cal. That's actually more than large company growth stocks that don't pay dividends, which have grown at an annual rate of just 11.7 percent.

In addition, the dividend-paying stocks were 40 percent less volatile.

Today you can invest in dividend-paying stocks that yield more than 3 percent. In addition, the dividend income generally is only taxed at 15 percent by Uncle Sam.

Mutual funds may be the easiest way to invest in dividend-paying stocks. The reasons: The funds are professionally managed and own a large number of stocks in different industries. As a result, a few poor performing stocks shouldn't hurt your overall return.

Best-rated dividend paying stock funds, according to the No-Load Investor, a Brentwood, Tenn. newsletter (www.noloadinvestor.com): American Century Equity Income, Fidelity Equity Income, Price Equity Income, Schwab Dividend Equity Income and Vanguard Equity Income. These funds all yield more than 2 percent. Plus, the funds are low-cost and no-load. You don't pay commissions to invest in them.

What if you want higher yields? The higher the yield, the greater the risk. Today you can invest in preferred stocks that yield more than 7 percent. But preferred stock is considered riskier than bonds because bondholders have collateral backing their bonds. On the other hand, if a company defaults, preferred stockholders get paid their dividends before common stockholders.

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Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).


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