Military Financial Advice - Military Times

Dividend-paying stocks can work -- if you manage them effectively

Dividend-paying stocks can yield above-average returns with below-average risk, if you manage them properly.

The key is going beyond simply purchasing the stock -- you also must reinvest the dividends and systematically purchase additional stock.

I'll tell you how to select a dividend-paying stock, how to purchase the stock in a dividend reinvestment plan or brokerage account and how to reinvest the dividends and add funds to your investment.

Selecting

The best source of information on dividend-paying stocks is a quarterly publication called Mergent's Dividend Achievers, which you can find online at www.wiley.com/go/mergent.

I suggest buying the most current publication once a year to use as a reference when selecting dividend-paying stock. You can also sign up as a guest at this Web site to access useful data.

Mergent selects a group of more than 300 dividend-paying stocks and sorts them according to different criteria. You should look for stocks that have increased their dividends at more than 5 percent per year, have a long and consistent record of dividend increases and have a compound annual growth rate in earnings of more than 5 percent.

Each stock on the list has a full page of financial information and a stock price chart. Ideally, you should look for a stock that has a consistently increasing price over time. Check out the number of years of dividend growth and the 10-year rate of growth in dividends. The publication also gives you information on dividend reinvestment plans and Web sites.

(In my next column, I will cover several mutual funds and exchange-traded funds that invest in the stocks listed in Mergent's Dividend Achievers. So if you do not want to invest in individual stocks, you can diversify through these funds.)

The Value Line Investment Survey, a weekly magazine you can find at your local library, also has valuable information on individual stocks, projected earnings and dividend growth rates.

Long-term stock price growth rates closely relate to the sum of the stock's dividend rate and the dividend's annual percentage growth rate. So a stock with a 4 percent dividend and a rate of increase in the dividend of 8 percent per year will tend to go up in value at a rate close to 12 percent per year over time -- if you reinvest your dividends back into the stock as the dividends are paid.

Purchasing

Once you have selected your stock, check the dividend reinvestment plan features on that stock's Web site. Some companies will let you make the original stock purchase with them. A dividend reinvestment plan is then set up online. The usual initial minimum purchase is $50 or less.

If you cannot make your original stock purchase with the company, buy your initial stock with an online broker and have the stock registered in your name and sent to you. The company will contact you regarding dividend reinvestment plans, and you can set up a plan at that time.

Don't forget to send your original shares to the company to be deposited in your dividend reinvestment plan so they will not be lost.

Reinvesting and adding

Most dividend reinvestment plans allow you to make additional investments with automatic debits from your checking account. You also can make additional investments by check each quarter when the dividend is paid.

The company will send you a notice that the dividend was paid and reinvested, and include a form to allow you to make additional cash investments. If you set up your dividend reinvestment plans separately, you will have a plan for each stock that you own.It is important to watch for fees. If there are no fees to reinvest dividends and make additional stock purchases, then setting up a dividend reinvestment plan with each company is the most cost-effective method. If there are fees for reinvestment and/or optional additional investments, consider using an online brokerage account to set up your dividend-paying stock portfolio.

I have used an ETrade account (www.etrade.com) to reinvest dividends. You can make your initial stock purchase for a small fee -- about $10-$12 -- and your dividends will be reinvested automatically without charge if you request that option.

Additional optional cash purchases will generate additional fees. But if you do not plan to make additional systematic purchases, then using an online broker allows you to have your stocks in one account. Be sure that your online broker will reinvest all of the dividends paid so that you will be buying fractional shares each quarter. Many full-service brokers only allow you to buy whole shares. If the price of one share of your stock is less then the quarterly dividend paid, then no reinvestment will occur.

Besides ETrade, another option is Sharebuilder (www.sharebuilder.com), which will allow you to set up initial stock purchases, dividend reinvestments and automatic additional purchases for up to 20 stocks. There are monthly fees to do this, so be sure it is cost-effective for you to use this service.

Other useful research Web sites include The Motley Fool (www.fool.com), DRIP Central (www.DRIPcentral.com) and Yahoo Finance (http://finance.yahoo.com).

Remember to review your investments once a year to be sure that earnings and dividends continue to increase. Mergent adds new companies to its list each quarter and eliminates companies that no longer meet its investment criteria.

Bottom line: Buying carefully selected dividend-paying stocks and reinvesting the dividends is an excellent strategy for achieving above-average stock market returns with below-average risk.

Barbara Pietrowski is a licensed certified public accountant, certified financial planner and personal financial specialist. Her practice includes tax preparation, fee-only financial planning and investment management. E-mail her at barbarapietrowski@yahoo.com.