By Brian Hepp Market Matters
SEASONED INVESTORS KNOW THAT there are generally two primary risks to your money: The long-term risk of inflation and the short-term risk of volatility. Inflation is the risk that your money’s purchasing power will not keep up with the rising cost of living while volatility is the risk that price fluctuation could result in selling an asset at a lower price than what you paid for it. In order to protect investors, like you, who want to establish a relatively low-risk way for conservative income-and growth-oriented investing, and also keep up with the rising cost of living, investing in a diverse mix of stocks may be worth considering.
Investing in a a pre-selected, regularly reviewed list of stocks with attractive current yields, chosen based on the likelihood of the companies to consistently raise their annual dividends is always sound advice. This strategy can help reduce the risks to your portfolio in two ways. First, with a package of stocks whose companies have the potential to regularly raise their dividends, conservative, income-oriented equity investors should be better able to fight inflation. Second, when long-term interest rates go up, stock prices frequently fall. Yet steadily increasing dividends may help cushion the fall of stocks in periods of rising interest rates, thus protecting you from increased volatility. Keep in mind that the return and principal value of an investment in stocks fluctuate with changes in market conditions. Upon redemption, it might be worth more or less than the original investment.
Although it may seem difficult to find companies with the potential to increase dividends with regularity, as only nine percent of all 6,656 NYSE, Amex and NASDAQ companies increased their dividends each year from 2001-2006, it is a primary objective of any broker to find such companies. However, past performance does not guarantee future results, and there is no guarantee that the issuers of the stock will continue to declare dividends in the future, or if declared, will remain at current levels or increase over time.
You may be wondering how this list is established. In general, some good-quality, well-managed companies have the ability to increase dividends as sales, cash flow or earnings grow. To create the list, there are four major criteria that guide the selection: (1) A company must be in solid financial condition, with (2) a secure dividend with an attractive current yield, (3) with prospects for dividend growth over time. Finally, because we most brokers believe that diversification is important, we look for companies with the potential to increase dividends in at least six to eight of the 10 sectors into which Standard & Poor’s divides the marketplace.
It is important to note that any good investment portfolio is designed to provide investors with higher dividends year after year, and because the only way to collect dividends is to own the stocks, this investment strategy is designed with an investment time frame of at least five years. For the long-term investor who does not need current income, it is also recommended to reinvest these dividends back into your portfolio. When you use dividends paid to purchase more shares of a stock in which you’ve already invested, the number of shares you own increases over time, thereby increasing your dividends and enhancing your total return potential.
If you think a rising dividend investment plan may be right for you, talk to your financial consultant today about minimizing the risks and maximizing the return potential in your portfolio.
BRIAN HEPP is a financial consultant and (310) 453-0077 or at
Originally published in the Santa Monica Daily Press print edition on November 14, 2007. Read the original PDF.