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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 605  
Subject: Re: Request for "Q"s for FAQ Date: 4/25/2013 10:57 AM
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Karen,

We may be able to take care of some of these without placing them in the FAQ

Q: How are dividends calculated? Is it a percentage of current stock price or par value (if there is a par value)?

Dividend/Share price = dividend yield.

The amount of the dividend is decided by the board of directors when ever it comes up on the agenda. Some companies discuss it quarterly others less frequently.

Q: What is the difference between preferred dividend stocks and regular dividend stocks?

A preferred stock has a higher claim on dividends then common stock does. The covenants of the preferred are set at issue and place restrictions on the preferred like no voting rights, their place in the debt chain and so on. A preferred often acts more like a bond then a stock because its dividend is set at issue unlike the common dividend that can rise and they have no claim on earnings. In other words you get what you pay for with a preferred at purchase, that's it, nothing more. They are often a very secure form of income because their price doesn't vary as much as the common and the dividend is known.

Q: Are there good tax-free dividend stocks?

No. The government is going to tax your dividends one way or another. We often buy dividend stocks inside IRAs so those dividends can be used "tax deferred" until forced withdrawal of the account.

Q: I'm close to retirement and want to have a more or less steady income from my portfolio. What are some things I should think about when selecting dividend stocks?

Stability of the company. How good is their balance sheet? How stable is the industry they are in? Do they consistently generate enough cash to pay the dividend and invest for their future?

Entry price/dividend yield at purchase. The price you pay matters. The lower you can buy the greater safety you have purchased for your invested capital. This is often called "Value" investing. Where we estimate a lifetime value for the shares of the company and attempt to buy for less than that value.

Does the company have a history of raising its dividend. This often demonstrates the financial strength of the company and its commitment to its share holders. It also helps fend off the erosion of inflation.

Finally, at some point you will want to consider diversification. You don't want to be 50% in company A and 50% in company B. You also probably don't want to be tied mostly to one industry or sector. Generally if you follow the above process, quality, price and growth diversification happens on its own. We do need to keep an eye out because sometimes one industry or sector is "on sale" for an extended period and it becomes really tempting to continue to add to that industry because they have the best yields of the moment.

The most important things are to take your time and keep your emotions under control. It is really easy to get anxious and think you need to deploy your assets now when it reality waiting a week or a quarter is not likely to effect your results 15 years from now that much.

Example, I have a friend who blew up a real estate deal over a $5000 difference on a $350,000 deal. For less than 2% she let the deal fall through, angered the other side, left the table angry for a plot of land she does not want to own or develop herself. In the short term she either has to find a different buyer, and in that community there is probably only one other and they probably don't want to have an island surrounded by the other guy or she has to deal with this developer who has no trust in her to follow through. 10-20 years from now that $5000 just doesn't matter and she will pay half of that or more in taxes this year. Emotions don't make money they lose it.

jack
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