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URL:  https://boards.fool.com/hi-youngmoneyc-the-motley-fool-investment-guide-34731767.aspx

Subject:  Re: Top Ten Dow Yielders Date:  1/25/2021  1:00 AM
Author:  CMF_Fuskie Number:  283723 of 284303

Hi, YoungMoneyC.

The Motley Fool Investment Guide, while a great read, was published quite a while ago and the mechanical strategies that were described are no longer recommended.

When looking at income equity investing, the first thing you look for is equities that pay a dividend. Many Fools recommend at least a 3% yield to make sure the investment is working for you, though a lower dividend may be an acceptable trade-off if the company also brings strong price growth potential. Companies that steadily increase dividend yields can be good investments as well as companies with high yields.

There are two types of dividend paying companies - Income and Growth & Income. With Income investments, the market price of the company remains relatively stable. With Growth & Income companies, the not only do you receive a regular dividend but the market price of the company has demonstrated a consistent ability to grow over time.

For a Growth & Income company, I might be more inclined to reinvest because growing the size of the position provides a second driver of gains than just the dividend payment. With a straight income investment, there is less potential for market price growth so the key driver of gains is the dividend payment, and reinvesting will still increase the number of shares on which you receive dividends.

Dividends are not short-term investments. Most companies pay out dividends annually, semi-annually or quarterly. They are not risk free, however, as if a company's stock price declines, it negates the gains from the dividend payments. Further, if you are reinvesting dividends, that is using the dividend payment to purchase more shares of the company which will lead to greater dividend payouts down the road, maintaining a long term buy-and-hold strategy is essential.

Dividend investing requires discipline because of the long periods of time between payments. Ideally, dividends are paid out because a company has excess cash flow after all expenses and reinvestment needs and opportunities have been met. Dividend-paying companies tend to be established businesses with reliable cash flows. Quality companies with strong management teams is often an indicator of reliable dividend activity.

Some investors look to get into income investing because they think they can generate cash quickly, but as you can see, that's really not how it works. Certainly you can take dividend payments and use it as income. Alternately, you can pool dividend payments and use the cash to fund other investments. And as mentioned above, you accomplish share accumulation by reinvesting dividends back into the company, which will lead to greater future dividend payments on your position.

Note that regardless of how you approach dividend investing, if your account is a retail (taxable account), the dividends are taxed as capital gains. If you are investing through a Traditional IRA or 401k, the dividends are not taxable in the current year but distributions will be taxable in the year taken. If you are investing through a ROth IRA or 401k, the dividends are not taxable in the current year or upon distribution, but note that while you can withdraw original contributions penalty free at any time, withdrawing dividend earnings before age 59 1/2 will incur penalties.

For Fools who subscribe to one of the premium subscription services, you select My Stock Screener from the My Fool menu, then select a dividend yield filter to see which companies in your services' universes pay out a dividend. Also, you may want to consider a subscription to the Total Income premium service, which is designed to offer income investment options in the areas of equities, REITs, bond funds and options strategies that will support Fools seeking to live off their investment income.

Fuskie
Who thinks a healthy portfolio has a good mix of growth and income equity investments...

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