Ken Himmler.com

It wasn't so long ago that many investors regarded dividends as roughly the financial equivalent of a record turntable at a gathering of MP3 users–a throwback to an earlier era, irrelevant to the real action. But fast-forward a few years, and things look a little different. Since 2003, when the top federal income tax rate on qualified dividends was reduced to 15% from a maximum of 38.6%, dividends have acquired renewed respect. Favorable tax treatment isn't the only reason, either; the ability of dividends to provide income and potentially help mitigate market volatility is also attractive to investors. As baby boomers approach retirement and begin to focus on income-producing investments, the long-term demand for high-quality, reliable dividends is likely to increase.

Why consider dividends?

Dividend income has represented roughly one-third of the monthly total return on the Standard and Poor's 500 since 1926. According to S&P, the portion of total return attributable to dividends has ranged from a high of 53% during the 1940s–in other words, more than half that decade's return resulted from dividends–to a low of 14% during the 1990s, when investors tended to focus on growth. If dividends are reinvested, their impact over time becomes even more dramatic. S&P calculates that $1 invested in the Standard and Poor's 500 in December 1929 would have grown to $57 over the following 75 years. However, when coupled with reinvested dividends, that same $1 investment would have resulted in $1,353. (Bear in mind that past performance is no guarantee of future results, and taxes were not factored into the calculations.) If a stock's price rises 8% a year, even a 2.5% dividend yield can push its total return into the double- digit range.

Dividends can be especially attractive if the market is producing relatively low or mediocre returns; in some cases, dividends could help turn a negative return positive. Dividends also can help mitigate the impact of a volatile market by helping to even out a portfolio's return. Another argument has been made for paying attention to dividends as a reliable indicator of a company's financial health. Investors have become more conscious in recent years of the value of dependable data as a basis for investment decisions, and dividend payments aren't easily restated or massaged. Finally, many dividend-paying stocks represent large, established companies that may have significant resources to weather an economic downturn–which could be helpful if you're relying on those dividends to help pay living expenses. The corporate incentive Financial and utility companies have been traditional mainstays for investors interested in dividends, but other sectors of the market also have begun to offer them. For example, investors have been stepping up pressure on cash-rich technology companies to distribute at least some of their profits as dividends rather than reinvesting all of that money to fuel growth. Some investors believe that pressure to maintain or increase dividends imposes a certain fiscal discipline on companies that might otherwise be tempted to use the cash to make ill-considered acquisitions (though there are certainly no guarantees that a company won't do so anyway).

However, according to S&P, corporations are beginning to favor stock buybacks rather than dividend increases as a way to reward shareholders. If it continues, that trend could make ever-increasing dividends more elusive. Dividends paid on common stock are by no means guaranteed; a company's board of directors can decide to reduce or even eliminate them. However, a steady and increasing dividend is generally regarded as one sign of a company's ongoing health and stability. For that reason, most corporate boards are reluctant to send negative signals by cutting dividends. That isn't an issue for holders of preferred stocks, which offer a fixed rate of return paid out as dividends. However, there's a tradeoff for that greater certainty; preferred shareholders do not participate in any company growth as fully as common shareholders do. If the company does well and increases its dividend, preferred stockholders still receive the same payments.

The term "preferred" refers to several ways in which preferred stocks have favored status. First, dividends on preferred stock are paid before the common stockholders can be paid a dividend. Most preferred stockholders do not have voting rights in the company, but their claims on the company's assets will be satisfied before those of common stockholders if the company experiences financial difficulties. Also, preferred shares usually pay a higher rate of income than common shares. Because of their fixed dividends, preferred stocks behave somewhat similarly to bonds; for example, their market value can be affected by changing interest rates. And almost all preferred stocks have a provision that allows the company to call in its preferred shares at a set time or at a predetermined future date, much as it might a callable bond.

Look before you leap

Investing in dividend-paying stocks isn't as simple as just picking the highest yield. If you're investing for income, consider whether the company's cash flow can sustain its dividend. Also, some companies choose to use corporate profits to buy back company shares. That may increase the value of existing shares, but it sometimes takes the place of instituting or raising dividends. If you're interested in a dividend-focused investing style, look for terms such as "equity income," "dividend income," or "growth and income." Also, some exchange-traded funds (ETFs) track an index comprised of dividend-paying stocks, or that is based on dividend yield. Be sure to check the prospectus for information about expenses, fees and potential risks, and consider them carefully before you invest. Taxes and dividends Some dividends, such as those paid by real estate investment trusts (REITs) and master limited partnerships, don't qualify for the 15% maximum tax rate, and a portion may be taxed as ordinary income. Also, the 15% maximum rate is scheduled to expire at the end of 2010, and there is no guarantee dividends will continue to receive favorable tax treatment.

The 15% rate applies to qualified dividends–those that come from a U.S. or qualified foreign corporation, one that you have held for more than 60 days during a 121-day period (60 days before and 61 days after the stock's ex-dividend date). Form 1099-DIV, which reports your annual dividend and interest income for tax accounting purposes, will indicate whether a dividend is qualified or not. Be aware that some so-called dividends actually are considered interest for tax purposes. These include dividends from deposits or share accounts at cooperative banks, credit unions, U.S. savings and loan or building and loan associations, federal savings and loan associations, and mutual savings banks.

One of the longest-standing debates in investing is over the relative merits of active portfolio management versus passive management. With an actively managed portfolio, a manager tries to beat the performance of a given benchmark index by using his or her judgment in selecting individual securities and deciding when to buy and sell them. A passively managed portfolio attempts to match that benchmark performance, and in the process, minimize expenses that can reduce an investor’s net return. Each camp has strong advocates who argue that the advantages of its approach outweigh those for the opposite side.

It generally goes without saying that when setting aside money for retirement you want to get the most out of your investments.  Every type of investment carries with it a certain amount of risk.  This has a tendency to scare people into sticking with the safest investments possible because they are afraid of losing all of their money.  Unfortunately, the risks involved with investments are not always clear at the outset.

While it may sound like a good idea, the fact is letting your money sit in a standard savings account could cause you to effectively lose more money than you would be risking in other forms of investment.  It is very true that a little bit goes a long way, and over time a small investment could grow exponentially.  Unfortunately, there are a lot of other factors that are figured into the growth of your money.  One of these factors that is often overlooked is the ratio of interest to inflation.  If the level of interest is lower than the level of inflation, you will effectively lose money in your investment.

With any investment option the goal is always to get the highest interest rate possible.  This is especially important when we take the rate of inflation into account.  The value of the US Dollar changes over time.  Placing $1 in the bank now might result in $100 in 20 years but the value of that $100 will be different than it is today.  To avoid losing value in your investment it is important that your interest rate is the same as or (preferably) higher than the inflation rate.  For this reason the safest investment options for you may not be the best options for you.  Talk with your retirement planner if you are having trouble finding investment options that will give you the most return.

In the light of the present recession, everyone is looking for ways to make safe investments.  Unlike in previous generations, today’s primary resource for conducting the much needed investment research is none other than the Internet.  Unfortunately, there are a lot of dishonest people who have caught on to the fact that everyone is looking for a way to make a easy, safe investments.  These dishonest individuals have set up several elaborate scams to swindle honest, hardworking individuals like you out of their hard earned money.  You will need to equip yourself with the information you need to avoid such scams when doing your own investment research.

One of the most common scams comes in the form of unqualified individuals who claim to be reputable investment advisors.  These are sometimes easy to spot because they make unrealistic claims about your money.  Unfortunately there are also many well thought out scams that are hard to spot.  Sometimes scammers assume the identities of actual, licensed investment planners with outstanding credentials.  If you are not careful you can lose a lot of money in a short amount of time.

The best way to avoid these types of scams is to double-check all of your references.  Never send anybody money for investment services until you are absolutely sure they are who they claim to be.  Most reputable investment planners have only a select few websites that they operate with, and these websites are usually well documented by services that specialize in this kind of research.  When in doubt, do a google search with the name of the individual or service in question followed by the word ‘scam’ to find complaints other people have had.  When in doubt, follow this golden rule of Internet investing:  If it sounds to good to be true it probably is.  There are many legitimate investment services out there just waiting for you to find them.
 

When investing for retirement it is only natural to want financial independence and security.  Retirement age individuals want to be able to pursue their dreams without having to worry about money.  This natural drive to reach a secure financial plateau is a positive quality to have, especially when it motivates individuals to invest for the future.  But is there such a thing as investing too much?

A pitfall that many individuals fall into is aggressive investing.  Ethically there is nothing wrong with making aggressive investments for the future.  The problem with aggressive investing is the very nature of high-risk investment practices.  Simply stated, high-risk investments can lose money as easily as it can make it.  When making aggressive high-risk investments, individuals can run the risk of potentially jeopardizing their retirement savings.  This can be a very dangerous game to play because you are essentially gambling with your future.

When planning an investment strategy, it is a good idea to anticipate potential losses and plan accordingly.  The best method to avoid unnecessary loss over the years is to invest in more than one option so that some portion of your money is always growing.  It is very important to make stable, patient decisions when considering where to invest your money.  The economic situation can change overnight, and a small lack of foresight can cost literally thousands of dollars of poorly invested money.

Keep in mind that we are living in a recession, and careful investment planning is more important than ever in the financial world.  Individuals who invested too aggressively prior to the recession learned a hard lesson overnight.  We can learn from their mistakes and rebuild the economy by following just one simple investment guideline:  Never place too many of your eggs in a single basket.  If the figurative basket drops, it could be your retirement that gets broken.
 

If you have ever done any research into the investment world, you are no doubt aware of all the benefits that come with owning a house.  For the past half-century, it has seemed the best way to calculate someone’s financial standing was to look at how they handled their housing.  For years, experts have been explaining about the benefits of investing in real estate. 

Jack Hough, a financial writer for Yahoo.com,offers a different opinion.  When it comes to investments, Jack says that it is best to pay cheap rent and invest all the money you save into the stock market.  He believes that stocks are more reliable in the long run and that investors will benefit more from stocks than real estate investments, especially during the recession.  “Basically,” he says, “houses produce poor returns…while stocks and other investments produce good ones.”

This may sound confusing at first, but Jack does have some sound reasoning for this statement.  He makes the argument that single-family homes do not actively produce income for their owners.  Houses do not constantly seek ways to increase their value independent of the families living in them.  On the contrary, houses have a way of ‘wearing out,’ which ultimately leads to depreciation in value over time.  Stocks are just the opposite.  Companies are always looking for new ways to increase their value, which ultimately spells success to stockholders who invested in those companies.

Jack lists many other reasons why real-estate investments might not be the best idea for people looking to get the most of their money.  His investment strategies are sound, and his reasoning is logical.  Depending on where you are living, it may be wise to do some research when considering the best housing option for you.  I would strongly encourage you to read Jack’s article for more reasons why renting might be your best investment option today. 

If you are like most people, you are probably a little insecure about how the current economic recession is affecting your investments.  Or, maybe you are unsure about whether or not it would be wise to invest during this period of economic instability.  While your financial concerns may be well founded, it should also be mentioned that now is the best time to be thinking about investing in your future financial security.

The stock market is at the lowest point that it has been in the past several years.  This has many wide spread implications about it, and can be quite a bit intimidating for inexperienced investors.  If you are retired or close to retiring, this could be especially disconcerting as you wonder about the security of your retirement savings.  Ultimately, however, there is no reason why you shouldn’t continue investing for the future.

Money that flows into the stock market helps to stabilize the economy and repair the damage caused by unwise investments made by big business.  Every little bit helps.  If you invest on a broad spectrum, through mutual funds and similar practices, you run very little risk of losing your entire investment as many fear.  Investing in other, low risk venues will help bolster your investments even more.

Time is not going to wait for you.  The less money you have invested, even during this economic recession, the less money you are going to make for the future.  The money that you have dedicated toward your retirement savings will continue to make money for you now will continue to make money for you through the rest of the current economic instability and into the future until you need it most.  If you continue to use sound investment strategies then there will be no reason why you would not have enough retirement savings built up by the time you get ready to retire.  Take control of your destiny and make wise investments during this recession.