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Investing for Dividends

Some stocks actually pay investors cold, hard cash. It's called a dividend.

Investing for dividend income is one of the most straightforward strategies around. All you have to do is buy stocks that pay dividends, and finding them isn't hard. Just visit our Investment Screener and use the Dividend Yield criteria to view dividend paying companies. You can even set your desired dividend yield to narrow down the companies listed. Keep in mind, buying stocks that pay dividends does not protect you against loss of your principal investment, and there's no guarantee that a company will continue to pay dividends.

Details about dividends

One thing that is important is that you come up with a plan both for choosing dividend-paying companies and using the dividend income.

When you're choosing companies to invest in, consider their dividend yield. It's the amount of dividend income per share a company pays during the year, divided by the market price of the stock and expressed as a percentage. With a little research you can find the current average dividend yield for stocks and from there, you can find stocks whose current yield is significantly higher (or lower).

The appeal of higher yield is more income. Keep in mind, though, that there is a risk that companies that pay the biggest dividends may pay out a much higher percentage of their earnings to stockholders than other companies. If they're doing that to mask financial troubles, their ploy could backfire. That could ultimately mean cutting the dividend or eliminating it altogether, or worse (like losing your principal investment if the company goes bankrupt).

What to do with dividend income?

When receiving dividends from your investments, you can choose to keep the cash as income, or reinvest it into buying even more shares.

Reinvesting may win the prize, depending on your goal. By reinvesting your dividends, you are regularly buying additional shares of dividend-paying stocks. Since dividends are paid depending on how many shares you own, owning more shares may give your long-term investment return a real shot in the arm. Or, you might use the money to make other investments that also seem promising.

If you're retired, or thinking about it, dividend income can mean the difference between just getting by and having enough money to live comfortably after you stop working. When dividend yield is higher than the yield on traditional income investments like bond funds - which isn't always the case - dividend investing has even more fans.

The risk with relying on dividend income is that dividends aren't guaranteed. A company can reduce them or cut them entirely if times are bad. That could leave you short. And if that happens, it's likely to be at the worst possible time.