This is a topic that I could write 100’s of posts on, and I probably will over the next year or two, but for now, I’ll just give a quick overview of my basic investing strategy.
Dividend Paying Stocks
Essentially, I invest in Dividend Paying Stocks. Dividends are a portion of the company’s profits that are paid out to shareholders, usually on a quarterly basis. There are plenty of things to consider when choosing which company to invest in, but I generally look for the following.
How to Choose Dividend Stocks
1. Companies that have a history of paying increasing dividends, raised at least once/year is best, but I would consider a company that briefly suspended their increase for a good reason (ie: paying down debt or buying a business).
2. Companies with a reasonable payout ratio. The payout ratio is the amount of money paid out in dividends relative to the overall profits of the company. I look for companies with 50% or less (30% is better), since that leaves room for the business to expand and the dividend to grow. A huge warning sign is a company with a payout ratio of 100%+. That means that the dividend is being paid through debt.
3. Companies that are a low forward Price-Earning ratio (P/E). I don’t really care about the present, I’m always looking to the future earnings of that company. “Low” means different things in different industries, so you’ll have to do your research. For example, oil companies are generally at much lower P/E ratios than high-flying tech companies.
4. Companies that have a history of increasing earnings. I’m looking at the trend and can overlook a bad year or two.
Also, check out my Dividend Stock Portfolio.
Part of my basic investing strategy is to buy exchange traded funds to round out my portfolio. For example, I have a gold, as well as silver ETF in my portfolio because when stocks are going down in value, these will often go up. I also have an emerging markets ETF since in theory, these are the high-growth companies I want to be investing in, but I don’t have the knowledge to invest in the individual companies. I have also recently bought a swap-based ETF for tax reasons.
For more details about the ETFs I invest in, check these posts:
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