Business and Finance

Posts Tagged ‘Dividends’

You need to really think about the purpose of your portfolio before searching for your investment options or sitting down with a financial advisor. (Choosing to use an advisor, or going it on your own is a whole different topic.)

What do you want out of your portfolio? Do you want dividends, royalties or increasing net worth? In other words are you looking for an income from your investments or are you building your portfolio to prepare for retirement? Or is it a combination of both?

To have a dividends re-investing in your account (DRIP – Dividend Re-Investment Plan) builds your worth, but doesn’t give you income. This is really a matter of where you are at in your investment life. Most people who are not retired are looking to increase the value of their account, while retirees are trying to find the plan that gives them income while not depleting the principle of their account.

If you are in position where you are trying to get some income, plus build principle, you are in a most complicated place. When you see a stock make a significant gain, you might want to sell to realize the gain in your pocket, rather than on paper. Taking the gain and re-investing the initial investment will give you some spending money, but will not increase the value of your portfolio. BUT, you also need to be aware that the realized gain will also impact your taxes at the end of the year. To some reading this, this may be a no-brainer, but the point needs to be made for the rest of us.

Another factor in the portfolio goal question is the risk and return question. Early in life one is usually advised to have a greater portion of one’s portfolio in stocks, rather than low risk-low gain areas such as government bonds. A typical percentage can be found by subtracting your age from 110 to determine the percentage of stocks to low risk investments.

An example; if you are 50 you should have 60% in stocks, 40% in low-risk investments such as bonds, certificates of deposit or money market accounts. If you are 40 years old the percentages would be 70-30, etc.

All these numbers are merely suggestion, and every person needs to determine their own philosophy. A healthy vibrant person in their 50′s will have a different outlook than someone the same age with health issues.

The point to all of this is to think about where you are placing your investments and what you want to get out of them.

Value stocks are a type of investment that refers to share ownership in a corporation. They represent the number of shares that one owns in that company and how much the company owes the shareholder. In other cases, they refer to financial instruments like government bonds and securities which can be offered to the general public.

There are many types of value stocks available in the market today. The most common however are the preferred stocks categories. They both have their advantages and disadvantages and this is what a buyer should look at when determining which ones to buy. As for the common category, the stock holder is entitled to voting rights. This means that they can dictate how the corporation is managed. On the other hand however, they are not entitled to any dividends before other shareholders have been paid.

This tells you that, it can be years before common shareholders get their dividends if the corporation happens to be doing poorly financially. The preferred shareholder category is more fortunate when it comes to dividends because they are given preference over all other shareholders, whether the corporation is doing well financially or not. Under this category there is also a sub category known as the convertible preferred value stock which allows one to convert his shares into a fixed number of common shares at a determined date.

The preferred share category is also faced with the advantage of becoming a hybrid. This happens when the shareholder decides to covert some preferred shares into the common category so that he can have voting rights, while at the same time remaining with a share of the preferred share. The preferred category is also open to the choice to accumulate dividends over time.