Money From Dividends

Do you want to make a couple to several hundred dollars a month with little effort?  Try investing in dividend paying stocks.  The article below is from SeekingAlpha, an investment analysis website.

This article is copied in its entirety and was posted on SeekingAlpha’s website on Jan 26, 2015.  The equities listed are examples – your goals and tolerance may differ.  The link to the article: http://seekingalpha.com/article/2850806-anns-simple-income-investing-strategy?ifp=0

Summary

  • Ann, our simple investor, looks forward to income, money received on a regular basis, because it can be used to pay down debt, pay bills, or to be reinvested.
  • A simple way to earn income is to buy shares in dividend-paying leaders.
  • Ann decides that her $11,000 investment should earn her a minimum income of $330 annually.
  • Ann ends up buying shares in 11 leaders in 11 sectors, earning an income of over $400, exceeding her goal.

Why Would You Want Income?

Money can be used for many things, including paying down debt, buying for groceries, paying for your children’s tuition, watching a movie, paying the utilities bill, paying for gas for your car… you name it!

Income is money received on a regular basis. Among the most magnificent thing income can do is that it can earn you more income. That is, by buying income-generating assets, you can use those generated income to buy more assets that would generate more income.

A Simple Way to Earn Income

Some people opt to buy real estates to get rental income. Please allow me to introduce Ann, who likes things simple. Ann thinks that it’s a hassle to earn rental income because she’d have to deal with tenants. Additionally, Ann doesn’t have a lot to invest, and getting a mortgage is another hassle to deal with.

She finds it can actually be simple to earn income by buying shares in dividend-paying companies. With the popularity of discount brokers, it takes seconds for anyone to buy shares in a company that’s traded publicly on a common stock exchange. Well-established companies pay dividends to shareholders for holding their shares. How cool is that to become a part-owner to a business such as Chevron (NYSE:CVX), Microsoft (NASDAQ:MSFT), and Pepsi (NYSE:PEP)? All these companies pay quarterly dividends. That is, every 3 months, you’ll get a paycheck from them. You can reinvest those dividends back into the same company for the long-term, you can accumulate those dividends and buy another company of your choice, or you can spend those dividends if you really need to. It’s very flexible. You are in control of what you want to do with those paychecks.

That said, some people hold both real estates and stocks at the same time. Nothing wrong with that, but for the purpose of this article, Ann is going to stick to dividend-paying companies.

Now that it’s established that dividends’ usage is flexible, here’s one way to come up with a list of companies for possible buys.

Buy the Leaders

Buy the leaders in each sector. The sectors are:

  1. Basic Materials
  2. Communication Services
  3. Consumer Cyclical
  4. Consumer Defensive
  5. Energy
  6. Financial Services
  7. Healthcare
  8. Industrials
  9. Real Estate
  10. Technology
  11. Utilities

For some sectors, Ann already knows who the leaders are. For example, for the Energy sector, the first companies that come to her mind are Exxon Mobil (NYSE:XOM), Chevron, and Kinder Morgan (NYSE:KMI).

Ann has limited funds to invest. Over the years, she has accumulated $11,000. Instead of choosing multiple leaders from a sector, she only has enough funds to pick one. So Ann ensures she chooses the most suitable leader for her portfolio. That is, Ann wants to have a decent income for each dollar she puts in. After talking to her more investing-savvy friends, she decides that each leader she chooses should pay her a yield of at least 3% per year. This means that for every $1000 Ann invests, she’s going to get at least $30 back every year.

Ann is unfamiliar with the Materials sector. So, she goes to Morningstar.com’s sector list, and clicks “Basic Materials.” She then clicks on “MarketCap” column header to get the companies listed from biggest to smallest. BHP Billiton (NYSE:BBL) is at the top of list. Alternatively, Ann could have stuck to what she knew and use the $11,000 to divide evenly into the 10 remaining companies she’s more familiar with.

(click to enlarge)
After clicking on “MarketCap” column header, we have the Basic Materials companies ordered by largest market capitalization on top.

Ann eventually ends up with the following list of leaders from each sector. Most are brands she recognizes.

(click to enlarge)

At the end of this exercise, Ann has a portfolio of 11 leaders from 11 sectors. Notice that some leaders Ann chose have yields below 3%. However, others have yields above 3%. So, Ann ends up with an annual income of $413.60, or a portfolio yield of 3.76% to start. This is 25% more income than the $330 minimum!

Of course, Ann kept the Math simple:

  • She assumed she could invest exactly $1000 into each company
  • She ignored commission fees
  • She ignored taxes

As simple as that, Ann now earns a diversified stream of income from sector leaders.