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Your Questions About Stocks That Pay Dividends


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Your Questions About Stocks That Pay Dividends

  1. 1. Your Questions About Stocks That Pay DividendsLinda asks…Why do some investors invest primarily in stocks that pay notabledividends, but others minimal or no dividendI am trying to review and determine that implications, positive and negative, of investing individend paying stock versus stocks paying minimal or no dividendsSteve Winston answers:Some people invest in dividend paying stocks because they are looking for current regularincome. A good example might be someone thats retired and needs the dividend income forliving expenses.Stocks that pay little or no dividends are using all of their profits to reinvest in the business. If itsa good company, that means the company will likely grow faster than it would if it was using alot of its profits to pay dividends and the price of the stock will go up more. The people that buythat type of stock are those that do not need current income but are looking for an investmentthat will grow in value. 1/9
  2. 2. William asks…If dividends are certain, why dont everyone invest in stocks thatpay dividends? What are the risks?For instance, IVR pays healthy dividends every quarter. What is stopping the big gunsinvesting heavily in IVR? I am just learning this game, please help me understand.Steve Winston answers:Stocks like IVR are a problem for amateur investing because they arent traditional corporationsproducing a product or a service and then paying out a dividend from earnings. Hencecomments like "Companies that pay high dividends have flat revenue growth" just dont makesense in this context.IVR is a mortgage REIT (mREIT). REITs have to pay out at least 90% of their revenue asdividends or they lose their status as REITs and get taxed at the corporate level (which woulddestroy them as other REITs dont pay this tax). Thus, an mREIT cant reinvest dividends intothe business and grow the business unlike traditional companies.The business of mREITs is to borrow money and buy mortgage backed-securities. The hugedividends that you see are the result of the difference between the REITs borrowing expensesand the yield on the MBS. There is no trick to this - MBS rely on peoples abilities to pay their 2/9
  3. 3. mortgages and thats suspect right now so yields are high and borrowing costs are really cheap.The downside is that the mREIT is making a big bet on mortgages. As the mortgage marketlooks more and more shaky because economic conditions deteriorate, the MBS in their portfoliolose value which is why the stock value has slid so much this year. There is no free lunch. MBSpay high coupons because their credit quality or cash flows are suspect. As there are problemswith the securities the value of the stock goes down. Thus you can get a 25% dividend(because as a REIT they have to pay it) and get a 30% decline in the value of the stock whichmeans the dividend didnt help you that much.There are some questions about IVR in particular that make it offer a very high dividend. If youlike mREITs I recommend the guaranteed ones like AGNC and NLY that seem to be aa littlemore solid than IVR.I also think that if you are simply looking at one number about a stock such as dividend yieldand thinking you should buy the stock, that you are not yet ready to buy any stocks. Every stockhas a story and you need to start by understanding the companys fundamental business modeland then deciding if thats something you want to invest in. Before you invest in mREITs youneed to decide if leveraged investing in mortgage backed securities is something you want todo.Sandra asks…When holding short sale stocks that pay dividends, how aredividends-charged reflected on IRS tax return?These short sale dividends that are charged to your account during the year, somehow shouldbe reflected as a "benefit" for federal tax purposes. If Im being taxed on dividends received / 3/9
  4. 4. credited regarding long stock holdings, I wouild think the opposite would hold true. I just dontwhere to reflect on the proper tax form. Also, how would they be handled for New Jersey taxpurposes?Steve Winston answers:Get Real: Use the real numbers when doing financial transactions and the confusion will end. Ifa stock is not out right purchased, the price maybe adjusted for dividends. In this case the profitis adjusted based on the contract closing price. The actual figures are the ones to use for taxes.Charles asks…How do I find stocks that pay dividends on a specified date? 4/9
  5. 5. Steve Winston answers:Check ull get ur answerMary asks…How do I find stocks that pay exceptionally high dividends?Im looking for stocks that pay a dividend in excess of 15% (Ive had them as high as 24%, so Iknow they exist). Of course, I want this dividend to be paid from profit, instead of the businesstaking out a loan for it.I am NOT INTERESTED in buying a stock with the intention of selling it. My interest is income. Iwant to buy the stock, and be able to retire on the dividends... with enough shares, that is.Got any ideas? 5/9
  6. 6. Steve Winston answers:Youre considering a very risky strategy for your investments. Dividends can be volatile if acompany has financial problems and need to cut them right away. This is a two edge sword.Whne the dividends are cut, investors scare and sell and the price of the stock drops like arock.What you should be looking for is dividend consitency and rate of growth of dividends. Telechartcan screen for this and many other criteria that the investor is interested in.Just for you, I have screened over 8000 stocks with dividends paying>10% and have beengrowing at an average 5 year rate of 15%. Here they are...AHMBPTBRTFROHSVLYMONMNATNFIPWIPVXUBMT---Steven asks… 6/9
  7. 7. What are some large cap stocks that pay high dividends that aregood for the long term?Im getting about $1200.00 and instead of spending it i want to invest it. Im going to college toachieve my MBA and become a fund analyst or a stock analyst. Eventually when i gatherenough capital i will become a self employed investor. Im just looking for stocks with gooddividends, to keep in their for years about 4-6 years.Steve Winston answers:You can visit the Dividend Detective for a list of dividendpayers but you will have to weed out the large caps,Also another site that will be helpful for you is Winning Investments to get a better feel for investing you should visit, on a daily basis but here are other sites that you will find helpful, notonly for investing but also for your education luck on your journey 7/9
  8. 8. Richard asks…Is it true that US stocks pay very low dividends?If so what is the ultimate point in buying them?Thanks Alexwass.., (and everyone else!) but if it doesnt pay dividends and people are onlybuying it to sell it higher to someone else later, ....isnt that what happened with the tulip bulbs inAmsterdam three hundred years ago???Steve Winston answers:The primary way people make money on the stock market is by trading stocks - buying low andselling high. Companies try to create "shareholder value" by creating earnings growth. Thisdoesnt mean continuing to earn money, it means that the business tries to continually grow.Investors reward growth by increasing demand (subsequently increasing the price) of stocks.Many US stocks have never paid dividends at all. 8/9
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