This is an example of dividend stocks. This document is useful for conducting dividend stocks.
Shared by: MaryJeanMenintigar
A stock represents an ownership or equity stake in a corporation. If you are a stockholder, you own a proportionate share in the corporation's assets and you may be paid a share of the company's earnings in the form of dividends. A stock may also entitle its owner to a proportionate voting right in the election of the company's board of directors and in special circumstances requiring shareholder approval, such as a proposed merger or acquisition. How stocks are valued After the company's initial public offering, investors determine the stock price by choosing to buy or sell the stock at a certain price. The stock price is quoted as the price paid at the stock's most recent purchase. Widely traded stocks like Microsoft change price many times during the day as shares exchange hands. Thinly traded stocks may only change in price once a week or so. Stock analysts influence what investors are willing to pay for a stock. Investors and analysts base their beliefs about the value of a stock at any given time on many different factors, including: Historical earnings Estimates of the company's future earnings made by corporate officers Perceived strength of the company's product or service Perceived strength of the company's sector (such as healthcare or retail) Current and historical stock prices Perception of management quality Anticipated mergers or acquisitions involving the company or the company's competition Regulatory changes that may affect the company's profits Lawsuits, patents, and innovations Key Features of Bonds As a part of a diversified portfolio, bonds can help you manage market fluctuations and generate income. The key features of the bonds generally available to individual investors are as follows: Coupon rate Credit quality of the issuer Whether the bond is callable at certain dates or may be prepaid prior to the maturity date Length of time between the date the bond is purchased and its maturity date Whether the interest paid is fully taxable Types of Bonds Bonds are generally categorized by the types of entities that issue them. Four common types of bonds include: U.S. Government Securities, Mortgage Backed Securities, Municipal Bonds, and Corporate Bonds. U.S. Government Securities U.S. Government bonds are issued by the U.S. Department of Treasury. These bonds obligate the government to pay the bondholder a specified sum of money, usually at specific intervals, and to repay the principal amount of the loan at the maturity date. You can purchase U.S. Treasury securities through a Wells Fargo Investments Brokerage account, through a UIT, or even directly online from the Department of Treasury's Internet site. U.S. Treasury securities include: U.S. Treasury bill or T-Bill o Negotiable debt obligation issued by the U.S. Government and backed by its full faith and credit o Issued in denominations of $1000 although brokerage firms may impose a minimum purchase order o Maturity dates from 90 days to 1 year o Interest is generally exempt from state and local income taxes o Interest is paid at maturity and is the difference between the cost to purchase the bill and the face value received at maturity U.S. Treasury note o Negotiable debt obligation issued by the U.S. Government and backed by its full faith and credit o Issued in denominations of $1000 although brokerage firms may impose a minimum purchase order o Maturity dates range from 2 to 10 years o Interest is paid semi-annually U.S. Treasury bond o Negotiable, coupon-bearing debt obligation issued by the U.S. Government and backed by its full faith and credit o Issued in denominations of $1000 although brokerage firms may impose a minimum purchase order o Maturity dates from 10 to 30 years o Interest payments are exempt from state and local taxes o Interest paid semi-annually U.S. government issued zero-coupon bond or accrual bond o Issue at a discount that varies depending on the length of the maturity o Pays no interest, instead, pays a higher par value at maturity than the face value at issue o Taxes due annually on accrued interest (except with tax-exempt municipal zeros) Savings bond or U.S. Savings Bond o Registered, non-callable, non-transferable bond issued by the U.S. Government and backed by its full faith and credit o Face value ranges from $50 to $10,000 o Issued in 3 types: Series EE, Series HH, Series I o Interest payments are exempt from state and local taxes Mortgage-Backed Securities A mortgage-backed security is a security created by pooling mortgage debt and selling it as individual bond securities. Mortgage securities tend to be higher-risk than other types of bonds and are often priced to achieve a higher yield as a result. Principal and interest payments are paid periodically, unlike other types of bonds that pay the principal upon maturity. Prepayment risk is a special consideration of mortgage securities. The most commonly sold mortgage-backed securities are issued by the entities Ginnie Mae and Freddie Mac. Government National Mortgage Association (GNMA or Ginnie Mae): A government-owned agency that buys mortgages from lending institutions, securitizes them, and then sells them to investors. Guaranteed against default risk (although not other interest-rates or prepayment risk) by the full faith and credit of the U.S. government. Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac): A government-chartered corporation which buys qualified mortgage loans from the financial institutions that originate them, securitizes the loans, and distributes the securities through the dealer community. The securities are not backed by the U.S. government. Municipal Bonds State or local governments issue municipal bonds to fund civic projects. The potential advantage of investing in "munis" is that bonds deemed to be public purpose bonds typically pay interest free from federal and/or state income tax. There are some exceptions involving alternative minimum taxes. In addition, any capital gain earned from the sale of a municipal bond is fully taxable and may in fact be taxed as income if the bond was purchased at a steep enough discount or is sold for a gain prior to its maturity. You will typically receive a lower interest rate on tax-free bonds since you are benefiting from the tax advantage. It is important to compare your after-tax returns to see if, given your tax situation, you might not be better off with a higher interest, taxable bond. When determining whether or not to purchase a municipal bond, you should calculate the taxable equivalent yield. This is the yield needed on a taxable investment in order to match the tax-free return offered on a municipal bond. Taxable Equivalent Yield = Tax-exempt yield divided by (1 - your marginal tax rate) For example, if you are in the 33% tax bracket and earn 5.5% on your tax-exempt municipal bond, 8.2% is the equivalent yield on a taxable investment. As noted above, if the interest earned is subject to the alternative minimum tax or if the bond was purchased at a steep enough discount to trigger a de minimus tax, the tax equivalent yield calculation will overstate your return. This calculation does not include any benefit for investors who reside in states that exclude interest paid from municipal bonds from taxation. Tax-free municipal bonds may make less sense for people in lower tax brackets since the tax savings is only as great as the investor's marginal tax rate. It is also important to understand that unlike U.S. Government bonds — which are considered to have almost no chance of default — municipal bonds bear varying degrees of default risk. Corporate Bonds Corporate bonds are debt instruments issued by companies to raise capital. Corporate bonds tend to be more risky than government bonds because they are backed by individual corporations and not by the full faith and credit of the U.S. Government. By the same token, because you incur greater risk with a corporate bond, corporate bonds have generally carried a higher yield than government bond issues with similar maturity dates. Corporate bonds commonly have the following features: Par value of $1,000 Minimum purchase is typically $5,000 Corporate bonds are subject to local, state, and federal taxation Credit ratings and what they mean Rating services like Standard & Poor's and Moody's assign a corporation's bond ratings based on their perception of whether a debt issuer will be able to meet scheduled interest and principal repayments. Typically, AAA has the lowest degree of risk, and D has the highest degree of risk. Moody's Standard & Poor's What the Rating Means Aaa AAA Highest quality Aa AA High quality A A Upper-medium quality Baa BBB Medium quality Ba, B BB, B Below investment grade Caa, Ca CCC, CC Highly speculative C C Typically bonds that are paying no interest -- D In default, interest and/or principal has not been paid 6 Secrets of Dividend Investing: How You Can Earn Great Returns with Less Risk Finding the best dividend stocks takes some legwork and careful analysis. But here's how you can find the best long-term winners: 1. Avoid the Highest Dividend Stocks — You can't pick stocks by dividend yield alone. Above-normal dividends are often a red flag for a company in distress. Studies have consistently shown that you will earn higher long-term returns by avoiding risky stocks with overly high dividends. 2. Beware the “Dividend Time Bombs” — Not all dividends are created equal. Even if a company has a generous dividend, it must be able to maintain it. A "doomed-to-be-cut" dividend can be worse than no dividend at all. Once a dividend is cut, it's likely to make the share price fall also. 3. Cash Is King — Free cash flow (FCF) is the true health of the business. Find the companies that generate tons of it. Even in the worst of times, those flush with greenbacks have options. Firms with cash can buy back their shares to raise stock prices, make their debt payments, increase dividends, and buy other profitable businesses. That's why cash flow is the single most important factor that determines value in the marketplace. 4. Don't Focus on Income without Growth — Only growing businesses are truly healthy. So cash flow needs to be strong enough to not only pay a healthy dividend but also generate enough cash to grow and stay strong strategically. 5. Don't Forget Value — An investment's total yield depends on both the dividend amount and the stock price. Stocks of companies making real products and real profits often don't make the headlines. So dividend stocks can also be a great source of hidden value. Finding value by focusing on dividends first can help you avoid catching the "falling knives" that trap some value investors. 6. Have a Longer-Term Focus — Many brokerage houses make investment recommendations based on a very short-term view of the world — often a maximum 12-month timeframe. Individual investors should have at least a three- to five-year view when considering investments. More time helps you fully realize the true power of compounding dividends. Dividend-paying stocks are absolutely the fastest and most reliable way to achieve financial security and independence. Here are five reasons why you should love dividend stocks right now: They're beating the market. According to Standard & Poor's, for the first seven months of 2006, dividend-paying stocks returned 4.3%, compared with -3.3% for non-dividend payers. They're low risk. Since the companies pay out cash, investors are more willing to hold dividend stocks through bear markets. Hence, they don't fall as far or as quickly as non-dividend stocks. These stocks become a magnet for investors seeking security. They earn much better yields with lower taxes. Thanks to a recent change in the tax law, dividends are now taxed at only 15%. Compare that to interest on your savings, CD, or money market account that is taxed as ordinary income — up to 35%! Standard & Poor's estimates this change should save investors more than $100 billion through 2008. Much of this will be invested back in dividend stocks. They help you avoid the Enrons of tomorrow. Dividends don't lie. For example, between 1997 and 2000, Enron's "earnings" rose 69% but dividends rose only 9%. That's a sure sign that something fishy was going on. Paper profits can fool analysts but hard cash can't be faked. By reinvesting dividends, you “dollar-cost average” and get the power of compounding automatically. Reinvesting dividends improves your portfolio's long-term returns by buying more shares when the price is low and by helping your profits earn more profits.
Shared by: Mary Jean Menintigar