Before getting involved in dividend stock investing there are five major lessons you should learn.

1. Dividends are never guaranteed

There were many people who chose to ignore this particular lesson in the months and years that led up to the financial crisis. Collecting interest on investments like bonds and CDs is a given but that is not so with dividends. It is up to the board of directors to decide whether shareholders will receive cash dividends or not. It is in the best interests of the company for the board to attempt to maintain or even increase payouts because it is a sign that the company is financially sound. A company that is financially strong can, in turn, attract more investors.

2. Do not chase high yields

Greedy investors in recent years were taking higher risks to find acceptable yields. This was because market yields and interest rates were so low. This proved to be costly in the long run. Any dividend yield that is higher than 2.5 times the market average is something to avoid. With the current rate at two percent, you should avoid anything listed at five percent or higher.

3. Cash flow is king

Pay close attention to cash coming in and going out for at least the past five years. Focusing on earnings will not give you a true picture of whether a dividend will be sustainable or not. Make sure you account for capital expenditures and the amount that is left is the cash flow available to the company to buy back shares or pay dividends. This is called free cash flow. You also want to find out how much the company paid out in dividends annually. If the cash flow amount that is considered to be free is bigger that the dividends paid, then you can be assured that the company can maintain the current dividend.

4. Be selective

Be selective when you are choosing companies to invest in and keep your investments diversified. Cuts in dividends tend be widespread when the economy is in crisis. Do not rely solely on ETF’s or an index to protect you. You should know that the ETF is only permitted one rebalance each year. Many owners were left holding onto stocks that were suddenly not paying dividends at all or were paying out very low rates until the rebalance was allowed to occur.

5. It pays to diversify

It is still important to diversify. There is no doubt that the financial industry was hurt the worst over the last two years with deep dividend cuts. Even heavily diversified portfolios were hurt when the crisis hit but they were far less affected than those that were heavily weighted with financial stocks that were initially promising higher yields. Sector diversification is still very important even if you are forced to give up some yield at the outset.

With these five tips you will have no trouble building a portfolio of diverse companies that will yield above average dividends with enough free cash flow left over sustain continued growth.

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What is a Blue Chip Company?

A blue chip company is a term given to a nationally recognized, financially sound and well established company. These companies are generally well respected companies within their sectors and are know for best quality products and services available in the market. Blue chip companies are generally known to ride the wave of economic downturns in a much better way than small caps and mid cap companies. In the longer term, these companies provide decent growth in a steady fashion.

The term ‘blue chip’ comes from the game of poker where the blue chip has the maximum value. Blue chip companies usually follow the S&P 500 index. These companies are less volatile than other types of stocks.

When faced with crisis and uncertainty in the economy and the broader market it is imperative to remember that throughout history, high-quality, blue chip stocks have rewarded patient investors. Those who dared to buy the blue chip stocks during the worst period of recession would be the investors who will gain the most. The long-term building of capital and a growing stream of income from that capital also requires some counter-intuitive investment decisions, such as buying at times of extreme pessimism or selling at times of extreme euphoria.

What are the best blue chips stacks in today’s economy?

After a deep recession, finally the markets are rallying again and analysts see signs of economic recovery. In this scenario let us take a look at a few companies from blue chip department which have the potential to get good returns.

BM (NYSE: IBM)

Altria Group (NYSE: MO)

Johnson & Johnson (NYSE: JNJ)

United Technologies (NYSE: UTX)

Coca Cola (NYSE: KO)

Union Pacific (NYSE: UNP)

Emerson Electric (NYSE: EMR)

Colgate Palmolive (NYSE: CL)

Abbott Labs (NYSE: ABT)

Molson Coors (NYSE: TAP)

AT&T (T)

Warren Buffet’s Berkshire Hathaway (BRK)

Comcast Corporation (CMCSA)

Exxon Mobil Corporation (XOM)

Microsoft Corporation (MFST)

Nestle (MSRGY)

Novartis Ag Basel (NVS)

Pepsi Co. (PEP)

The investor should always be looking for buying some of these best blue chip socks since these are the best long term investments in stocks. These companies are financially stable and provide steady returns over the period of time. The investor can never fail if he uses the buy and hold strategy while investing in stocks of blue chip companies.

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 Invest time to invest in the regular investing plan of mutual funds.

The best way to get rich off the mutual find is to become a totally passive investor and that will mean that invest the money in the regular systematic investment pan of a mutual fund and then just enjoy the money. 

However one thing that you need to be sure of is that you pick the right mutual find or a basket of mutual funds.

 The best thing to do is to just blindly invest in the diversified equity mutual funds of the to the top mutual fund companies that is Fidelity and Van Guard. The other option is to invest in the sector specific mutual funds. But investing in sector specific mutual funds is not easy as that will mean that you will have to churn your mutual funds portfolio every now and then to make sure that you are invested in the best mutual finds. 

Mutual finds are the best when it comes to investing and enjoy the dollar cost averaging. 

There is money to be made in the mutual finds provide you follow that simple strategy which is the buy low and sell high . Apply this to mutual funds too and you will make good money. 

If you are looking at the complete listing of the mutual funds as well as the costs and the fees then the best place to go for the  is the Morningstar. It has all sorts of tools as well as ratings for the mutual finds. 

With stocks the best part is that you will be able to invest directly in the stock market using the index funds. 

A lot of funds tell you about the past five years returns but that is not a guarantee but merely indicator of the performance. However it is still much better than having no parameter to go by. 

Some tips for investing in mutual funds 

Have discipline and patience

Select only the five-star funds

Invest only in no-load funds

Compare the returns over the five years and invest in the best one.

Also for investing in the funds the best thing to do is to open an account with discount stock brokers

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I am not going to be too deep with this and there is no secret formula to this. 

However I am big proponent of two things which are

1)      Buy low sell high

2)      Averaging the costs

3)      Long term investing

4)      Small portion of money on volatile stocks

5)      Cash at hand is a must

6)      Use crisis as a time to buy

Old fashioned as it may seem but these theories are by far the best that I know.

Let us each one of these one by one. In fact each one leads to another

Always buy low sell high – Never start investing when the market is at a bull run and it all time high. Most investors will do that and then will have no cash when the market starts tumbling

Always when the economy is in recession buy the stocks and good stocks are available at dirt cheap prices.

Average out the costs – Again this is a long terms strategy but you can easily use this. Do not but too many stocks at one go. If you thing a good stock has potential then buy say 10 or 20 shares of that stock and sit tight. At every fall accumulate so that your cost of holding goes down.

But yes, if the stock is going to tumble because the company is going to be bankrupt then exit.

The strategy will yield handsome returns only if you invest for a long term basis and also you have a constant supply of cash. This leads to my next point and that is

Long term investing – Always go for the safe bet and that long term investing. In short term as stock market beginner you may need to be very alert as well have huge cash at hand to make money. The risk is too high.

Small portion of money on volatile stocks – have small percentage of your entire corpus invested in volatile stocks and then use the averaging strategy to make money. To use this strategy you need to initially pay small and then sell immediately if you have made money on these stocks. Once you have the money then gain invest in volatile stocks and keep on doing this to make handsome gains. Use cycles which are fifteen days or a month based on the time when you enter the market.

Cash at hand is a must – Always have 20-30% of cash at hand out of the total money which you wanted to invest. The reason is simple it will help to but stocks that are cheap at any given pint in time. It will help in averaging the costs too.

Crisis is good time to buy – Use the crisis as a best time to but the stocks. Again have your list ready of good stocks which are down because of the general market sentiment.

A lot of people invested in Goldman Sachs and Citibank at the height of the mortgage related meltdown a few months ago and now are getting rich.

So in all how to get with stocks is not very tough and the only thing is discipline and focus.

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