Investing Tip: Ultimate Dividend Rules

Who wouldn't like a reliable and steady source of income without the inconvenience of working? It may be possible, when you invest wisely in dividend-paying stocks.

One of Morningstar's newsletter editors, Josh Peters, has just written a new book on dividend investing. The Ultimate Dividend Playbook will appear in bookstores nationwide this month. The following is an excerpt from Josh's book:

The Ultimate Dividend Rules

• Capital gains are an unreliable source of income. If you need income from stocks, get it from dividends instead.
• Dividends are the ultimate source of a stock's value for shareholders.
• Current dividend yield plus dividend growth indicates a stock's future total return prospects.
• Avoid stocks with unsafe dividends.
• Past rates of dividend growth are a useful guide, but a forward-looking estimate is much more relevant.
• The real world is unpredictable, so demand a margin of safety by requiring a higher total return prospect than you might otherwise settle for.
• Start your portfolio planning with a target yield; then buy a group of stocks that, as a group, can deliver the income you seek.
• Growing dividends are usually safer dividends as well. Within your target yield, seek as much growth as possible.
• The more companies you evaluate before buying, the better your eventual portfolio will look and perform.
• Consider selling when a stock's dividend no longer looks sustainable. Beyond that, let opportunity cost be your guide. Unless a new candidate offers a materially higher prospective return than the least attractive stock you already own, you should feel no need to trade.

Morningstar.com is great tool for new and veteran investors. It's chock full of unbiased analyst reports, tools for evaluating your portfolio, and lessons on how to invest. The best part is that it's free to all valid library cardholders! Begin now or learn more.