Tag Archives: dividend

Using Dividend Stocks For Extra Spending Money

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I would like to buy some dividend paying stocks so I can use the dividend for Extra Spending Money instead of using money from earned income.

First let me say that each month I thought I only spent $250 as my personal Extra Spending Money, but I was wrong!  I spend well over $300.  While I’m going to use $300 as my basis for the calculations below, I want to go back to the $200 to $250 that I use to consume someday.

My current formula for using money for my “Extra Spending Money” is a more of a consumption based model.  This is where once the money is gone, it’s gone!  Here are my simplified steps:

  • The money I have allocated for spending, all gets spent
  • I have zero dollars left at the end of the month.

My future formula for using my “Extra Spending Money” will be a investing-spending hybrid model.  I envision it as the following steps:

  • I save $200 of the $300 that I have allocated.
  • $100 of the $300 is for spending.
  • Invest the savings into a stock that provides a 5% dividend.
  • After year 1use the dividends to help supplement the $100…
  • Eventually as the dividend become big enough, stop spending the $100 and have it go into the dividend stock.

This process will be similar to my Free Lunch Experiment, but this experiment require much more money invested and time than the Lunch experiment.  So I’ll have to do it gradually over years, unless I come up with a way to speed up the investment contribution.

For example, just to generate a monthly $50 from the stock, I’d have to have $12,000 lump sum at an interest rate of at least 5%.  So that would mean some far off future day, to get up to the minimum $200 level, I would need to save at least $48,000 to $50,000 at a similar 5% interest rate.  and this isn’t even taking into account taxes and inflation!  I could envision the true amount that I would need for the month $200 payout being more in the range between $80,000 to $100,000.

I will provide more details in the future, thanks!

-MR

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Hidden Value In Owning Dividend Paying Stocks

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With non-dividend yielding stocks, you have to sole depend on capital appreciation of the stock price to get ahead.  Admittedly, you could latch onto a great stock and ride it up to the moon, but more than likely, this will not be the case.

So today, I’m going to talk about the advantages of stocks that do yield a dividend.  Perhaps a good example would be McDonalds (MCD), it has a decent yield (3.3%) and a chance for stock price appreciation to boot.

In Volatile Markets

When there is scandal or a major concern in the country (or world), stock prices get pummeled.  This can create stress and even temporarily depress investors.  Currently, there is instability in Egypt that has caused the stock market to decline by 166 points this past Friday.  While I’m very concerned about this, having dividend yielding stock takes some of the edge off of the stress about the stock market.

Why, you might ask?

Because for the most part, dividends that stocks pay out aren’t determined by current events.  Temporary drops in the stock market do not affect the dividend payout by the companies that elect to pay a dividend.  Mainly profits and executive decisions are what determine what the company will pay out as a dividend (at least at the better companies).  Some companies (like REITs) are required to pay out around 90% of their profits for the year to be classified as a REIT (Real Estate Investment Trusts).

Since most dividends are paid out quarterly, current news is immaterial and may have resolved by the time that the dividend payout amount is determined.

Another positive value is that fact that the dividend payouts reduce the downward action of the dividend yielding, stocks price.  People are less apt to give up the juicy dividend, so the decline of the price of the stock moves slowly.  The reason for the slow downward movement of the stock price is because if there is a drop in the stock price, the dividend yield become more appealing because the payout percentage will be higher.  This naturally motivates people to jump in and grab hold of that great percentage yield before the stock price starts to go up again!

Caveat!

Just because a stock pays a dividend, doesn’t mean that they are still viable!  Do the proper research to make sure that the dividend paying stock is a solid investment (don’t by any typewriter stocks!).

As an alternative to purchasing individual dividend paying stocks, Nicole at “Grumpy Rumblings of the Untenured” suggests and go out and buy a mutual fund that is oriented towards paying out a dividend or actually only purchases dividend paying stocks (watch out for high fees though).  This way you reap the rewards while a professional manages your dividend portfolio.

-MR

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Disclosure, I do own a very small position in McDonalds stock.

Dividend Stocks, Free Lunch Experiment #6

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Well, it’s time for another update!  The dividend payout rates have not changed and the overall appreciation of the stocks has raised!

The Free Lunch Experiment, which invests in dividend stocks, is my first true experiment here at MoneyReasons.com and was started with the article called: “Paying An Adult Allowance, A Lunch Experiment”.

In a nutshell, the experiment is that I want focused investments in certain dividend stocks to pay for my lunch when I go out to eat at work.

The real advantage is that the money I’m investing in, is money that I would have spent for lunch anyway.  In my opinion, this make this money free because it would have been spent!  So if I were to lose all of the money tomorrow, I would be sad, but it’s money that I wouldn’t have had anyway had I not started the experiment.  In other words, the first dollar saved was a 100% gain on what I had previously, which was a spent dollar.

So much like the reference in the movie “Blade“, the Lunch Experiment has all of the advantages, and not of the disadvantages of being an stock dividend investment.

Stock Name Anworth EV Energy Chimera
Stock Ticket ANH EVEP CIM
# of Shares 260 45 600
Orig. Price $7.84 $23.25 $4.01
Curr. Price $7.14 $38.25 $4.13
Orig Cost $2,038.14 $1,046.25 $2,404.80
Curr Value $1,856.40 $1,721.25 $2,478.00
Annual Yield 12.89% 7.92% 17.43%
Actual Dividend $59.80 $34.07 $108.00
Total Dividends $807.48
52 weeks 52
Dividend / week $15.53
Total Gain in
Stock Apprec. $566.46
% Change 10.32%
Amt Loaned to myself: $1,726
Amt paid back to date: $1,139
Amt Still Owned: $587.00

Previous Update:  Dividend Stocks, Lunch Experiment Update #5

Thanks for following me and my “free lunch” experiment!

-MR

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REITs as Investments

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Okay, I decided to take the money from my Lunch Budget (Experiment) and put it into a REIT (Real Estate Investment Trust).  Now, I don’t expect the stock price of the REIT to rise much higher than the levels that they are currently at.  So you might be wondering why am I doing this?  …The dividend!

REITs historically pay a dividend percentage payout of about 6% to 7% for their dividend.

Why? Because they get special tax treatment if they do so.

To qualify as a REIT tax structure, a company has to:

  • invest at least 75% of total assets in Real Estate
  • deriving at least 75 percent of gross income as rents from real property or interest from mortgages on real property
  • distributing annually at least 90% of taxable income to shareholders in the form of dividends

So why would a company decided to be classified as a REIT?  Because they are able to pass the taxes to the shareholder instead of paying it themselves.  So these investment would be great in a Roth IRA, or in a child’s UTMA account where they don’t earn much money or the tax consequence is minimal.

I’m hoping that the addition of a REIT company while the fed interest rates are low will benefit me by the REIT stock appreciating and by receiving the juicy stock dividend that is higher than normal at this time!!!

Bests,

Don