LEARNING TO INVEST
- Do you invest for appreciation or income?
- If you are an income investor, this article discusses DGI (Dividend Growth Investors) vs Immediate Income investors
One of the most difficult decisions a person must make is to determine how they will invest. This is important because most people do better if they are able to focus their energy and efforts in one major investment category. This means that each person must determine what type of investor they are and what to focus on. It would be helpful if investors could make this decision: Do I invest for appreciation or for income?
INVEST FOR APPRECIATION
Investors make money when the price of a security appreciates in value. One age old message that you will remember hearing is: “Buy low, sell High”. Generally, investors look for companies that are growing in revenue, net income, cash flow, etc. That should also mean investing in companies with good and growing products and services. The price of a stock is normally based on the relationship with net income. As a company increases their net income, the stock price will generally follow. At the same time, the higher the rate of earnings growth, the higher the price will be in relation to the earnings. It makes sense. All things being equal, if one company’s net income is growing at a rate of 5% and another is growing at a 10% rate, the company that is growing at 10% will be priced higher than the 5% growth stock. Most growth companies do not pay a dividend. If the investor prefers to focus on growth and appreciation, they understand and approve of the company using as much income and cash flow as possible to be re-invested into the company to maximize future growth.
INVEST FOR INCOME
Investors can also make money by investing in companies that pay dividends and/or interest. This means that the investor will receive income regardless of whether the stock price goes up or down. There are 2 types of income investors.
DGI (dividend growth investors). Dividend growth investing is a strategy that focuses on companies which have a history of increasing the amount they pay in dividends on a regular basis. The typical dividend growth stock does not yield a lot today, but over time, can increase to where they will generate substantial income. DGI investors look for quality companies who have paid an ever-increasing dividend on a regular basis and have what it takes to continue increasing the dividend for many years to come. As the dividends are paid, investors reinvest the money back into the company, or they buy other dividend growth stocks in order to invest in better opportunities or to diversify their portfolio. As those dividends increase, the stock price should also increase providing the investor with a good return on their initial investment and higher income in the future when income is important to them.
Yields on DGI companies will generally range from 1 to 3%. The yields are low simply because the marketplace places a premium on these companies. Remember that low risk stocks generally result in low yields.
DGI companies can be found in all industry categories, but I Prefer Income has placed companies that have increased their dividends every year for 25+ years into a program called: “Dividend Diamonds 25+”. There are currently over 130 companies that meet these requirements and include some of the largest and most well-known companies in the U.S. Here are a few that most will recognize: Coca-Cola, Pepsico, McDonalds, General Dynamics, Eaton Vance, Thomson Reuters, Automatic Data (ADP), Air Products, H. B. Fuller, Sherwin-Williams, A T & T, Colgate Palmolive, Clorox, Hormel Foods and many others. All companies in the Dividend Diamonds 25+ program should be considered as high quality DGI companies. Some have increased their dividend every year for more than 50 years!
Immediate income investors. Many investors feel that it is better to invest for immediate income rather than wait for future rewards. This generally means investing in higher yielding securities that generate more income than is found in dividend growth companies. The income received can be utilized for daily living expenses or to be re-invested in other income producing securities. Higher yields are generally found in higher risk securities or in safe, but low or no growth companies. The reason that these company’s dividends provide higher yields is because the marketplace does not place a premium on these stocks. However, these companies do provide good opportunities for Immediate Income investors, but it is important to do the research to find safe companies that pay a reliable and sustainable dividend.
Yields on Immediate income securities will generally range from 5 to 8% and higher. There are always exceptions where yields can go much higher if certain conditions exist. Currently MLP, midstream and other energy companies are providing some extraordinary yields.
“I Prefer Income” has several programs that Immediate Income investors will appreciate. These include:
- REIT Program – Equity REIT stocks in 16 industry categories
- MLP / Midstream Program – Oil & Gas pipeline companies, energy related, shipping companies, etc.
- Preferred / ETD Securities Program – Over 600 preferred stocks & ETD companies that provide higher yields & fixed income.
There are several important differences between DGI and Immediate income investments. Here are 2:
- Yield and income: Dividend growth stocks generally have lower yields than Immediate Income investments. DGI stocks might have a 2% yield versus 6% (or higher) for immediate income stocks.
- Dividend Growth: Dividend growth stocks have a history of increasing dividends on a regular basis. Immediate income stocks generally have low or no growth dividends; or they are higher risk.
Risks: There are risks inherent in both types of investments. Has the outlook for the company changed? Does the company continue to generate the distribution as expected? Are there other investments that provide better opportunities?
People invest to make money. There are 2 basic ways to make money in the stock market: appreciation or income. If your interest is on income, “I Prefer Income” has the programs for both Dividend Growth Investors (DGI) and Immediate Income Investors.
- Dividend Growth companies can be found in all industries and in all IPI programs; however, the Dividend Diamond 25+ program focuses on dividend growth companies by gathering all companies that have increased their dividend every year for 25+ years.
- Immediate Income investors are interested in higher yields that produce increased immediate income.
Thanks for taking the time to read this article. I will follow-up with additional articles to provide general guidelines for DGI and Immediate Income Investors.
**Please remember that all investments have risk and there is no guaranty that they will provide the results you want. However, by doing quality research your chances for success are greatly improved.
I Prefer Income