Saturday, September 21, 2013

The Ten Points of Income Investing

1. Income investing is a separate and distinct strategy

It's not growth, it's not value -- income comes first. (See: The Income Investor's Manifesto)

2. Discipline and patience are behavioral prerequisites 

Great dividend-producing portfolios are built over decades, not weeks and months. It's critical to keep short-term market moves in perspective. (See: Making Each Investment Count)

3. Insist on owning dividend-paying companies with economic moats

You'll save yourself a lot of trouble if you own firms with durable competitive advantages. Read this book to learn how to recognize an economic moat.

4. Keep transaction costs to a minimum

Ideally below 1% per year. Remember: you can only compound what you keep.

5. Beware of unrealistic yields

If a yield seems too good to be true, it probably is. There might be something wrong with a stock that carries a yield more than twice the index average. (See: Ultra High Yield = Ultra High Risk)

6. Don't be afraid to sell, but do so for the right reasons

Trading and income investing don't mix. Take an investor's perspective and aim to hold for at least three years. (See: A Simple Guide for Selling Stocks)

7. Have a dividend reinvestment strategy

How you manage the regular cash flows from your dividend portfolio can have a tremendous impact on your long-term returns. (See: 5 Keys for Reinvesting Dividends)

8. Think globally, but be mindful of extra costs 

There are great dividend opportunities in foreign markets, but be aware of possible withholding taxes in the company's home country.

9. Stay away from companies drowning in debt

Companies with too much debt become beholden to creditors and the dividend can come under pressure if the creditors aren't satisfied.

10. Take a portfolio perspective

A dividend strategy isn't comprised of one or two stocks, but rather a group of stocks assembled to achieve specific objectives and goals. (See: 5 Rules for Building a Dividend-Focused Portfolio)

What do you think? Any points to add? Please let me know in the comments section below.


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