Ok - today, I just want to cover Dividend Yield Investing and how you can actually use dividend yields to protect your investments.

Firstly - what is a dividend? This is the Wikipedia definition of “Dividends”:

“Dividends are payments made by a corporation to its shareholders. It is the portion of corporate profits paid out to stockholders. …”

Is the dividend a company pays a better gauge to look at the health of a company rather than a company’s earnings? That’s an interesting question. Lets look at this:

Earnings

Firstly, existing earnings-based models are based on a company’s declared earnings. However, if you have been ALIVE over the last year you will have heard many stories of companies over-stating their earnings or disguised/under-stated their debts.

This is all due to the flexibility within the accounting process for companies. Also - reported earnings do not show clearly the available cash-flow. The true problem is that the management of a public company are under so much pressure to deliver profit results because the traders in the market rely on these earnings to buy or sell the company’s stock.

Dividends

On the other hand - dividends are PAID in hard cash. Dividends allow you to see how well a company can generate free cash-flow. Bottom line is, if the company has no cash in the bank, then no dividends can be paid. And if the company is in a lot of debt, the cost for servicing those debts will eventually start straining on company’s resources, therefore if the company is in a lot of debt, generally there won’t be enough cash to pay for dividends.

Warren Buffett And Dividend Yield Investing

Warren Buffett generates a huge amount of cash from dividend investing. Let’s take a look at an example:

Warren Buffett started buying Coca Cola stock in 1988 like a coca cola addict. Looking at historical prices, let’s assume he bought the stock for $4.99 the price as of January 4th 1988.

He has held this stock since then and continued to generate cash-flow through other investing strategies, but let’s JUST look at the dividend:

Right now the dividend on Coca Cola(as per Yahoo Finance) is currently $1.64.

So assuming that Warren Buffett’s cost basis is still $4.99 per share, which it wouldn’t be because of all the dividends and other cash generated on the stock, but let’s assume it is.

That would give Warren Buffett an ROI (Return On Investment) of:

(1.64/4.99) * 100 = 32.9%

And that’s 32.9% per year - JUST on dividends.

Dividend Yield Investing - Perfect For Long Term Investors

Dividend yield investing is perfect for long term investors and can help you generate a huge return on your stock over the long-term.

Please let me know what you think by leaving a comment below.

Thank You,

References:

1.http://www.Yahoo.com/Finance
2.http://beginnersinvest.about.com/cs/warrenbuffett/a/aawarrenbio_5.htm
3.http://www.incrediblecharts.com/investing/warren_buffett.php

http://www.CashForLifeInvesting.com