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Don't Just Pay Any Price

|Includes: Berkshire Hathaway inc. (BRK.B), KO, MDLZ
Dividend investing, like any other aspect of investing, can get to be kind of a specialty. After all, someone who's a Forex trader or someone else who practically lives to deal in commodities is naturally going to have a different way of going about their business than someone who might be a growth stock aficionado. That stands to reason. The same is true with dividend investing. Just as there are particulars and specifics to Forex or commodities or any other group of investments, there are usually popular ways of investing or trading within these specialties that most investors use. So with dividends, what are some of these, and how are they distinguished from other investment methods?

Approaching Dividends

The attitude many investors have about dividends varies as you might expect. First you might want to know many investors don't believe in dividend investing at all. Some great investors line up on one side of the spectrum or another. William O'Neil's view was extreme. He stated bluntly in his classic book, "How To Make Money In Stocks," "I do not believe most people should buy common stocks for dividend or income." Martin Zweig, on the other hand, was not against this, and thought wise selection could give reasonable returns. Both O'Neil and Zweig, who were considered traders rather than investors (despite their protests, perhaps), warned against indiscriminate selection of stocks. Other great investors, especially Warren Buffett, have made getting paid dividends a large and welcome part of their business. Peter Lynch liked to pick up dividends along the way with his slow growers.

Your Approach

Investors or traders like O'Neil or Zweig had other methods they preferred rather than going after dividends. But investors like Buffett and Lynch can be instructive. Lynch looked at dividends as a sideline, as he was a growth stock picker. Buffett keeps the dividends more central to his Berkshire Hathaway (NYSE: BRK.B) empire, piling up cash along with the mountain of capital appreciation in the stocks and businesses he owns. There are a couple of keys right there for investors: the time factor is one. Buffett and Berkshire have been at it a long time, piling up cash and vastly increasing value of his holdings. Think of his Coca Cola (NYSE: KO) stock, which is now the equivalent of free, given the dividends he's received and the capital appreciation it's piled up in the years of ownership. Not bad, is it?

Coca-Cola's Earnings Growth And Dividend Growth

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Reinvesting

One of the approaches long term income investors use is not unlike what Buffett does with his portfolio, and that's to put the cash back to work from the dividends received. Individual investors can utilize dividend reinvestment plans, or DRPs, where the investor isn't choosing the price of the stock at which the dividend money is reinvested; but the approach can be valuable, so there's something to that. The prices paid are mitigated to some degree by what would be a smoothing over time. That simply means that over the course of many quarters or years, the dividend money would be reinvested in a given stock at various prices. It's the same kind of principle as dollar cost averaging—which is also scorned by some professional investors.

Don't Be Dissuaded

Professional investors often want to pick the precise moment they buy or sell an investment, which is understandable, as that's what they're paid to do. The criticism of dividend reinvestment or dollar cost averaging, where you buy a stock on a regular basis, for example, monthly or quarterly, which should find you buying more shares at a lower price, is again that it is automatic and doesn't rely on any particular expertise. But for the non-professional, who has a long time horizon and is busy with career, family and life, this can be a good method. It's a disciplined way of investing that can pile up stocks, deliver income and grow a small fortune, over years.

The Long Term Value of Reinvesting Dividends

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Bargains And Value

For those income investors who have a little more time and desire to do their own research, though, if they take the time to try to buy their dividend stocks at attractive prices, which is sometimes admittedly difficult to tell, that can pay off greatly. The thing not to do if you're doing your own research and investing, is to simply pay any price for a stock thinking that it's okay, that the dividend income will make up for it. Some dividend investors do ignore stock price. You might be able to get away with that or you might get hurt, but you can certainly do better if you take the time to watch the price and market fluctuations a bit. Whether you buy conservative income stocks like Kraft Foods (NYSE: KFT) or high-yield stocks, the price you pay ultimately does matter. Dividend investors who pay attention to the price they pay for their stocks can enhance their gains.


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