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Suze Orman Money Matters

Suze Orman, Money Matters

Want an Investment Boost? Dividend and Conquer

by Suze Orman

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Posted on Friday, October 19, 2007, 12:00AM

The half-point drop in the Federal Funds rate in September certainly had an immediate (if temporary) positive effect on a jittery stock market. But on the flipside, it's talking a cut out of yields on bank CDs, savings accounts, and money markets.

Already, ING has reduced its savings account yield from 4.5 percent to 4.3 percent; HSBC's went from 5 percent to 4.5 percent. And the 5.05 percent offered by Emigrant Direct is now down to 4.75 after Ben Bernanke announced the rate haircut.

A Cushion in Volatile Times

Those are still nice yields, but if further easing is in store, they're going to head further south. While your emergency savings and short-term savings belong in these super-safe investments, I think now is a great time to revisit the topic of dividend stock investing -- not as a substitute for your cash investments, but as a complement.

The 2 percent to 4 percent or more you can get on many solid dividend stocks is a great way to generate income from a portion of your money that's earmarked for the stock market.

Dividends are also a nice cushion in a volatile market, as most large firms that pay a dividend to shareholders are loath to stop the practice. If you stick with solid, established companies that can easily manage their dividend payouts, you're as close to a sure thing as possible in the unpredictable world of investing.

Dividends Made Simple

The stock price may go up, it may go down. Market volatility will determine that. But the dividend payout from the likes of Johnson & Johnson and Bank of America isn't so fickle; as I said, it's rare for a solid -- and I emphasize solid -- company to suddenly reduce or rescind its dividend payout.

Knowing you can count on a dividend payout no matter what can make it easier to weather a market downturn. And keep in mind that over the past 60 or so years, about 40 percent of the total return for stocks in the Standard & Poor's 500 came from the dividends paid out by the stocks.

A quick table-setting for any dividend newbies out there: A dividend is a cash payment made to shareholders of a company on a regular schedule, typically quarterly. As a shareholder, you can take the dividend as cash or, in many instances, you can opt to have the dividend reinvested in additional shares of the stock. A stock's dividend payout per share divided by its stock price is called its dividend yield.

Right now, the dividend yield for the S&P 500 stock index is hovering around 1.7 percent. But some well-known companies sport much higher yields; General Electric has a 3 percent yield, while Bank of America is at 4.7 percent.

Risky Payoffs, Less Taxes

Dividends are typically the domain of established, well-off companies that have sufficient earnings to issue a payout. But "typically" is important here -- not all dividend payers are on super-strong footing. Some companies stretch to attract investors by offering big dividend payouts that they can't sustain over long periods.

Obviously, those aren't the types of dividend-paying stocks I recommend. I'm more interested in companies that have a long history of sustaining and increasing their dividend payouts, rather than a company struggling to make an 8 percent payout when it doesn't really have the cash or business model to support that over the long term.

It's also important to recognize that a high yield is sometimes a function of a very low -- as in troubled -- stock price. Remember, the formula is per share dividend income divided by per share stock price equals yield. If the stock price plummets, the yield goes up. But the goal is to get the steady income stream without running the big risk of the stock tanking.

If a stock has a huge dividend yield, be very cautious. Do your homework to make sure you understand the underlying risk not just of maintaining the dividend, but more important, for the stock itself.

There's a nice tax break these days on the dividend income payout, too. One of the raps against investing in dividend stocks used to be the fact that the payout was taxed at your ordinary income tax rate; for the well-off, that could mean a 35 percent tax bite on all dividends. But a tax law change a few years ago now taxes most dividends at a far more reasonable flat rate of 15 percent.

A Diversified Dividend Strategy

You can, of course, invest in individual stocks of companies that issue dividends. But unless you have the time and acumen to properly evaluate and monitor your holdings, and the ready cash to build a portfolio of at least 15 or more stocks, you're better off sticking with an ETF or low-cost mutual fund that specializes in dividend-paying stocks.

The granddaddy of the dividend ETFs is the iShares Dow Jones Select Dividend (DVY). Its current 3.28 percent yield is nearly double the payout of the S&P 500. This ETF screens for 100 stocks that have strong trading volume and that have raised their dividends -- and never reduced the payout -- -in the past five years. Stocks that use more than 60 percent of their earnings to cover the dividend payout are ruled ineligible.

The current high yield for DVY is in part a function of its heavy weighting in financials (40 percent); thanks to the subprime mess, the stock price for many of those financials have struggled this year.

For a more diversified dividend approach, check out Vanguard High Dividend Yield (VYM; 2.8 percent yield). It holds about 500 stocks and doesn't have such large-sector bets as DVY; financials currently account for about 25 percent of this ETF's assets. The Vanguard offering also has a nice fee edge. Its 0.25 percent annual expense ratio is even better than the not-so-shabby 0.40 percent fee for DVY.

Another interesting dividend ETF is the Wisdom Tree Total Dividend ETF (DTD; 2.2 percent current yield.) It charges a low 0.28 percent expense ratio and follows a different investment path that ranks its universe of dividend-paying companies (over the past 12 months) by their anticipated payouts for the next 12 months relative to the payout rate for the overall index.

Mutually Beneficial

If you prefer mutual funds to ETFs -- the right move if you're making frequent periodic investments because you don't want to constantly pay the brokerage commission charged on ETF trades -- you have plenty of options.

Again, costs matter. The Vanguard Value Index (VIVAX; 2.37 percent yield) levies a stingy 0.21 percent expense ratio.

Though it isn't expressly on the prowl for dividends, the universe of large-cap value stocks tends to be home to many dividend-paying companies. T. Rowe Price Equity Income (PRFDX; 1.8 percent yield) seeks out large-cap value stocks with an eye toward companies whose yield exceeds that of the S&P 500. Its 0.69 expense ratio is a bit higher than the other options I've discussed here, but it's well below the 1.5 percent average for actively managed funds. And T. Rowe is a great place to invest if you're on a tight budget: You can invest as little as $50 as long as you agree to continue making periodic payments through its Automatic Asset Builder plan.

To conduct in-depth research on top high-yielders, go to Yahoo! Finance's Mutual Funds Center and ETF Center.

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  • jamure - Friday, November 9, 2007, 3:25PM ET  Report Abuse

    • Overall: 1/5

    I understand this is an "Expert Opinion!" I wonder how all these people became experts in what they write. What is their education? What is their experience? Do they manage investment portfolios for living? Or do they just write articles, publish books, and give speeches. As far as I know, there is no Suze Orman Investment Fund - at least not that is operating now. It is my understanding she was a certified financial planner - which is not very difficult to become. I wonder how the investment portfolios performed when she was advising investment strategies for those people/businesses. How does her performance compare - say with Warren Buffet, or Peter Lynch or some other "experts" in this industry. I also wonder why Warren Buffett is not writing articles for Yahoo! May be he is too busy "doing & implementing" what he thinks is a good idea. May be Warren doesn’t need Yahoo publicity and stamp of approval saying he is an "Expert." The problem with Investment advising is - any advice can be very good or very bad depending on the time and duration of implementation of that strategy. You can say pretty much anything you want (within reason) and sound like an expert. I have an advice for Suze Orman: What you did so far is great - I think you got lot of people thinking about finance matters that didn't care to do so in the past. Now the next step is to provide the operational help - that is starting a Financial Management Group and show the results. If you can beat the other fund managers consistently - you will be an "Expert" - by the way - this advice goes to all the other Experts who give investment advice on Yahoo "Expert Opinion" section. Writing articles and books is easy - especially after the computers and internet have become a common place. We don't even have to do a spell check anymore - few years ago we had to click few menus and buttons to do the spell check - now the computer will tell you when you misspell something. We can type up some GARBAGE - organize it into a list or bullet points - and give a catchy title - Six steps to show off your belly button - Seven steps to retire on the beach - Four ways to die on the beach - or something like that - boom, you are in business. You are a "celebrity" - You are an "expert."

  • Yahoo! Finance User - Friday, November 2, 2007, 5:58PM ET  Report Abuse

    • Overall: 1/5

    She reminds of fingernails scraping on a chalkboard

  • Yahoo! Finance User - Friday, October 26, 2007, 12:51AM ET  Report Abuse

    • Overall: 2/5

    I've seen the words "risk free" pop up in the comments section several times. Folks, your "risk free" assets face one of the biggest risks out there. INFLATION RISK. Nothing is wrong with a 5% mma, but please don't think it should be the cornerstone of your investment portfolio. Nothing is wrong with dividend paying stocks either, but they aren't a savings vehicle. And while the volatility of dividend paying stocks maybe less, they are still far from a low risk investment. Look at BofA in the last few weeks and tell me that 5% yield is risk free. Suze's advice isn't very good, but the advice in these comments is deplorable.

  • Invest - Friday, October 26, 2007, 12:38AM ET  Report Abuse

    • Overall: 3/5

    A good informational article -- obviously geared for her particular audience --the "average" guy who is not financially sophisticated. The two major messages are about investing in dividend stocks, and investing in low-cost mutual funds. However, she kind of blends them together in a confusing way so that she ends up talking about broad index funds. A couple of points: 1) She has a good point about dividend stocks giving retirees and income investors cash flow -- on a per share basis -- no matter how the market price of those shares fluctuate. However, that advantage is lost if the investor DRIPs the dividends back into the stock, or if s/he invests in a mutual fund -- which Suze also advocates in the article. 2) Investing in ETFs and Mutual Funds does subject one's principal to swings in value as the markets move up and down. For investors who want security of principal (as in bank accounts) or rely a partial withdrawal of principal as well as interest each year to provide the income they need -- they are taking a risk that principal could decline substantially (as much as 30% or more) and take as much as 5 to 10 years to recover value -- as has happened in past markets. If they are retirees and have to rely on continuing principal withdrawals, this could result in serious damage to their nest egg -- and severly curtail their retirement income.

  • Eric - Thursday, October 25, 2007, 1:05PM ET  Report Abuse

    • Overall: 2/5

    Funny to see Suze change her toon from a few years ago when she said all people needed to buy was the S&P 500 index and the QQQ's and they would be ok. Oh wait those went down 40% or more? Oh better recommend something else. No one should be taking investment advice from her.

  • Ranger14 - Thursday, October 25, 2007, 10:58AM ET  Report Abuse

    • Overall: 4/5

    This is probably the best article I've read from Suze. Dividend stocks are some of the most overlooked investments out there, especially now that the dividend tax rate has been lowered. They are a perfect part of a portfolio for retirees or conservative investors because they will give them the needed growth with little risk. Why anyone would invest all there money in CD's or Tresuries is beyond me and this is a good article to get people to think of some other options.

  • ThomasH - Thursday, October 25, 2007, 12:20AM ET  Report Abuse

    • Overall: 4/5

    Wow! The 1 star comments here are really dumb. Suze should have emphasized the long term nature of dividend stock investing. Her suggestion of Bank of America is interesting since it is now yielding 5.4%. The other item Suze should have suggested is automatic dividend reinvestment or DRIP. The great thing about DRIPs is that if the stock price goes down (without any div. cuts) the performance of your investment gets better over the long run. At a lower price, you get more shares when the divs. reinvest. The total return for BofA over the last 10 years is 9.8% annual. Over the last 5 years its been 15% ann. Or if you had done the same with Altria you would have gotten 18.4% over 10 years, or 23% over 5 years. Bonds and CDs are puny by comparison.

  • david - Wednesday, October 24, 2007, 9:39PM ET  Report Abuse

    • Overall: 5/5

    solid information.

  • Al - Wednesday, October 24, 2007, 2:19PM ET  Report Abuse

    • Overall: 4/5

    Ignore the first rating, remember risk free cd is taxed at your typical tax rate so if your in the 25% or higher rate thats a big cut, Suze says divident is 15% thats a big difference so even if the return is 3%, thats not bad, plus you get stocks as well, personally I like Tbills since you don'tt have to pay state tax on the interest.

  • Ajay S - Wednesday, October 24, 2007, 1:32PM ET  Report Abuse

    • Overall: 1/5

    You can get 5% RISK FREE in CDs. You can also get 4-5% TAX FREE in muni bonds. Why would an investor invest in stocks that pay dividends of 3-4% with all the accompanying risk ? Poor article.

  • Yahoo! Finance User - Wednesday, October 24, 2007, 12:53PM ET  Report Abuse

    • Overall: 1/5

    A general comment is that these articles are usually always wrong. For a person in the highest marginal tax bracket, why would I want to put my money in a taxable bank account (at 4.5%) when I could simply put the money in a high yield US treasury money market (at 3.75%) that will give me an after tax benefit that beats the bank and not lock up my money for year!!! For a financial expert, I can't understand why she has such a following.

  • Yahoo! Finance User - Wednesday, October 24, 2007, 11:21AM ET  Report Abuse

    • Overall: 1/5

    So let's summarize, instead of investing at 4.75% RISK FREE, she is advocating that you invest in risker assets based on a 3.28% before expenses. So, you are losing 1.75% of yield. But, stocks have upside right? Well, if you are moving assets out of high yield savings accounts because you fear rates are falling, what does that imply: The Economy is weaking, so you get a short pop in stocks, followed by lots of earning misses that will drag the stock prices down. The 3% dividend yield is also focused on the financial sector, which is getting hammered. Dividend yielding stocks can be the right assets for the right people with the right risks and goals, but the basis of her 'analysis' and argument is lacking.

  • Raiddinn - Wednesday, October 24, 2007, 9:28AM ET  Report Abuse

    • Overall: 1/5

    More worthless information from Suze Orman. All she wants to do is sell books, she isnt any better than Robert Kiyosaki. Seriously, suggesting people should do the things she tells them to do is very irresponsible of her. For one thing, average people should not be told to create a portfolio of 15 plus stocks. If anything the max I would say is 5 if not 3. Not to mention the average person has no way of knowing what stocks are good or bad in the first place. She could serve her readers a lot better by telling them to go ask their 6-18 year old children what new things that came out are getting big with their peers. Or heaven forbid doing like Peter Lynch, one of the best if not the best money manager of all time, he took his kids out shopping and invested in the companies that the kids went straight to. His kids got his Vanguard Fund into "The Body Shop" before it exploded. By the way, focusing on fees is the most worthless idea ever in investing. The people with real money to invest dont just try to guess based on fees which mutual fund to buy, they hire a financial advisor and pay him or her a fee and get it all back in increased investment performance. Here is a hint, if you try to do both a diversifying strategy and a strategy of buying the best stuff from last year, you are guaranteed to lose to the average every time. Consider also, Warren Buffett charged fees out the yin yang when he started. He gave people the first 6% yearly gains free, but on top of that he charged 1/4 of the investment gains as a fee. Since he was clocking in high 20s increases at the minimum for yearly gains he was looking at bare minimum 5% of assets as a fee that his investors were more than willing to pay. Suze Orman would rather have you pay a 0.2% fee and buy her books and watch you get a gain of maybe 3 or 4% a year after tax rather than have you pay a 5% fee and still come out with 15% a year after tax. Thats how much she cares about you. I wish the average person who worships her knew half the stuff about money that Suze Orman thinks she knows, they would give up on her in a heartbeat and the world would be much better off.

  • BRAD - Wednesday, October 24, 2007, 4:35AM ET  Report Abuse

    • Overall: 3/5

    Well balanced article. Suze needs to start pushing her readers/watchers past, "Live below you means." Joe D and Vicky R did it well years ago with, "Your Money or Your Life." I appreciate the help she gives the newbies, and maybe this is all she is meant to be...yet she needs to find a way to push her current readers/watchers to the next level. When I hear someone come-down on her for basic financial information, I remind them that if not for writers like her, we may still be stuck at the first building block. You go girl!

  • Mark - Tuesday, October 23, 2007, 7:24AM ET  Report Abuse

    • Overall: 4/5

    My comment is for those reviewers who expect a small on-line article to explain any concept in depth. Obviously, this article is meant to stimulate those who have no knowledge of the topic so that they can improve their investing after further research. The comments, especially those including digs at housewives and other "uneducated" investors, have nothing to do with the content of this article. If Ms. Orman has encouraged the "average" investor to do anything, it is to do their research, get out of silly debt, and to invest in products that don't cost the investor an arm and leg (for example, investing in an index fund instead of an actively managed fund which more often than not underperforms the overall index). Taking control of your own finances is far easier than the expensive experts would have us believe. I appreciate that Ms. Orman clearly tells us the expense ratio for the products she suggests. Is a dividend the ONLY thing one should be concered with? Of course not, but this article does not state that it should be. Will investing in dividend paying companies prove to a good long-term investment strategy? Do your research and find out....this article was never meant to be the answer, but simply an introduction to one option that's out there for investors.

  • John - Monday, October 22, 2007, 11:54PM ET  Report Abuse

    • Overall: 1/5

    IMHO, this is a very poor article - there is just enough knowledge here to sound impressive to a pure novice... but it will get them in trouble fast. Moderately knowledgable investers might glean an idea or two, but it's pretty useless to us as well. Advice of this type needs to answer several questions: Where is the evidence that high dividend stocks do better than other stocks? Under what kind of conditions? If you are using high dividend stocks in your portfolio to hedge against volatility, where is the evidence of reduced volatility? When should you get in? When should you get out? How much of your portfolio should you invest? Most investors are in 401Ks, and Asset Allocation is the key thing. How do we use this information but stay true to our benchmark? If we use the S&P500 to measure ourselves, how would you recommend we change our allocation? What risk do we now take by adjusting our asset allocation to favor high dividend paying equities? Besides which, what defines volatility? A few swings of 5-10% is normal, even though we hadn't seen it for a few years until this past March. This market really isn't that strange... nobody knows where it is going, and what's so unusual about the random walk? Nothing personal against Suze, I just think the critical thinking to support her recomendation is sorely lacking.

  • Yahoo! Finance User - Monday, October 22, 2007, 11:38PM ET  Report Abuse

    • Overall: 1/5

    Dividend Stocks are a play on a down market. When the dow is trading off near record highs dividend stocks are a bad play. The dividend comes at the cost of growth. This women is clueless.

  • DavidH - Monday, October 22, 2007, 8:27PM ET  Report Abuse

    • Overall: 3/5

    Good enough for a beginner in investing. Some of us are new to this stuff. So any financial jargon explained is good. I wish I truly understood what causes stock prices to rise and fall. I've got a feeling I'm not alone. For those who know so much, they should write their own columns.

  • Yahoo! Finance User - Monday, October 22, 2007, 7:25PM ET  Report Abuse

    • Overall: 2/5

    No wonder she goes on Oprah - you need to be a clueless, bored and uneducated housewife to listen to this gibberish. It is disappointing that Yahoo! is succumbing to the vulgarization of science, culture and financial advice.

  • Yahoo! Finance User - Monday, October 22, 2007, 7:19PM ET  Report Abuse

    • Overall: 1/5

    This information has appeared elsewhere. If you think Suze wrote it, you are dreaming. YAY Suze, we hate you.

  • JakeM - Monday, October 22, 2007, 6:52PM ET  Report Abuse

    • Overall: 5/5

    YAY SUZE! WE LOVE YOU!

  • r13 - Monday, October 22, 2007, 6:48PM ET  Report Abuse

    • Overall: 5/5

    I would have rated it a 3 or 4, but after reading some of the other comments, I realized how badly these people need Ms. Orman's advice. Most of the commenters mistakenly assume the only significant return from dividend stocks is the dividends. Not so. They go up and down like all stocks. The dividend actually prevents them from going down too much, because if the yield goes up, more people will buy them. Dividend paying stocks have all the advantages other stocks do, plus the dividend, plus the fact that the companies are solid enough to pay dividends.

  • Yahoo! Finance User - Monday, October 22, 2007, 6:19PM ET  Report Abuse

    • Overall: 5/5

    Suze always provides good, sound, easy to understand advice that makes sense.

  • jay - Monday, October 22, 2007, 6:19PM ET  Report Abuse

    • Overall: 5/5

    This was a decent article for the beginning investor. A stable dividend-paying stock or etf can provide security during volatility, which is getting more and more common. The most important kernal in the article that people often overlook is the low 15% tax rate on dividends. If you are doing a lot of trading you know that the short term capital gains tax can eat away at your profits. Some other good dividend yielders not mentioned in this article are MO and many dry shipping companies.

  • Jeff B - Monday, October 22, 2007, 5:02PM ET  Report Abuse

    • Overall: 2/5

    You have to buy ALOT of stock to start getting income that is paying 2%. 10,000 dollars of stock gets you $200.00. I am not buying that much of any one stock. I will find a mutual fund with many dividend paying stocks instead.

  • albert - Monday, October 22, 2007, 4:41PM ET  Report Abuse

    • Overall: 1/5

    This is very poor advise. A 2-4 % income on stocks that will still go down with the market is a recommendation that makes no financial sense. I am surprised she would lead people in such a direction. I hope noone follows her advice in this article.

  • Yahoo! Finance User - Monday, October 22, 2007, 4:26PM ET  Report Abuse

    • Overall: 2/5

    Some of you readers crack me up. If you have better advice than this, publish it. Dividend paying stocks provide needed income in volatile markets. Add that to the savings of not having to pay stock commissions and you have yourself a pretty good source of retirement income.

  • Yahoo! Finance User - Monday, October 22, 2007, 3:54PM ET  Report Abuse

    • Overall: 1/5

    Besides sounding like plagiarized content, it also completely overlooks the pounding that high yielding sectors (e.g. financials) have taken in recent months. I guess such lame advice should be no surprise from a woman who admits she doesn't invest in stocks.

  • monty - Monday, October 22, 2007, 3:44PM ET  Report Abuse

    • Overall: 1/5

    Again, Ms. Orman has taken a very pedestrian approach, or should I say, "given drive-by" advice. Anyone with a modicum of finance intelligence could have come up with those funds, however, BofA is not a great pick. US Bank would have been far better choice, for a variety of reasons, most notealby it's ROE, which I am sure she did not take into account, and it's dividend as well.

  • David - Monday, October 22, 2007, 3:34PM ET  Report Abuse

    • Overall: 1/5

    She continues to ignore the market trend over the decades. With a bit of caution, it's not hard to be in the 10 % annual return over the past 3 years. Both my wife's and my 401k have done so.

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