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Develop a strategy for dividend-paying stocks

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"Then we have high-yield dividend growers, such as Bank of America, Duke Energy and Altria Group. We combine the two groups and we can put together portfolios yielding 4 percent. When you're living off your investments, the safe withdrawal rate is around 4 percent. If you can develop a portfolio with broad diversification and a rising dividend income stream that pays 4 percent, then you can systematically withdraw that dividend, keep pace with inflation and not have to dip into principal during periods when the market is selling down."

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Do mutual funds pay?
If the thought of researching a company's fundamentals makes your mind drift off, you may want to leave the selection to an expert or explore dividend-oriented mutual funds offered by Fidelity, Vanguard, Schwab and scores of other companies. But mutual funds may limit your returns.

"Rarely do the funds have the yield that one might achieve by being a little more choosey," says Bryant Evans, portfolio manager at Cozad Asset Management.

"A fund's goal is to build assets under management into billions of dollars, so they need to buy larger-cap, highly traded issues. You, as an individual, don't have those liquidity concerns, so you can buy the small- and midcap companies that might have low trading volumes, compared to larger-cap stocks, but have higher yields. A lot of the high-yield is in that small- to midcap arena."

Keep in mind that a dividend strategy needs time to work. If you're not relying on dividends for income, you should reinvest them to really put them to work. You'll be buying additional shares in a dollar-cost-averaging fashion. If the share price is down, you'll be buying more shares at a lower cost and vice versa when the share price is higher.

Additionally, if you buy diversified companies that not only pay dividends but also have a sustained history of raising them, as Schluederberg mentioned, you'll benefit even more. These factors, along with share-price appreciation, are what make a dividend strategy so valuable to a portfolio.

Bankrate.com's corrections policy -- Posted: Dec. 3, 2007
 
 
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