Friday, June 3, 2011

Dow down 700 points in 5 weeks; should the income investor care?

                Income investors care about the Dow Jones Industrial Average because many of the quality, dividend producing companies we own are in this average. 
When the DJ is down that means the value of our holdings is down.  No one likes that.

                However, income investors care even more about income than we do about the effect the DJ average has on the value of our holdings.  Ordinary investors who track the income producing portion of their investments should track the income from the investments.  We cannot control anything about the DJ average.  We can only control where we invest for income. 

                Note that every investment designed for income should pass the key tests of making more money that it pays in a dividend.  Moreover, we raise that hurdle to exclude any company that has cut their dividend in the past five years.   For equity investments that we count on to pay our monthly bills, we raise the hurdle even higher and demand at least a three percent dividend yield and a history of increasing  the dividend every year for at least five years.

                You can sleep well this weekend and during the rest of this tumultuous time in the market if you have confidence in your income producing investments.

                Keep it simple.  Know all four key criteria for every stock you buy.  Know about the issuer of any debt (bonds) you buy.  While this blog does not cover individual real estate ownership, the same criteria apply to those investments; they should all make more money than they pay out; they should be able to increase your income periodically, and the debt to equity should be reasonable.

                It is just not that hard if you are consistent.

Very Truly Yours,

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