Dividend stocks have been on a tear over the past three years, sending many investors running to the category.
So the question arises: how should an individual choose dividend stocks or mutual funds/exchange-traded funds?
One issue is dividend size. Stay away from companies with very large dividends, Cincinnati financial adviser Dave Foster tells The Wall Street Journal.
"Our portfolio doesn't have a 4.5 percent yield," which would be more than double the Standard & Poor's 500 Index’ current yield of about 2 percent, he says.
Instead, Foster looks for a yield slightly higher than the S&P 500 without taking much more risk.
Investors should seek with yields of 3-6 percent, Morningstar strategist Josh Peters tells Bankrate.com. Stocks yielding less than that aren’t giving you adequate reward for your risk, he says. And stocks that yield above 6 percent may well face a dividend cut.
Experts advise opting for companies that regularly increase their dividends, as that is a sign that the companies are healthy and in the business of rewarding their shareholders.
Foster stresses the importance of diversifying your holdings among different industries. In 2008, financial services companies dominated the dividend space, and most of them plunged during the 2008-09 market meltdown.
Peters likes companies with businesses that aren’t very cyclical and aren’t weighed down with debt. A payout ratio – dividends to earnings – of 60 to 65 percent is a good rule of thumb for most companies, he says.
Editor's Note:The IRS’ Worst Nightmare — How to Pay Zero Taxes
© 2014 Moneynews. All rights reserved.