How can I earn large dividends?

Question

Besides real estate, what is the best way to earn dividends on a $20,000 investment if you would like to access it, without penalty, in just 2 to 5 years? Would a CD be the best investment? What are some other options?

I'm a little squeamish about the stock market and I not savvy enough to know where to go to invest.

Answer 1

I think you are really asking about returns, of which dividends are a part. Returns = Dividends + Capital Gains. Capital gains are increases in the value of your investment. Dividends and capital gains are not always good things as they can increase your tax liability, but the investments I recommend later give you options to reduce this added cost.

CDs generally are not good investments because they usually have small returns, and when you factor in inflation your returns could disappear and your CD actually lost value. So much for FDIC insurance, that is, if your financial institution even is a member. CDs also lock up your money, and you would have to pay stiff penalties if you suddenly needed the money.

I would not recommend investing in individual stocks, especially if you are not comfortable with the stock market. Nor would I recommend individual bonds for the same reasons as CDs. Individual stocks and bonds take a lot of time to research, and judging from your question, you probably do not want to spend all your spare time doing extensive research.

I recommend investing in mutual funds from well respected companies that do not charge commissions (loads) and have low annual maintainance fees (0.5% or lower). Good fund companies include Vanguard and Fidelity. Mutual funds are good because a professional investment manager combines your money with all the other investors of a fund, researches stocks and bonds for you, and invests in the best securities for the fund's stated objective. Some funds try to reduce the dividend and capital gains distributions (and your tax liability), so that the growth is reflected in the price (you pay the taxes when you sell the fund shares). Others invest in tax-exempt investments like municipal bonds.

Determining what kind of mutual fund to invest in depends upon your financial need horizon.

If you need all the money in a year, go with a money market fund. These funds invest in very safe bonds and short-term investments and earn about the same return a CD would get you. However, unlike a CD, you have access to the money any time you need it, without penalty. Most money market funds allow you to write checks from them, usually in amounts of $250 or more, so accessibility is not an issue with money market funds, and only a slight (basically non-existant) issue with the other funds I discuss below.

If you need all the money in 2-5 years, invest in a bond fund. These funds generally have higher returns than money market funds, but may fluctuate more day-to-day. Don't worry too much about this because in a couple of years it will most likely average out to a substantial gain. You will receive periodic dividend distributions from the fund and, unless you need them for immediate income (i.e., retirement), have the company reinvest them into more shares of the fund.

If you can wait a little longer (5-10+ years), invest in stock funds including foreign market funds. Stocks are more volitile than bonds and other investments, but in the long term, they have the largest returns on average. The fund spreads your investment across most, if not all, sectors of business. By investing in one mutual fund, you could potentially be investing in 100s and maybe 1000s of different companies. That way, if a few stocks go bad, you will hardly notice the impact on your portfolio. Stock funds usually pay out dividends, as well as capital gains distributions. I recommend reinvesting these as well.
Foreign stock funds tend to be more risky than domestic funds due to possible political instability and currency price changes. But if the domestic economy goes through a recession, other foreign economies, especially developing nations, could likely be going through a huge boom. I recommend investing between 15% and 33% of your stock fund money in foreign stock funds, depending on your risk tolerance.
From your question, it does not sound like you will need all the money you invest in your 2-5 year window, so you should invest in a mixture of stock and bond funds, as well as a money market fund. If you don't think you will need a lot of the money in 2-5 years, invest primarily in stock funds. As a guide, estimate the amount of the money you will need over the next 5 years. Put 25% of that in a money market fund. Put the other 75% in bond funds plus about 20% of the total amount you will invest. The rest should go into stock funds.
Example: You have $20000 to invest.
You will need $5000 for a new car in the next 5 years.
25% X 5000 = $1250 goes into a money market fund.
75% X 5000 + 20% X 20000 = $7750 goes into a bond fund.
20000 - (1250 + 7750) = $11000 goes into stock funds.
If you feel comfortable with 25% in foreign stocks,
11000 X 25% = $2750 in a foreign stock fund.
11000 X 75% = $8250 in a domestic stock fund.
The main thing that determines a fund's returns are fees. Stay away from load-based funds because the commission you pay takes away a good chunk of your investment, often around 5%. This could happen when you buy shares of a fund, when you sell them, and/or throughout the life of the investment (12b-1 fees). All funds have some expenses to pay the fund manager and are factored into the total expense ratio. The best fund companies are the ones that offer no-load funds with low expense ratios (about 0.5% or less). Fidelity offers a wide range of no-load funds (and load funds, too) that have low expense ratios. Vanguard only offers no-load funds and nearly all of their funds have extremely low expense ratios (0.3% and lower).
Both Fidelity and Vanguard offer funds of funds. These funds, as their name suggests, invest in other mutual funds, spreading your money out over even more investments. These funds are usually balanced funds, meaning they invest in both stocks and bonds. Vanguard's LifeStrategy series of funds are four funds offering four different allocations of investments. These funds make investing even more simple. Fidelity offers a series of funds that have a specific year set as a goal (good for retirement investing) and they automatically change the investment allocation as they approach their deadline. So the 2050 fund will have an aggressive portfolio now, mostly stocks, and as time progresses, it will shift more towards bonds.
Whether you go with Vanguard or Fidelity (no-load!), you will be in good hands. Just remember to look at the expense ratios for funds you consider, and avoid loads, especially if you go with a different company than the two I mentioned.
Other things to watch out for are sector funds that only invest in part of the economy, like tech and energy funds. If you do go with these, keep them a small portion of you portfolio. Also, stay away from funds that invest considerable amounts in derivatives like futures and options. Derivatives are highly risky investments that, in the long run, always lose. Most mutual funds, especially Vanguard and Fidelity, might lose money one or two years here and there, but over 5 and 10 year periods they almost always gain value. In fact, I read something the other day that said something about stocks on average have never had a 10-year period in which they lost money as a whole.

If you have any further questions about this subject, please feel free to email me.

Answer 2

Invest in High Yield Dividend paying stocks

Answer 3

Many people have invested in Canadian energy trusts. Many are traded on the New York Stock exchange. Dividends range form 8 to 12 percent. They are also very liquid. Meaning you can sell them anytime you want. These trusts were created so that the Canadians could profit from the energy boom in Canada. But they are also owned by Americans and because dividends in the US have preferencial tax treatment you get a double bonus.......Good luck [e-mail]

Answer 4

It depends on your risk level. A CD interest rate won't be very much. You can get much better in the stock market, but then you will have to deal with market volatility.

But your stock can also go up, so you would get growth + dividends.

Answer 5

Income Trusts, easily get 8-15% dividend yields, most pay regular dividend monthly and you can buy/sell without any penalties.

http://www.nabloid.com/investing/income-trusts/stocks/

To find out more about those companies, go to globeinvestor.ca

Answer 6

You should not invest in stocks unless your time horizon is over 5 years (that includes stock mutual funds & ETF's).

When you invest for over 5 years (5-10 years time horizon) you'd be foolish not to put at least 50% into stock mutual funds.

The answer to your question. FDIC Insured Bank CD's or Savings.
www.GMACBank.com
www.INGDirect.com
www.HSBCDirect.com
www.EverBank.com

Good luck

Answer 7

Invest aggressively in stocks-preferably foreign emerging markets. Stay away from bonds unless your really old. Inflation and bonds don't mix.