I have recently introduced a friend of mine from work to the world of dividend based investing, and by the sound of it, he is pretty excited about the idea of living off of a constant stream of passive income. I accomplished this 'conversion' by first lending him the book, "Stop Working: Here's how you can!" by Derek Foster, and then I pointed him towards some of my articles on dividend based investing and how to find dividend stocks. Now that he is hooked, he's coming to work with lots of questions which I am more then happy to answer, because not only does this keep me thinking about dividends, sometimes I also get a question that reminds me of a fundamental concept, or one that requires me to find out myself.

In this case I tried to explain to him, why it is important to wait for a stock price to drop a little before jumping in. To which he replied, If your looking at the long term, the current price doesn't really matter as long as the dividends keep rising. And he was right, *sort of*, it is true that if you are looking for a long term dividend based strategy, you should not really care about the price movements of the stock, because as long as they keep pumping out the dividends (and increasing them) you are laughing all the way to the bank. But before you go jumping in, I want you to consider a couple things. First off, and most importantly, I want you to consider the dividend yield. The best way to say this is to use an example, so lets take a look at Stock XYZ, which is currently trading for $10, and gives a $0.40 / year dividend which translates into a 4% yield If you were to buy the stock right now. Lets say the stock prices normal fluctuations bring up or down a few dollars every couple of weeks. Two weeks ago, this stock was trading for $11/share, which means if you bought it then, you'd be making a 3.6% yield, obviously with this knowledge, you're pretty glad you waited until today to buy the stock.. but lets say the current downtrend continues and in two weeks from now, the stock will be trading for $9/share, which means it would be giving a 4.4% yield. This means, by holding off for one month, you are now making an extra 0.8% yeild. Some might say 0.8% isn't much, and its not worth waiting that extra time. But stop and think about it, with $1000 invested, that 0.8% is an extra $8 / year. or with $10000 invested, thats an extra $80/year you could be making just for waitng for the price to come down a bit! Assuming the latter, that $80 is enough to buy an extra 8 shares (at $10/share) which means, if you reinvest your dividends the following year, you'd be making $money off of your original investment PLUS all those *free* shares you bought with the previous years dividends. Year after year, you're slowly going to get more and more money just because you bought the stock at a low point.

The last example was working off of a stocks normal ups and downs, now imagine how much extra money you can make if you were to buy a stock after a bit of bad news about hte company has come out and the price plummets. In a lot of cases, nothing has fundamentally changed for the company, they've just seen a bit of bad press. As long as you've done your homework and konw that the company is still fundamentally strong, and that its dividends aren't in jeapordy. Then you can really cash in on some extra yield, and you'll be benefiting from that for as long as you hold onto the stocks.

But, how do you konw If the stock price is at a high point, middle point, or the optimal low point? well, to answer this you have to start looking at my other favorite part of investing,Technical Analysis. In its simplist form, technical analysis lets you look at a stocks past price movements, so that you can get an idea of what direction it is going to go in the future. I am not going to get into how technical analysis works here, that is way to big of subject, but I highly recommend you check out my Introduction to technical analysis, as well as my articles on specific indicators, like the Stochasitc Oscillator, RSI and MACD.

Either way, I believe that if you follow a dividend based approach you will be ahead in the long run, but I do hope that this article has instilled a little bit of patience in you when you have found that perfect dividend stock. Please share your comments and experiences below!

Bullish Dividends

Disclaimer: Any information contained in the above article represents my opinions only, and should not be construed as personalized investment advice. I cannot assess, verify or guarantee the suitability of any particular investment to any particular situation and the reader of the article bears complete responsibility for its own investment research and should seek the advice of a qualified investment professional that provides individualized advice prior to making any investment decisions. All opinions expressed and information and data provided therein are subject to change without notice.