With the collapse of the banking system and unsurety of a lot of investments, many people are rightfully concerned about where to put their money; not only to increase it, but to even hold on to it.

Although we usually talk about what is considered very safe investments at Savings Toolbox, there is one investment that has been largely ignored for a long time because it’s somewhat boring and unexciting to talk about or invest in, and that is the incredible safety and value in targeting companies that pay out dividends.

With safety being one of the major concern at Savings Toolbox, we’ll focus on how you can invest in a company that almost ensures a good return for years into the future, no matter what the current economic conditions are, and whether the stock price goes up or down.

The secret in this is to find companies that have a record over a period of time of raising their dividends year after year. That means that they are in a great competitive position and as Warren Buffett would say, have a moat around them protecting their business from competitive pressures.

For example, take Wal-Mart (NYSE: WMT). Every year since they became a public company, they’ve increased their dividend year after year. So whether their stock price went up or down or not didn’t matter, you still build wealth through the dividends always kicking in. Any company that has a proven record of increasing their dividends every year means they have a competitive advantage over the market of markets they serve, and even if you don’t understand their overall business, that in itself will be one of the key metrics to use in determining how strong of a company they are.

The second part of the power of investing in a company for their dividends is to be sure to reinvest those dividends back into the company. That will build up uninterruptedly for years into the future, and ensure a safe and sound return until the day you want to tap it for retirement.

Why can this happen? When a company starts to mature while dominating their market, the need for capital to market and expand the business at a strong pace recedes, and so capital expenditures decrease, making the company strong in cash, which is the key to ongoing dividends.

So our job is to find companies like a Wal-Mart and others that have been around even longer, and find out the history of their dividend payments. When you do, you understand that they have prospered during good times and bad, and so can be counted on to build your wealth with a long term horizon in mind, and do it safely. Don’t underestimate of be afraid of investing in these companies, just to invest in companies that don’t have that type of proven dividend-increasing track record.

Tags: Dividends, retirement, saving money, saving strategies

This entry was posted on Tuesday, September 15th, 2009 at 11:43 am and is filed under tips. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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