The Effect Of Dividends And Interest Rates As Investment Approach

By Adriana Notton

There is a role for dividends and interest rates as investment approach planning. One must decide what level of risk is acceptable in their portfolio. The proportion of your total portfolio that is composed of interest paying notes and dividend paying stock must be based on several factors.

One factor is age. When one is younger they can tolerate higher risk with their investments. They have the time to make up a loses made on speculative investments. More speculative investments may be risky but the winners may be extra profitable. One speculative winner can make up for for many losers. The investor needs the advantage of time, however. The older investor does have this time advantage. The older investor should take less risk.

Stocks in established companies that are profitable and have a history of paying dividends are considered a conservative investment. Dividends have tax advantages as well. A well selected portfolio of dividend paying stocks can provide income. Some dividends can be reinvested in more shares of the company.

When interest rates are low investors tend to put their money in dividend paying stocks. With shares of stock you have the possibility of capital gains on price appreciation. However, if interest rates climb investors will put their money in interest paying debt instruments like certificates of deposits or money market funds.

Certificates of deposit are a safe investment because federal deposit insurance protects your money in case the bank fails. Because certificates of deposit are safe the rate of interest they pay tend to be low. The investor must make a trade off between risk and rate of return. Portfolios must be balanced in terms of acceptable risk. A balanced portfolio ensures study if not spectacular returns.

Investing in government debt instruments is another conservative investment worthy of consideration. Government debt is backed by the full faith and credit of the government. It is least risky investment vehicle there is.

Mutual funds are portfolios that are managed by professionals. Investors may buy shares of the mutual fund. The fund distributes income and capital gains to the share holders. The advantage of a mutual fund is that you benefit from the buying power of the fund. Another advantage is that the fund is managed by professionals. There are many different types of fund. Funds invest in a variety of investment vehicles. There are thousands of mutual funds whose shares are for sale. A money market fund is a fund that invests in short term commercial paper. Commercial paper are short term loans of less than 90 days. Many of loans are as short as just a few hours. You can use a money market fund like a check accounting with a higher rate of return but with slightly more risk because it is not insured.

There are many factors to consider when deciding how to manage your money. Dividends and interest rates as investment approach help focus the investor on finding the best plan. The best approach is to have a balance between conservative interest paying instruments, growth stocks with the possibility of capital gains, income stocks that pay dividends, and good life insurance to protect your family in case of your death.

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Source: isnare.com

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