New investor wants
to ease into the market

On Investments
By Jeff Kane

I would like to start investing in the stock market. Do you have any conservative ideas I can start with?

Seasoned investors know that there generally are two primary risks to your money: the long-term risk of inflation and the short-term risk of volatility.
Inflation is the risk that your money’s purchasing power will not keep up with the rising cost of living, while volatility is the risk that price fluctuation could result in selling an asset at a lower price than what you paid for it.
To protect investors, like you, who want to establish a relatively low-risk way for conservative income- and growth-oriented investing, and also keep up with the rising cost of living, investing in stocks that compose a diversified stock income plan may be worth considering.
It typically features a pre-selected, regularly reviewed list of stocks with attractive current yields — stocks chosen because of the likelihood of the companies to consistently raise their annual dividends.
This strategy can help reduce the risks to your portfolio in two ways. First, with a package of stocks whose companies have the potential to regularly raise their dividends, conservative, income-oriented equity investors should be better able to fight inflation. Second, when long-term interest rates go up, stock prices frequently fall. Yet steadily increasing dividends may help cushion the fall of stocks in periods of rising interest rates, thus protecting you from increased volatility.
Keep in mind that the return and principal value of an investment in stocks fluctuate with changes in market conditions. Upon redemption, it might be worth more or less than the original investment.
Although it may seem difficult to find companies with the potential to increase dividends with regularity, as only 9 percent of all 6,656 NYSE, Amex and NASDAQ companies increased their dividends each year from 2001 to 2006, it is a primary objective of a diversified stock income plan to find such companies.
For example, since inception of the A.G. Edwards Diversified Stock Income Plan in November 1993, more than 95 percent of the companies on the list have raised their annual dividends. However, past performance does not guarantee future results, and there is no guarantee that the issuers of the stock will continue to declare dividends in the future, or, if declared, that the dividends will remain at current levels or increase over time.
You may be wondering how this list of stocks is established. In general, some good-quality, well-managed companies have the ability to increase dividends as sales, cash flow or earnings grow. To create the list, there are four major criteria that guide the selection: 1) A company must be in solid financial condition, with (2) a secure dividend with an attractive current yield, (3) with prospects for dividend growth over time. Finally, because diversification is important, the aim is to look for companies with the potential to increase dividends in at least six to eight of the 10 sectors into which Standard & Poor’s divides the marketplace.
It is important to note that because the program is designed to provide investors with higher dividends year after year, and because the only way to collect dividends is to own the stocks, this investment strategy is designed with an investment time frame of at least five years. For the long-term investor who does not need current income, it is also recommended that these dividends be re-invested in the portfolio. When dividends are used to purchase more shares of a stock already held by the investor, the number of shares owned by that person increases over time, thereby increasing dividends and enhancing the total-return potential of the portfolio.
If you think a rising dividend investment plan may be right for you, talk to your financial consultant about minimizing the risks and maximizing the return potential of your portfolio. ••
Jeff Kane, CFP, is a financial planner and investment broker with the Horsham office of A.G. Edwards & Sons Inc., member SIPC. Questions may be submitted by calling Mr. Kane at 215-659-2500, ext. 126, or by fax at 215-659-8041. You also can visit his Web page at www.agedwards.com/fc/jeffrey.kane