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I'm still learning to invest my money correctly and I found my investing strategy and my goal, but I think there's a flaw in my thinking and I wanted you to give me some advice or point me on one direction to read more before I invest some of my money.

So I want to invest for the long term (5-10 years min) into dividend paying stocks for income. I'm not investing anything because I'm still learning (at least for the 2 next years).

I've found my strategy for investing which is:

  • 3-4.75% min yield
  • 10% growth
  • 30-60% payout ratio
  • A 10 year history of dividend payout
  • 5-10% net income growth annually
  • stable or growing operating cash-flow
  • low debt
  • ROE > 12%

I know this is not perfect but a good start (but any critique is welcome), and for me a company has to fit at least 5 of these 7 criteria before I consider investing. But my investing goal has a flaw, if the company stock price goes up, I can have greater value with my dividend income, but if the share price goes down, I can lose my money, which is not good. What kind of strategy would you advise me to use in case this happens?

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An alternative options strategy to minimize loss of investment capital is to buy a put, near the money around your original buy price, with a premium less than the total dividend. The value of the put will increase if the stock price falls quickly.

Likely, a large portion of your dividend will go towards paying the option premium, this will however ensure that your capital doesn't drop much lower than your buy price. Continued dividend distributions will continue to pay to buy future put options. Risks here are if the stock does not have a very large up or down movement from your original buy price causing most of the dividend to be spent on insuring your position.

It may take a few cycles, but once the stock has appreciated in value say 10% above buying price, you can consider either skipping the put insurance so you can pocket the dividend, or you can bu ythe put with a higher strike price for additional insurance against a loss of gains. Again, this sacrifices much of the dividend in favor of price loss, and still is open to a risk of neutral price movement over time.

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Your question reminds me of a Will Rogers quote:

buy some good stock, and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.

There's no way to prevent yourself from buying a stock that goes down. In fact all stocks go down at some times. The way to protect your long term investment is to diversify, which increases the chances that you have more stocks that go up than go down. So many advisors will encourage index funds, which have a low cost (which eats away at returns) and low rick (because of diversification). If you want to experiment with your criteria that's great, and I wish you luck, but

Note that historically, very few managed funds (meaning funds that actively buy and sell stocks based on some set of criteria) outperform the market over long periods. So don't be afraid of some of your stocks losing - if you diversify enough, then statistically you should have more winners than losers.

It's like playing blackjack. The goal is not to win every hand. The goal is to have more winning hands than losing hands.

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If by saying you wish to invest "for the long term 5-10 years" I take it you mean to hold a stock for between 5-10 years. If this is the case, this is the fundamental flaw in your screening algorithm. No company stock price continues to go up without end for 5-10 years. The price of every company's stock goes down at some point. You have to decide on a company by company basis whether you want to ride out the downturn or sell and get out. This is a personal decision based on your own research.

The list of screening criteria you list indicates you are looking for solid earnings companies. Try not to apply these rules rigidly because every company runs through a rough patch. At times past, GE (for example) met all of your criteria. However, in 2017, it would not and therefore would not meet your screening criteria. Would you sell GE if you owned it? Maybe, or maybe you would hold through the downturn. The same be said for MSFT in 2010 or AAPL pre-Jobs return.

A rule you may want to add to your list: know the company business well; that is, don't invest in companies you have no understanding of their business model.

  • Thank you for your input rocketman. Yesterday i tried a free stock screener and i noted that my screening critrrieas are too rigid. So i changed it. I think it's better to think the criterias in terms of range instead of fixed values, instead of searching for companies with only 10% growth min it's better to search for companies with a growth between 7-10% for example. Which is much better, and gives me better results. – Laz22434 Nov 2 '17 at 16:23
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A specific strategy to make money on a potentially moderately decreasing stock price on a dividend paying stock is to write covered calls. There is a category on Money.SE about covered call writing, but in summary, a covered call is a contract to sell the shares at a set price within a defined time range; you gain a premium (called the time value) which, when I've done it, can be up to an additional 1%-3% return on the position. With this strategy you're collecting dividends and come out with the best return if the stock price stays in the middle: if the price does not shoot up high enough that your option is called, you still own the stock and made extra return; if the price drops moderately, you may still be positive.

  • Thank you user662852, that's what i was looking for. I will look up the links. I think with that i will be more at ease! – Laz22434 Nov 2 '17 at 16:27

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