1. An investor’s choice of asset allocation is the single largest factor that will influence the probability of long-term success. Historical evidence suggests that cash investments return the least amount over the long run.
2. There is significant upside potential in equities for long-term investors right now. Stock valuations are well below their highs and have a long way to go to be back in line with what we consider to be fair value.
3. Sustained low interest rates and dramatic increases in money supply combined with increased deficits have many fearful of the inflationary impact once a true economic recovery takes hold.
   Money market investments, non-market linked CD’s and high interest savings accounts offer little protection against the wealth eroding effect of inflation.

That is not to say that there is no downside.  In fact, there is an inherent risk when investing in equities and there may, in fact, be another leg down.

However, I believe the risk vs. reward payoff  favors the astute dividend growth stock investor at this time.

Collateral

Collateral is used to describe an object of high value that is used to guarantee the repayment of a loan. If repayments are late, or the agreement is defaulted, the collateral is taken in place of the repayment. Amongst the most common types of collateral are people’s houses in regards to their mortgage payments, or their cars if ‘part-ownership’ deals have been made. Therefore, mortgages are amongst the most common loans with collateral. For some of the top rates on mortgages, take a look at NatWest.

Secured and Unsecured Loans

A secured loan is one that has collateral back it up in the event of default, they usually have lower interest rates due to the fact that if payment isn’t made the lender has the ability to take ownership of the collateral and sell this to make up the money that they are still owed.

Accordingly unsecured loans are Loans that don’t have collateral. Instead they charge much higher interest rates so that if the repayment is unable to be made, the lender will already have received back much of his original capital and therefore make the smallest loss. Alliance and Leicester is provides some of the best rates on loans available from the reputable high street banks. Also, take a look at ASDA Finances for low rates on both secured loans and unsecured loans.

Equity

Equity refers to the monetary value of a property or business after the amount that is still owed on the loan originally used to purchase it is taken off. Most commonly that loan is the mortgage on someone’s house, which means the equity is the part of the house that is owned directly and solely by the individual and not the bank, or mortgage lenders. The more money that a person pays towards their mortgage then the more equity that they are considered to have.

Equity, therefore, is linked to collateral in as much as it is the equity that an individual holds on their house that is considered as the collateral in mortgage agreements.

Default

Defaulting is when an individual is unable to fulfill their obligations in regards to a financial agreement. Simply put, if you are unable to meet the payments of a mortgage, or of a loan, then this is considered defaulting. In regards to the current global credit crunch, the problems are simplistically assigned to large numbers of people defaulting on their mortgages in America. This was due to certain financial institutions taking the risk of agreeing mortgage terms with people who would not certainly be able to meet the terms of their mortgages.

These are just a few of the simplest terms that are found when addressing personal finance, particularly in regards to loans, credit cards, bank accounts, and mortgages. It is important to be closely familiar with them when dealing with anything financial, as slight misunderstandings can have incredibly grave consequences.

As we know, investing in dividend paying stocks is more complex than just searching for the highest yield. In fact, we know that high dividend stocks are often priced as such because there is a fundamental problem with the company and the extremely high yield is a signal of significant risk.

In the past we have learned to further investigate dividend yield with a number of factors.

Average Dividend Yield

First off, we like to compare a company’s current dividend yield to the average dividend yield offered by that company over time – 5-10 years is sufficient. The methodology here is to determine where the company is priced in terms of dividend yield based on where the market typically prices the company.

If the current yield is significantly higher than the average yield for that company over time, then it may be a buying opportunity. However, if the yield is extremely higher than the average, it may also be a signal of additional risk – something significant has changed and needs to be investigated.

Dividend Payout Ratio

Secondly, we must determine if the dividend payout ratio is within the normal range for the company. For example, if a company has an average dividend payout ratio of 40% and the current payout ratio is 80% then we must investigate the reasons for the change.

Most dividend paying companies companies have a policy that attempts to maintain a certain percentage of profits that will be paid out as dividends. If the dividend payout ratio moves significantly higher than the stated range, investors may be looking for a dividend cut!

With high dividend stocks, it isn’t uncommon to see dividend payout ratios greater than 100%. Obviously, it doesn’t take a genius to determine that paying out more in dividends than is earned in profits is unsustainable. This is why the examination of the current dividend payout ratio in relationship to the average for the company is a useful exercise.

Examples

To further illustrate the previous points about high dividend stocks and looking beyond the yield, let’s view a couple of examples.

Below is data gathered from Reuters on Proctor & Gamble and Yellow Media Inc.

As we can see, both Yellow Media and Proctor & Gamble offer dividend yields greater than their own 5-year average yields. Both give higher yields than the industry average, and both offer a better 5-year average yield than the S&P 500.

However, on one hand, we have Proctor and Gamble that is currently paying out 48% of profits in dividends, while Yellow Media is paying out, an unsustainable, 1o1.84%.

Perhaps even more importantly is how the payout ratio relates to the dividend growth rate.  If the payout ratio is high, that leaves little (or no) room for reinvestment in the business. If there is no reinvestment into the business, the potential for growth is limited.

As the data indicates, the dividend growth rate over the past five years for PG has averaged 11.81% , while Yellow Media’s dividend has remained essentially flat. If an investor has a long time horizon, the growth of the dividend may be more important than the initial yield.

Of course, there is more to evaluate than average yield and payout ratio when screening for dividend stocks,  but these are two excellent metrics to evaluate when screening for high dividend yields that are sustainable.

What are Life Leases?

In basic terms, a life lease is a form of prepaid rental housing.  The owner of a life lease purchases the right to occupy a unit and use the common facilities for as long as the lease remains in place. The length of the lease term could be for life or for a fixed number of years. Depending on the contract structure and jurisdiction, as we will learn later in the article, a life lease is a legal agreement that usually lies somewhere between renting and owning a residential premises.

Depending on the legislative environment, the occupant of a life lease unit may be referred to as the purchaser, lessee or tenant.  The developer or owner of the life lease units may be referred to as the sponsor, lessor or landlord. A life lease is not equivalent to the ownership of a condominium or strata unit even if the life lease project has been registered with a condominium or strata plan.

Typically, life lease projects are targeted at those over 55 and may also be targeted at specific ethnic or religious groups.

A life lease may, depending on the terms of the lease (see below) be sold, either to a third party or to the lessor. Construction of new life lease projects may be undertaken by for-profit or not-for-profit entities.  Where a for-profit entity develops a life lease project, ownership of the project is generally transferred to a not-for profit entity after completion.

Few jurisdictions have legislation covering life lease projects.  In most jurisdictions, the life lease is simply a contractual arrangement between the lessor (generally a not for profit entity) and the lessee.

Advantages of Life Leases

• Most commonly provides accommodation for seniors in a community of seniors.  Amenities are generally geared to this target market.
• May allow lessees to obtain “ownership” of a property at below market levels.  This can occur because land may be donated or sold to the sponsor at below market rates or the sponsor may not earn the usual developer’s profit on the project.  New construction may not always provide this opportunity as sponsors are often inexperienced and profits given up by a not for profit developer may be partially or wholly offset by increased consultant costs.
• Can allow individuals on fixed incomes to tailor level of rents to their incomes.
• Generally not subject to the will of a condominium or strata council.
• Life leases may avoid land transfer tax in some jurisdictions where this applies.
• Redemptions by, or sales back to, the lessor (which may have a waiting list) may reduce market risk.

Disadvantages of Life Leases

• Units may not be freely marketable (e.g. lease may require units to be sold back to the lessor at predetermined prices).
• Lease transfer restrictions (such as a requirement for new lessees to be “approved”) may depress resale prices.
• Title is held by the lessor and registration of a lease on title may or may not be possible (in jurisdictions with land transfer tax, lease registration generally triggers tax payment).
• New construction is generally not covered by the usual new home warranty program.  As such, deposits are often used to fund development costs and are uninsured (i.e. the lessee risks losing the deposit if the development is unsuccessful).
• Lessee does not have input into operations through a condominium or strata council.
• Lessee generally does not have registered title to his/her unit.
• It may be difficult to obtain residential mortgage financing of a life lease unit.
• Lessor may not have liquid assets to fund redemptions.
• Lessees who wish to vacate may need to find their own substitute tenant.

The Life Lease Ownership Process

• Applicable terms and conditions of life leases vary widely but the general features are similar.  Life leases should not be confused with ownership of a dwelling unit on leased land.
• The lessee of a life lease unit pays a sum of money to the lessor.  The amount of money paid may be the full cost of the unit leased or it may be a lesser amount.  If the lessee pays the full cost of the unit, then (subject to the terms of the lease), the lessee will generally only pay a monthly maintenance fee (roughly equivalent to condominium or strata fees).  If the amount paid by the lessee is less than the full cost of the unit, the lessee will also pay a prorated rent (e.g. if the cost of a unit is $200,000 and the lessee pays $100,000 up front, his/her rental payment will be approximately equivalent to a payment on a $100,000 mortgage plus the monthly maintenance fee)
• Most not for profit lessors of new life lease projects expect full payment in order to cover construction costs.
• The lessee does not generally obtain title to the unit.  Some leases do not permit the registration of the lease but, where this is permitted, registration of the lease generally triggers the payment of land transfer tax.

Types of Life Leases

• Zero balance lease/life estate: the purchaser pays in advance for the right to occupy a unit for the duration of his/her lifetime.  No redemption value exists (i.e. the lessee or the lessee’s estate cannot sell the leasehold interest).
• Declining balance redemption value: the redemption value of the unit is fixed and reduces on a pro-rata basis over a fixed term until a redemption value of Zero Dollars is reached.  Generally, if the lessee moves or dies while there is a redemption value, the unit is returned to the lessor and the lessee (or estate) has a claim for the redemption value.
• Fixed value: the redemption value is constant for the life of the lease.
• Indexed redemption value: the redemption value is based on an initial fixed value with periodic indexing to an inflation-sensitive index.
• Future value:  probably the most common type of life lease.  The lease may be sold at market value with the lessor usually taking an administration fee to facilitate transfer of the unit.  The tenant may bear the market risk if the value of the life lease unit has fallen.

Who Develops Life Lease Properties?

• Life lease project sponsors are often religious or charitable foundations.  While these may have been successful in raising the initial funds for the project, they may have limited development experience and they may lack the ability to fund cost overruns.
• A full review of the history, resources and capacity of the developer should be undertaken by the buyer.
• Life lease projects are often targeted at the constituencies of the charitable or religious foundation developers.  It is essential, therefore, to ensure that the life lease agreements are non-discriminatory.

As we can see, the concept of the life lease is very complex. Because each development may have a different set of lease parameters, and many jurisdictions have no legislation governing the parameters of life lease developments, it is essential to get an informed legal opinion on the specific development to type of life lease contract that you are considering.

Dividend growth investing is an excellent strategy that you can use to maximize your cash income generated from your equity investments. In fact, if you can put in place a smart and consistent dividend growth strategy, you can replace the income from your regular job. Or, if you are in debt, you can utilize the dividend proceeds to become debt free.

However, to design a successful dividend growth investing strategy, you must have good knowledge of the dividend growth companies on the market. To find dividend growth stocks, you can check out the historical dividend performance of various companies on the Dividend Achievers and Dividend Aristocrats lists.

Of course, past good performance does not ensure robust future performance. Rather, you have to select stocks which are fundamentally strong and which are undervalued at the current time to frame out a successful dividend investing strategy. Here are few tips so that you can find out successful dividend investing strategy.

Dividends are not rights but privileges

It is to be kept in mind that dividends are not guaranteed, rather they are more like privileges enjoyed by the shareholders. It depends entirely upon the discretion of the board of directors of a company to issue dividends to the shareholders, given the condition that the company has scripted a solid financial performance. Paying dividends to the shareholders shows the financial strength of a company and it also attracts income-minded investors to the company’s fold. Again, when a company cuts back the dividend amount, it shows that the company is not doing well.

Be skeptical about very high dividend yields

Do not expect to earn huge money with super-yield dividends. In fact as a general rule, any dividend yield which is over two and a half times the broader market, should be viewed skeptically. It has been seen time and again that many stocks fared exceedingly well and fetched super returns and dividends to the shareholders during the bull phase but plummeted appreciably during the bear phase, offering no dividends at all to the shareholders. This has been the case with many real estate investment trust (REITs), with their stock prices receiving a serious drubbing during the bear phase.

Analyze the cash flow statement

To find a high-dividend stock, it is important to analyze the cash-flow statement of a company. Check whether the company has the required cash to pay out the dividends or it is resorting to debt or selling stock to finance the dividend payment. If the company is selling stocks or resorting to debt to pay out the dividends to the shareholders, it can’t be a sustainable.

Follow the above mentioned tips to find out successful dividend investing strategy and to earn a lot of money.

This guest post is written by I Davis. She is the Community Member of http://www.creditmagic.org/ and has been contributing her suggestions to the Community. She is quite knowledgeable of various financial matters like tracking down identity theft, money investment tips, credit card debt, credit card fraud and has a unique approach to analyze them. Check out her articles on various financial topics with special emphasis on ‘Credit’ related issues.