Over the last year almost everyone has had their investment portfolio ravaged by market declines. Stocks have lost almost 50% of their value in developed countries, even more in some emerging markets and if you listen to some stock market prognosticators you could believe that the worst is yet to come.

One could be tempted to pull their money out of the stock market and hide it under a mattress. This is a perfectly reasonable response if you’re simply following your emotions. I consider myself an “aggressive growth” investor – willing to take risks in the pursuit of more robust long term returns – but watching my portfolio deteriorate by almost 50% has surely tested my resolve. I know, intellectually, based on history and research, that the absolute worst thing to do is get out of the market now.

Dividend Paying Stocks Are Once Again Hot

I don’t mean their share prices are doing well – they’re in the tank along with everyone else. Good, solid companies are paying out dividends of 4%, 5% – even as high as 7%. Meaning that there is now a unique opportunity to get paid while you wait for the stock market recovery. It seems like this is the best of both worlds – what’s the catch?

It’s important to realize that just because a stock is a large blue chip company it doesn’t mean they can’t go bankrupt and take the value of your investment down to zero with it. The Detroit auto makers (who have hefty dividends right now) should serve as a good real world example. They aren’t bankrupt, but only for the grace of the US Government.

A divident is not guaranteed – many large company’s recently cut their dividends. The juicy 5% dividend could end up being a paltry 2% within a few months. In particular be weary of companies paying out a large percentage of their earnings in dividends – they’re more likely to cut the dividend as sales slow.

You’ve heard it said that if something is too good to be true, it is. This applies to dividends as well. If you find companies with large dividends – 12%, 15% or even higher, be extra careful before investing in them. Very high dividend payouts are usually the result of a recent stock slide (as we’ve just had), and aren’t usually sustainable.

Finding a few good companies with solid dividends is a great way to create passive investment income!