It’s probably no surprise that in the last year I’ve been buying some blue chip companies with a solid history of dividends. Dividend investing is one of those long term investing strategies that has, for the most part, fallen out of favor after the fantastic dot-com craze, crash, and subsequent bull market that saw the Dow at 14,000 before it crashed to the mid-6000s in the depths of the economic panic. Throughout that time the Dividend Aristocrats, stocks that have paid and raised their dividend in 25 consecutive years, and the Dividend Champions, stocks that have paid a constant or rising dividend for 50 years, have maintained their dividend like clockwork.

Through dividend increases, many a billionaire’s fortune have been built (Warren Buffet’s annual dividend from his shares of Washington Post and Coca Cola exceed his investment).

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If you’ve been interested in dividend investing and unsure where to begin, I recommend reading The Little Book of Big Dividends by Charles B. Carlson. I’ve had a healthy interest in the subject for the last six months, ever since the credit crisis offered a great opportunity to start picking up fantastic companies on the cheap, and this book covers just about every major topic in dividend investing.

One of the most important lessons in the book was the importance of establishing your investing goals. All too often we do things without really considering our goals and that’s dangerous in dividend investing. When it comes to dividend investing, there are two camps of investors – those looking for income today, such as retirees, and those looking for longer term returns, like myself.

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I’ve been investing in a few dividend stocks lately because savings account rates have been pretty abysmal. The prospect of earning a percent or two on my money is great for an emergency fund but lousy for anything long term.

One of the important ideas behind dividend investing is that you should reinvest the dividends if you don’t need the income. Public companies offered dividend reinvestment plans, or DRIPs, that let you buy shares directly from them and have your dividends reinvested for free. Nowadays, many brokers offer this service for free and I take advantage of them.

However, just because everyone says it’s a good idea doesn’t make it a good idea. Why should I reinvest my dividends?

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If you take the 120 minus your age investment allocation rule to towards retirement, the conclusion is that your investments should mostly be in safe “bond” investments and out of risky “stock” investments. Since you no longer have the time to wait out the volatile swings of the stock market, you are advised to be invested in “fixed income” investments, like bonds.

Unfortunately, even with all the strategies below, nothing replaces the dependability and safety of a high yield savings account. The days of exceptionally high yields protected by FDIC insurance are gone until we see the stock market reach its once lofty heights but hopefully some of these strategies can bridge the interest rate gap without introducing too much risk.

Fixed income investments are usually safe investments that give you a fixed rate of return. The safe part is really a relative term, as bonds are only as safe as the ability for the bond issuer to pay the fixed interest rate. The idea is that you pick stable companies or municipalities and you have a reasonable expectation that the interest will be paid. How do we use those principles to find similar “investments” to boost our savings rate?

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If being a Dividend Aristocrat wasn’t enough, I recently stumbled upon the idea of a Dividend Champion. The Dividend Champions list was an idea created by George Smyth and published monthly on his DRiP Investing Resource Center site. Whereas the Dividend Aristocrat is a company that increases their dividend payout each year for 25 consecutive years, the requirements to be a Dividend Champion are less stringent. They have to at least maintain the dividend (they can increase it) over that same period.

What makes the Dividend Champions list so valuable is in the wealth of information the list provides. Not only does it include almost everything you could possible want to know about the Champions and their payouts, but it includes soon-to-be champions/aristocrats (20-24 year streaks) and the extent to which a company is a champion. For example, did you know that eleven companies have been on Champions for over 50 years?
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The S&P Dividend Aristocrats are companies in the S&P500 index that have increased their dividends every year for at least 25 consecutive years. Companies on the list have been increasing their dividends since 1984 – meaning they’ve increased it through the economic malaise of the early 90′s, the dot com bubble of the early 2000s, and the worst recession since the Great Depression!

Before you go out and snatch up a few shares of some of these companies, remember that there is only one reason why they are on this list – they have increased their dividends each year for twenty five years. It doesn’t mean they are good companies, it doesn’t mean they will continue to increase dividends (ten companies dropped from the list in 2009), and it doesn’t mean they make good investments. Remember to do your own homework and that past returns are not indicative of future performance.

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I was poking around on the internet the other day when I saw one of those morbid life insurance policy ads. You’ve probably seen them before too. They usually have someone kneeling at a grave or a kid wearing all black at a funeral. They ask you the pointed question of – “If you died today, who would take care of your family?” I suspect they’re trying to tap into your fear of the unknown, how your kids won’t be able to fend for themselves or how your husband or wife is going to be lost without your financial support.

First of all, my lovely wife is quite capable and she can take care of herself. I bet she’d miss my sparkling personality but after a while she’d probably be OK with it.

Second, our dog Tobey is the fiercest beagle in all the land. He’d do fine finding his own rawhide cow ears and kibble. Just the other day we left some food on the table and he managed to to jury-rig a Rube Goldberg-contraption just to get at it.

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Two days ago I wrote a post about how to set a New Year’s Resolution you can keep and today I want to know what your resolution for 2010 is going to be!

Mine? I plan on taking half of our emergency fund and committing it to the stock market in individual company holdings. I’ve long been an advocate of index funds, all of our retirement savings are in index funds, and only recently have I been dabbling in buying stock in companies that offer dividends. Our emergency fund has twelve months of expenses, a conservative amount because I am self-employed and my wife is a lightly compensated graduate student.

We will invest half of the fund over the next six months in individual stocks and then replenish the emergency fund with income as the months pass. Part of the process will be learning more about the investing and the stock market in general, so this won’t be a random selection of stocks “we think will do great,” but a more analytical approach. The idea is to learn more about investing in the stock market, perhaps learning it’s just not for me, and the means to measure success will be in committing to investments and feeling good about it.

It follows the whole SMART mantra and I am confident this is a resolution we’ll be able to keep.

What’s your New Year’s Resolution? If you need some ideas, Bankrate has a list of New Year’s resolutions that will save you money (and years on your life!).

And Happy New Year!