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The Motley Fool

Ask the Fool

Dividend Details Q: How and why do companies decide to pay dividends? — H.T., Gainesville, Florida

A: If a company’s management expects reliable cash generation in the years to come, it may decide to reward shareholders by paying a cash dividend — and it won’t want to stop doing so, as that would suggest trouble. That dividend will likely be a portion, but not all, of earnings, and will typically be a fixed sum paid each quarter. Healthy and growing companies tend to increase their payouts over time, often once a year.

Aside from paying dividends, companies may also deploy earnings to pay down debt, buy another company, build more factories, hire more workers, buy more advertising and so on. Young or quickly growing companies often don’t pay dividends, but instead reinvest all that money into growth.

To see a list of promising stocks we’ve recommended, many of which pay dividends, check out our Motley Fool Stock Adviser service (at Fool.com/services).

Q: What subjects should I master to become a good investor? — P.L., Charleston, South Carolina

A: Gaining a solid understanding of financial accounting will allow you to make sense of companies’ financial statements and spot red flags such as shrinking profit margins or rising debt.

Books such as “How to Read a Financial Report” by John Tracy and Tage Tracy (Wiley, $23) or “Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports” by Thomas Ittelson (Weiser, $20) can help. Peter Lynch’s “One Up on Wall Street” (Simon & Schuster, $18) and Philip Fisher’s “Common Stocks and Uncommon Profits and Other Writings” (Wiley, $25) cover investing well.

Simply reading broadly — about psychology, science, history, business and more — can also make you a savvier investor.

Fool’s School

Pros and Cons of

Downsizing

Downsizing is a great way to shrink your cost of living, which can help you get by in retirement or free up funds for saving and investing. Think it through carefully, though, before taking any action. You might start by considering how much of your home you really use and need, how easy or hard your home is to maintain, and how high taxes are in your town and state.

There are many benefits to downsizing. For starters, if you move to a less costly home in your area — or further, to a less costly region entirely — you can end up spending much less in mortgage payments, property taxes, home insurance, utilities, maintenance, repairs and so on. All that money saved — and it could be many thousands of dollars per year — might be invested in retirement accounts, strengthening your future financial security. Or it could get you out of debt, if you’ve been carrying a lot of credit-card or student-loan debt.

A new location might offer other benefits, such as better health care, or easier access to ski resorts, fishing streams or golf courses. College towns attract many downsizers with sporting events, arts performances, lectures to attend and courses to take. Moving into a city might let you dispense with a car and access necessities and entertainment on foot or by public transportation.

On the other hand, you might not want to downsize if you need room for friends and family members to visit regularly — or if they need a place to live for a while. You also might not want to move far from your social circle and support network.

A final consideration is the current real estate market. If you do want to sell, waiting for a seller’s market would maximize your gain. Alternatively, you might stay put and rent out some space in your home in order to generate income.

Learn much more about moving, real estate and real estate investing at our sister site, Millionacres.com.

My Smartest

Investment

Less Fun, More

Profitable

My smartest investment has been putting money into an S&P 500 index fund. It has outperformed my other mutual funds and my individual stocks. Warren Buffett is right. (But it’s less fun!) — B.T., online

The Fool responds: If you don’t have the time, interest or skill to study stocks and carefully select which ones to buy, you can instead choose to invest in a low-fee, broad-market index fund such as one based on the S&P 500 (an index of 500 of America’s biggest companies).

That may seem like you’re taking the easy road and settling for slower growth, but you’re not — because, just as your experience suggests, index funds tend to outperform most other mutual funds. Indeed, over the past 15 years (as of the middle of 2019), a whopping 90% of large-cap stock funds underperformed the S&P 500.

Investing in individual stocks can be more exciting: When they’re rising, they will often soar faster than funds do, and it can be fun to cheer on the companies in which you’ve invested. But as you noted, even Warren Buffett has recommended index funds for most investors.

And remember — even if you have most of your long-term dollars in one or more index funds, you can always invest in some individual stocks, too — for fun and perhaps a chance at great gains. Over long periods, it’s hard to beat the stock market.

The Motley Fool Take

Decades of Dividends

If you’re looking for a growing, dividend-paying investment, consider shares of PepsiCo (Nasdaq: PEP) — a beverage and snack giant that can perform well in good and bad economic environments. Its offerings are available in more than 200 countries and territories, and its brands include big names such as Pepsi, Lays, Mountain Dew, Doritos, Gatorade, Tropicana, Quaker Oats, Aquafina, Cheetos, Tostitos and Fritos, along with SodaStream, Near East, Naked, Smartfood, Life and Sabra. A whopping 22 of its brands generate more than $1 billion in sales each year.