Investors seldom stop to think that a company may reduce the dividend or stop paying them altogether. It happens. In recent years, the dividend payment has been lowered to almost historical lows with many companies. Investor expectations of what a company owes them, if unfulfilled, feels almost like emotional abandonment. According to John M. Schneider, author of "Private Wealth Investors"if an investor has purchased stock in the expectation of receiving $500 a year in income and one day the company announces that it's cutting the dividend because it needs to retain the cash to build a new headquarters, the investor is not going to be pleased.

His natural reaction is to sell the stock and do something else with the money. When many people do this at the same time, the price of the stock gets clobbered and it may take years to recover. Not only has the stock returned unreliable earnings, it has marked itself as prone to capricious changes in dividends, so investors are unlikely to pay as much for whatever income it provides as they'll pay for income from companies which have never suspended or cut their dividends (and there are companies whose record for increasing dividends extends over a century).

If future earnings cannot sustain the dividend and the company is forced to skip or reduce the payment, the stock will be triply hammered: first in reaction to the earnings themselves, then by disappointing investors who had expected the dividend payment, and finally by establishing a record for unreliable payment of dividends.

How do you calculate dividends received in terms of yield?There are two ways to do this; what many small investors may not realise is that the dividend yield fluctuates with the value of the shares you purchase. Let's take the example of two different company stocks, one currently selling for $40 per share, the other currently in the market at $30 per share. They have one thing in common. Each pays a dividend of 30 cents on a quarterly basis ( $30 x 4 = $1.20) per share on an annual basis. What is the current yield on these two stocks? The $30 stock yields about 4 percent, while the $40 dollar stock only yields three percent. That's a big difference.

You can look at yield another way. Suppose you wish to set a limit on the price you will pay for the stock, but you really have a required rate of return of 4.5 percent. You know that this particular company pays a dividend of $1 per year on a quarterly basis. Divide the dividend by the required rate of return, and there you have it, you should not pay any more than $22.22 a share. The higher the price you pay to obtain this stock above that set limit, the lower your real yield will be.After all Bill Gates, who is now officially the richest man in the world, only recently starting paying a small dividend at Microsoft. Mature companies with solid earnings tend to return some profit to shareholders. Tech companies don't, wanting to enjoy the sometimes huge upside increases in share valuation. Prudent companies almost never pay out more than 50-55 percent of a current year profits. A much higher percentage is a warning sign to carefully assess that company's financials.

I am asked this loaded question a lot. I don't have the time (on my own) to be an individual stock picker, even though (or since) investment advisory services is a large part of my life. It takes experience and expertise garnered from years and years of analysing a company (down to the number of staplers that a company owns) to generate the same comfort level that a professional CFA analyst possesses. In spite of the advances in technology, analytical tools to measure company financials and performance are best used and accessible to the experts. I prefer to get my information from research analysts whose day job is only to analyse securities, and even they and experienced portfolio managers worry when markets are volatile.

Owning enough securities in a basket (both stocks, bonds, and alternative class) to be truly diversified means having at least a bare minimum of 60-70 stock positions. Yes, I know, many say it can be done with less, but even the folks at Janus Twenty ( 20 stock positions) fell on hard times when their fund crashed. It is very expensive to purchase 60 positions, both in dollars and time spent tracking the volatility.

Currently in Bermuda, consider that many folks owned two stock positions in their portfolio that may be prone to concentration and currency risk. When thinking of replacing that dividend income stream, would you invest half of your savings in one stock, such as GE, or Ford, or IBM? Most folks would say, no, that's not a good idea.

Even if you as an individual investor decide to hold only a few stocks or bonds, are you planning on putting an investment policy in place for yourself that includes rebalancing and maintaining your diversification. Most investors cannot; they fall in love with some stock and as it does well buy more ? instead of selling off the profits. Or they resist selling the losers, holding on hoping the market value will come back. So they get hammered on both sides of market swings.

In spite of what everyone claims at parties, meetings and so on, individual investing is not easy. It can be very risky and leave you very, very vulnerable to the next market correction. Remember, when you hear about how well other investors have done, people often exclude those little (or big) losses.

@EDITRULE:

Martha Harris Myron CPA CFP is a Bermudian, a Certified Financial Planner?(US license) practitioner, VP, Financial Planning at Bank of Bermuda. She holds a NASD Series 7 license, and formerly owned a US financial services practice meeting the needs of 400 individual and corporate clients. Confidential Email can be directed to marthamyronnorthrock.bm