Have You Considered Dividend-Paying Stocks Lately?
Whether you are saving for retirement or are already retired, you might consider adding some dividend-paying stocks to your equity portfolio. They offer a way to achieve returns on a regular basis while protecting you from economic instability. They also are continuing to receive favorable tax treatments, due to the extension of the Bush-era tax cuts.
Consider these pluses for dividend paying stocks:
Companies that issue and raise their dividends consistently represent stability and sound financial health. You are generally able to count on their returns. If you are looking for steady returns, add these companies’ stocks to your portfolio.
Diversification: While other, more volatile stocks in your portfolio may plummet due to market conditions, stocks that consistently provide dividends over time provide the buffer to mitigate losses. Also, these dividend paying stocks typically do better than bonds in a negative bond market.
Dividend reinvestment: Instead of taking cash for a dividend, you can opt to reinvest the dividends and receive additional shares of stock. The longer you continue to reinvest the dividends the greater the spread between price return and total return. When measuring performance, total return is the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions. Selecting companies with strong balance sheets, rising cash flows, and strategic advantages to reinvest in can provide major long term benefits. Reinvestment is easy and automatic. Consider too that If you own a stock that is consistently raising its dividend, your dividends per share will be growing in addition to your number of shares growing.
Selecting dividend paying companies
While the most straightforward way to include dividend income in your portfolio is to buy stocks with high dividend yields and/or mutual funds that buy dividend paying stocks, you should also focus on a company’s expected dividend growth. Companies in certain industries, such as tobacco companies, utilities and REITS generally pay substantial dividends and exemplify growth. Select companies with a worldwide market presence, which generally can also provide a hedge against inflation.
Avoid stocks with very high yields, though, as this could signal significant risk. For examples of top dividend paying companies, check out the exclusive S&P Dividend Aristocrats Index. These companies have raised their dividends annually for at least the past 25 consecutive years.
Keep in mind that past dividends are not a guarantee that dividends will be offered in the future. Reviewing historical data on the companies that issue dividends can provide valuable information. For example, if a company made dividend cuts in the past, it likely will sometime in the future. In general, look for companies with steadily increasing dividends. It is important to compare the earnings-per-share and the dividends-per-share of any potential investment.
The minuses to dividend paying stocks
- In general, dividend-paying companies see less price appreciation than growth stocks.
- Share prices can drop whether the stock pays dividends or not.
- Companies can slash or eliminate their dividend payments at any time for any reason.
- Tax rates on dividends can rise, making dividend stocks less attractiveÑboth for the company to pay and for you to receive. While the American Taxpayer Relief Act this year extended the related tax cuts, which are capped at a maximum of 15% on qualifying dividends for most taxpayers, this could change in the future. Additionally, the rate is 20% for those who earn over $450,000.
With the markets continuing their volatile ways, giving these investments consideration is a wise idea. If you are new to dividend paying stocks or would like additional information on how these investments can enhance your specific portfolio, contact your financial advisor.
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Provided by courtesy of Herb White, MBA, CFP®, a CERTIFIED FINANCIAL PLANNER™ with Life Certain Wealth Strategies, 8400 E Prentice Ave, #715 Greenwood Village, Colorado, www.lifecertain.com, (303) 793-3999. Securities and investment advisory services offered through Woodbury Financial Services, Inc. Member FINRA, SIPC and Registered Investment Advisor. Life Certain Wealth Strategies and Woodbury Financial Services are not affiliated entities.