Investment in dividend stocks can provide a steady income as well the potential for appreciation of stock value. Well known companies such as Proctor and Gamble have continually increased their dividends year after year for decades. There are companies that have never missed a dividend payment for a century! During a recession investors commonly buy consumer goods companies that pay dividends. The argument against dividend stocks is that they are not growth stocks. That is not necessarily true. Over a five or ten year span the best dividend paying stocks typically outperform the S&P 500 by several percent. Of the various different types of stock, dividend stocks demand a share of your stock portfolio.
A dividend is a payment, typically every quarter, from the company to its shareholders. A dividend is part of the company’s profits, after taxes. The company has two things it can do with profits. One is pay dividends and the other is to reinvest to grow the business. A mature and stable company will make money on its business but will not grow at the rate of a startup. It may have a major share of its market and can only increase its share through research and development instead of capturing market share. The company pays dividends to compensate for a lesser growth rate than a newer, faster growing company. Some stocks, such as power companies, have very slow growth rates but will pay very high dividends. Stock investing in companies paying dividends to shareholders is especially attractive for retirees as these stocks provide quarterly cash income.
In picking dividend stocks the investor can look on a stock screen for the highest dividend rates or can look for companies that have continually increased their dividends for the last 3, 5, or 10 years. The ability to pay dividends for years on end is a measure of the company’s financial health whereas a company that is only currently paying a high dividend may be in trouble and essentially trying to bribe investors into buying their stock. It is wise when looking at buying dividend stocks to do fundamental analysis of the company’s financials, its current products, and product development, and its competitors in its market sector. Investors typically buy dividend stocks for the very long term as many of these are very healthy, well managed companies. However, there may also come a time to sell these stocks.
Sometimes it is wise to sell a stock even though its dividend yield has gone up substantially. This would be the case when a stock as lost share price but has maintained most or all of its dividend payments. In this case the investor needs to decide if the company will stage a comeback in share price or if it is time for picking new winners in the stock market. Using a record of long term, increasing dividend payments as a measuring stick of long term financial health and growth it is wise to include a number of dividend stocks in a balanced portfolio.
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