Dividend-paying stocks can provide steady income in the form of regular quarterly cash payments. Two ways investors earn a return on a stock investment are capital appreciation and dividend payments. Ideally, you want your stock to appreciate in value, but if it doesn’t, an income-paying stock still provides you with regular income, like a paycheck. (Don’t forget that the initial investment carries the risk of the principal amount declining in value.)
Do dividend-paying companies perform better?
If a company pays a regular dividend, it must get that money from somewhere. Most likely, it’s from steady earnings. A company can choose to pay its earnings to its shareholders or use that money to reinvest in its future growth. Traditionally, companies that pay dividends have strong earnings. Stocks that pay regular dividends may tend to outperform those of non-dividend payers because a company must maintain or grow profits to sustain its dividend.
A company may delay or cancel dividends if its earnings are weak. The more volatile the earnings, the more likely a company is to slash its dividend to preserve profits to pay operating or capital expenses.
What should I do with my dividends?
- You can either use dividend income for current spending (much like your paycheck), or you can reinvest it.
- Dividend reinvestment involves investing your payment into the original stock or fund. Instead of receiving a quarterly cash dividend, the dividend proceeds will be used to buy more shares in the underlying investment. This is a great way of having your money grow.
- When comparing dividend-paying stocks, look at the dividend yield — the percentage of the current share price paid in dividends — and the rate at which it increases (the dividend growth rate). For example, if you own a stock that trades at $50 per share and pays a $1 dividend (25 cents each quarter), your “dividend yield” would be 2%.
Speak with your financial professional to determine if dividend paying stocks have a place in your investment portfolio. For other ideas on how to increase income from your portfolio go to: Profile-Financial.com/steady-income
For more on how dividends may be able to increase your retirement income, click here.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published May 28, 2018. Updated May 2021