Considering Dividend Paying Stocks
The quickly changing market landscape makes it more difficult for investors to figure out what strategies will help grow their portfolio. Just when you think you’ve adjusted for market factors, like low interest rates, something new gets thrown into the mix. Uncertainty and the changing marketplace is one reason that investors may want to consider adding dividend-paying stocks to their portfolio.
Before we get into the pros and cons of stocks that pay dividends, let’s clarify what type of investments we’re talking about. There are three types of dividend including: cash, property and one-time. One-time is the rarest type of dividend and normally occur when a company has sold a portion of the business or liquidated assets. Property dividends are shares of physical assets or properties a company owns. Neither of these are the type of dividend stocks we are considering.
We’re examining stocks that pay cash dividends to stockholders. Dividend payments are distributed to shareholders when a corporation generates profits or has a cash surplus. Some companies make regularly scheduled dividend payments. Others provide stockholders with the dividend bonus on a more sporadic basis. The amount of the dividend depends entirely on the financial situation of the corporation.
No matter how often they are distributed, dividends can help improve most investor’s portfolios. There are a number of reasons to consider dividend paying stocks. Stocks that pay dividends can help generate cash flow, which can be used for living expenses or reinvested to increase the overall gains in your portfolio. For example, Acme Widget’s stock price has increase by 7.5% since it was purchased last year. If in addition to the rise in price, Acme distributes a dividend to shareholders equal to 2.5% of the share price – your total return is now 10.0%. If you decide to reinvest the 2.5% dividend, the effect of compounding will accelerate your future returns.
Dividend payments can also help to blunt the impact of a market in which stock values and capital gains aren’t appreciating quickly. Another advantage of dividends is that they have a tax advantage over ordinary income. Dividends allow you to realize returns from your investment, while retaining ownership of the company’s shares (and any future stock price gains).
So if dividends are so great for investors, why doesn’t every single company on the stock exchange distribute them? Paying out dividends does have an impact on the company’s share value. Cash that is used for dividends drains total assets of the organization. Since these funds are no longer available for reinvestment and growth, dividends may impede future share price appreciation.
If you are thinking about buying dividend-paying stocks, keep in mind that the frequency or amounts of past dividend payments are not always indicators or future dividends. Companies can decide to greatly reduce the amount or frequency of dividend payments to shareholders. They can also opt to eliminate dividends completely. It also pays to find out when the company normally pays out the dividend before you purchase shares, so that you know when the yearly cutoff is for qualifying to receive dividends.