Have you thought about investing in dividend-paying stocks? As the name suggests, these are stocks that pay out a certain percentage of the company’s earnings as a dividend periodically (usually quarterly) to the investor. Recently, dividend-paying stocks have received a good press in publications such as The Wall Street Journal. Have you considered why dividend-paying stocks might be good for you?
Here are three possible reasons for thinking about dividend paying stocks:
1. You can reinvest the dividend payments in the same stock. Chances are you originally bought the stock because you believed in the fundamental strength and stability of the company. As long as you continue to believe in the strength of the particular firm, if you reinvest your dividend income in the company and continue to buy more shares of the same stock, you will increase your position in a company that you believe is strong. If you choose carefully, your investments might turn out like those of Grace Groner, a secretary at Abbott Labs. Her $180 investment in 1935 eventually grew to $7 million (which eventually went to fund a foundation to benefit students of Lake Forest College.)
2. Dividend-paying stocks have the potential to maintain a certain amount of stability when the market gets rough. Stocks that pay dividends are generally considered safer in a down market because they still keep a certain level of value and generate income in the form of a regularly paying dividend. Even if the stock value drops, unless the board of directors vote to eliminate the dividend, you can still anticipate receiving a periodic check.
3. The need to pay out dividends to shareholders can keep a company’s management in check. If the board of directors knows shareholders expect a dividend on a regular basis, they may be more likely to avoid embarking on risky projects that could end up fundamentally destabilizing the company. Since stockholders will only continue holding onto their shares if they believe in the fundamental stability of the company, both the board of directors and shareholders have a common interest in furthering the company’s profits.
If reading the above has convinced you that to buy dividend-paying stocks for your portfolio, wait a minute before you call me (or your broker). First, read my next post, to learn about potential problems with dividend-paying stocks. As always, don’t invest in anything until you get proper advice from a licensed financial advisor.Doug Goldstein, CFP®