Seeking Income? Consider Dividend-Paying Stocks
Posted by Richard on March 12, 2013
As continued uncertainty at home and abroad roils the financial markets, income-minded investors seeking protection from the bumpy road ahead may find that dividend-paying stocks offer an attractive mix of features and warrant a place in their equity portfolios.
The appeal is simple: Dividend-paying stocks can provide investors with tangible returns on a regular basis regardless of market conditions. Note that dividends can be increased, decreased, and/or eliminated at any time without prior notice.
The Potential Benefits of Dividend-Paying Stocks
If you own stock in a company that has announced it will be issuing a dividend, or if you are proactively considering adding an allocation to dividend-paying stocks, history provides compelling evidence of the potential long-term benefits of dividends and their reinvestment.
• A sign of corporate financial health. Dividend payouts are often seen as a sign of a company’s financial health and management’s confidence in future cash flow. Dividends also communicate a positive message to investors who perceive a long-term dividend as a sign of corporate maturity and strength.
• A key driver of total return. There are several factors that may contribute to the superior total return of dividend-paying stocks over the long term. One of them is dividend reinvestment. The longer the period in which dividends are reinvested, the greater the spread between price return and dividend reinvested total return.
• Potentially stronger returns, lower volatility. Dividends may help to mitigate portfolio losses when stock prices decline, and over long time horizons, stocks with a history of increasing their dividend each year have also produced higher returns with considerably less risk than non-dividend-paying stocks. Since 1990, the S&P 500 Dividend Aristocrats — those stocks within the S&P 500 that have increased their dividends each year for at least 25 consecutive years — produced annualized returns of 11.29% vs. 8.55% for the S&P 500 overall, with less volatility (13.91% vs. 15.04%, respectively).1
If you are considering adding dividend-paying stocks to your investment mix, keep the following thoughts in mind.
• Dividend-paying stocks may help diversify an income-generating portfolio. Income-oriented investors may want to diversify potential sources of income within their portfolios. Given current realities present in the bond market, stocks with above-average dividend yields may compare favorably with bonds and may act as a buffer should conditions turn negative within the bond market.
• Dividends benefit from continued favorable tax treatment. The American Taxpayer Relief Act extended the Bush-era tax cuts, which are capped at a maximum of 15% on qualifying dividends for most taxpayers. The rate rises to 20% for those who earn over $450,000.
Please note that past dividends are not a guarantee of future dividends. Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Different parts of the market can react differently to these developments. The value of an individual security or particular type of security can be more volatile than, and can perform differently from, the market as a whole.
The information in this communication is not intended to be tax advice and should not be treated as such. Each individual’s tax situation is different. You should contact your financial or tax professional to discuss your personal situation.
1Source: Standard & Poor’s. Volatility is measured by standard deviation. Past performance is no guarantee of future results. Indexes are unmanaged, statistical composites, and investors cannot invest directly in any index. The returns shown do not reflect payment of any sales charges or fees an investor would pay to purchase the securities they represent. The imposition of these fees and charges would cause the actual performance to be lower than the performance shown.
Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2013 S&P Capital IQ Financial Communications. All rights reserved.