Investors have always had a love-hate relationship with stocks that pay dividends. In bull markets, dividend paying stocks are often viewed as extinct dinosaurs; worthy of attention only by older retirees and individuals living on a fixed income. In bear markets, however, stocks that pay dividends are generally viewed as being a safe place to park available funds until the market begins to rebound. With that being said, here are five reasons why every investor should include stocks that pay dividends in their investment portfolios.
Stocks that Pay Dividends
1. Decreased Level of Risk – In general, dividend stocks are better equipped to handle a downturn in the overall market when compared to non-dividend paying stocks. Savvy investors know that the simple mechanics of declaring a dividend helps to erect a pricing floor for the stock’s price.
2. Decreased Level of Maintenance – Many investors consider dividends as merely a bonus derived from owning a stock. Dividend investors, however, know that over the past 30 years, more than 30% of the stock market’s overall return can be directly attributed to dividends. Investors that own these types of investments do not have to worry about the day-to-day fluctuation in the market value of their stock. They can rest easy knowing that each and every quarter they will receive a dividend which effectively reduces their overall cost basis.
3. Passive Income Opportunity – Investing in dividend paying stocks is a tremendous way to build a healthy stream of passive income. As the overall risk of ownership is low, and the level of required maintenance is marginal at best, it is easy to set up a reoccurring stream of income. Savvy investors will often elect to reinvest any dividends they receive in order to further increase their passive income.
4. Potential Stock Appreciation – While it is certainly true that investors recognize the potential of receiving regular dividend payments, many overlook the fact that the stock’s price can also appreciate significantly. Increases in the value of a company’ stock can often exceed the total sum of dividend payments received.
5. Inflation Adjusted Earnings – If the decreased level of risk and maintenance, or the potential for future stock price appreciation were not enough to convince you of the benefits of adding dividend paying stocks to your portfolio, there is one final reason why dividends will almost always outperform fixed income investments; they rise with inflation. Unlike bonds, which generate consistent income based upon their stated coupon rate, a company’s board of directors will generally increase its dividend payments to at least match the rate of inflation during a set period of time.
Despite the fact that today’s investor has more choices than ever before, stocks that pay dividends will always be a crucial element of any portfolio’s overall performance.