The Power of Dividends

Dividends Dividends may not seem exciting, but they can be beneficial as they are paid from real earnings and in real dollars. Considered one of the most boring investment approaches among many in the financial world, investing in dividend-paying stocks can potentially offer investors an opportunity to grow their assets, if they choose the right companies in which to invest.

According to a report by Broadridge Investor Communication Solutions, a leading provider of investor communications to the financial world, “Since 2003, when the top federal income tax rate on qualified dividends was reduced from a maximum of 38.6%, dividends have acquired renewed respect. Favorable tax treatment isn’t the only reason, either; the ability of dividends to provide income and potentially help mitigate market volatility is also attractive to investors. As baby boomers approach retirement and begin to focus on income-producing investments, the long-term demand for high-quality, reliable dividends is likely to increase.”

Why consider dividends? Dividend income is said to represent roughly one-third of the total return on the Standard & Poor’s 500 since 1926. According to S&P, the portion of total return attributable to dividends has ranged from a high of 53% during the 1940s to a low of 14% during the 1990s, when investors tended to focus on growth.

Dividends can potentially add a meaningful impact to the overall return of a portfolio. As such, investors should consider dividends as the starting point of an equity allocation for an overall portfolio. “Dividends also possibly help to cut down on the volatility of a stock. While all stocks have the ability to lose their value, companies with long histories of paying dividends – or even better, increasing dividends – could tend to be companies doing well and generating profits and substantial cash flow, and they are returning that money to shareholders,” said Aaron Katsman, author of Retirement GPS: How to Navigate your Way to a Secure Financial Future with Global Investing.

Several dividend-paying stocks represent large, established companies; investors traditionally look at dividends as a sign of a company’s health and overall governance. As an investor, you need to ask yourself what you consider a great company, how long is enough time to invest and how do you measure good value?

Financial and utility companies have been traditional mainstays for investors interested in dividends, but according to Broadridge, other sectors of the market also have begun to offer them. “For example, investors have been stepping up pressure on cash-rich technology companies to distribute at least some of their profits as dividends rather than reinvesting all of that money to fuel growth. Some investors believe that pressure to maintain or increase dividends imposes a certain fiscal discipline on companies that might otherwise be tempted to use the cash to make ill-considered acquisitions (though there are certainly no guarantees that a company won’t do so anyway). However, according to S&P, corporations are beginning to favor stock buybacks rather than dividend increases as a way to reward shareholders. If it continues, that trend could make ever-increasing dividends more elusive,” said Broadridge.

For an investor to grow his or her portfolio means investing across the board. Investing in dividend-paying stock has its benefits and can help in the overall building of wealth. Speak with your independent financial advisor to learn how to incorporate dividend-paying stocks in your portfolio.

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