As uncertainty at home and abroad roils the financial markets, income-minded investors seeking protection from the bumpy road ahead may find 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.
The 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 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 reduce 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. For instance, over the past 10 years, the S&P 500 Dividend Aristocrats -- those stocks within the S&P 500 that have increased their dividends each year for the past 25 years -- produced annualized returns of 10.67% vs. 8.01% for the S&P 500 overall, with less volatility (13.70% vs. 14.76%, respectively).1
The Growth of Dividend-Paying Stocks, 1985-20142
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 extension of the Bush-era tax cuts helps to reinforce the current case for dividend stocks. The tax bill that passed in early 2013 made the 15% top tax rate on qualifying dividends and other forms of investment income permanent for most investors, though it did raise the top rate to 20% for certain high-income investors. However, this is still lower than the 39.6% top rate on ordinary income.
Note that dividends can be increased, decreased, and/or eliminated at any time without prior notice.
1Return and standard deviation cover the 10 year period ended March 31, 2015. Volatility is measured by standard deviation. Past performance is no guarantee of future results.
2Source: ChartSource®, Wealth Management Systems Inc. For the period from January 1, 1985, through December 31, 2014. Stocks are represented by the S&P 500 index. Stock prices are represented by the change in price of the S&P 500 index. It is not possible to invest directly in an index. Past performance is not a guarantee of future results. Copyright © 2015, Wealth Management Systems Inc. All rights reserved. Not responsible for any errors or omissions. (CS000029)
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Stock investing involves risk including loss of principal. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time