stocks paying dividends

Why Do Some Investors Prefer Dividend Stocks?


by

4 June,2013

Since the stock market crash of 2008, many investors have turned to dividend stocks.

Dividend investing has become more popular as investors look for ways to continue earning income even during down markets. And, even though the market has recovered and surpassed its former level, many investors are looking for other ways to earn a higher yield in a low-yield environment that punishes savers.

What are Dividend Stocks?

Sometimes, companies make regular payments to their shareholders. These payments are part of the profit a company makes. As a reward for holding shares, the company pays out a portion of its profits to shareholders.

For the most part, dividends on common stock are discretionary. Companies announce, ahead of time, when they will pay a dividend, and how much they will pay per share. Everyone who holds a stock on a certain date will be paid according to how many shares they hold. If you hold 100 shares of a company, and the dividend payment is $0.50 per share, then you will get $50 when the dividend is paid.

Since dividends are discretionary, companies can decide when to raise the payout, and decide to cut what they pay — or even eliminate the dividend altogether. Companies can decide to pay a one-time dividend, or pay dividends irregularly, or they can decide to pay regular dividends on a schedule (usually quarterly, but sometimes monthly or semi-annually). There are some companies, known as dividend aristocrats, that increase their payouts every year. If the company has increased its payout each year for 25 years, it is a dividend aristocrat.

Why Investors Like Dividend Stocks

Investors like dividend stocks because it provides a source of income in addition to capital appreciation. If you invest in dividend aristocrats, you have a good chance of receiving your payout even during times when the stock price drops. During the recent downturn, dividend aristocrats kept raising their payouts.

This provides you with a measure of stability (as long as you trust the company to keep paying a dividend) even in tough times. On top of that, when you add your income from dividends to the capital appreciation of the stock, your returns are more likely to beat the current savings rates. You can see a lot better potential return when you include dividends in the equation.

Plus, some investors like to reinvest their dividends. When you do this, the money that you receive in payouts is automatically used to buy more of the stock. This increases the number of shares you own without you needing to invest even more money. As a result of your increased shares, you will earn more in dividends at the next payout. It’s a cycle that repeats itself and can help you improve your ability to build wealth over time.

It’s possible to get dividend stocks at most online brokers. In some cases, you can even reinvest the dividends without paying a transaction fee. You can also find dividend index funds that can help you put dollar cost averaging to work for you in a more efficient manner.

As with all investments, you need to be careful about how you choose dividend stocks, and you need to be prepared for the possibility of loss.