One of the best things about investing in dividend paying stocks is you get to collect a healthy, and hopefully growing, dividend while you wait patiently for the stock to rise in value over the long-term.
Many investors consider it like having their cake and eating it too.
Not all dividend stocks are great investments, of course. But many can provide a steady and growing income stream, making them more attractive than bonds to some growth-oriented investors. According to one source, a whopping 78% of the total return of the S&P 500 Index from 1970 to present can be attributed to reinvested dividends and the power of compounding.
What’s happening to dividends in 2020?
“Dividend stocks have long been a foundation for steady income to live on and a reliable pathway to accumulating wealth for retirement,” wrote Lawrence C. Strauss in a recent Barron’s. “Even in times of market stress, companies could be counted on to do everything possible to maintain their payouts.”
While the financial outlook is clearly uncertain given the coronavirus pandemic, one encouraging fact is that many companies in the S&P 500 index have been steadfast in paying dividends in 2020, even under intense financial pressures.
J.P. Morgan analyzed how companies have increased, decreased, or suspended their dividend so far in 2020. The results, shown in the accompanying graph, underline how in most sectors, dividends have remained on the upswing.
In particular, the relatively healthy tech and health care sectors have for the most part escaped dividend cuts. Stocks in those sectors are important dividend-payers in the S&P 500 index, together accounting for over 30% of S&P dividends.
Growing dividends: the icing on the cake
Over time, stocks have provided returns to investors in two ways. One way investors make money is if the price of the stock increases over time. That’s called capital appreciation. Investors also earn a return on their investment as they receive quarterly dividend payments, assuming they invest in a stock that does pay dividends (not all do).
The icing on the cake is having those dividend payments grow over time. Dividends on the 500 stocks in the S&P index have grown on average about 5% per year, surpassing inflation, and benefiting investors by showering them with an ever growing income stream.
That’s why many investors prefer to put their money into high-quality companies that have consistently grown their dividends. That’s easy to do nowadays, as specialized Exchange Traded Funds (ETFs), mutual funds, and other investment vehicles focus on selected companies that have raised their dividends year-after-year, sometimes for over two decades or more, through good times and bad.
That doesn’t guarantee, of course, that they will continue to do so in the future, but it does show the commitment these companies make to maintaining a solid balance sheet and building shareholder wealth through steady and disciplined dividend payments. And they may provide some peace of mind to investors looking for a time-tested investment strategy to capture growth and income for year to come.