With renewed concerns about slowing economic growth, more of our clients want to discuss how dividend-paying stocks can play a role in their portfolio.
What’s the attraction?
Investing in stocks that pay dividends can generate a nice income stream. That’s especially attractive when you stop working and need to take monthly income from your portfolio.
Not all stocks pay dividends, of course, or are good investment candidates.
But many researchers say selected dividend-paying stocks often tend to have more stable earnings and strong histories of profits and growth, not to mention a commitment to returning wealth to shareholders.
A substantial part of investor returns come from dividends.
Since 1960, dividends have contributed 33% of the S&P’s total return, according to investment research firm Morningstar.
Nowadays, it couldn’t be easier to build a low-cost, diversified portfolio of high-quality dividend-paying stocks. There are a number of mutual funds and exchange traded funds that focus on exactly that segment of the market, screening multiple companies to select those that meet your specific income, quality and growth requirements, all at minimal cost. By investing in one simple fund, you can now own an entire basket of dividend-paying companies.
Here’s an even better reason to focus on high-quality dividend stocks. Companies that grow their dividend over time tend to outperform those that skip or cut the dividend, or leave it unchanged, all at a lower level of risk, according to Ned Davis Research.
What does that mean? When building a dividend portfolio, don’t reach for the stocks with the highest dividend. It could mean there is something wrong with the financial fundamentals or the growth prospects of the company. Instead, pick the companies that grow their dividends the most over time. Those are the companies that will tend to put more money in your pocket over the longer haul.