There are many benefits to investing in companies that pay dividends, especially if you plan to invest in them for the long-term.In addition to providing consistent income, many dividend-paying stocks are in defensive sectors that can weather economic downturns with reduced volatility. Dividend-paying companies also have substantial amounts of cash, and therefore, are usually strong companies with good prospects for long-term performance.
A dividend is a regular payment distributed from a company's earnings and paid to a class of its shareholders. Although cash dividends are the most common, dividends can also be issued as shares of stock or other property.But not all stocks pay dividends.
Dividend-paying stocks allow investors to profit in two ways. First, through appreciation in the price of the stock, and secondly, through distributions made by the company. Most companies pay dividends on a quarterly basis. Investors who are nearing retirement or are already retired many gravitate toward dividend stocks as a source of income.
Key Takeaways
- Dividend-paying stocks allow investors to profit in two ways: through appreciation in the price of the stock and through distributions made by the company.
- In addition to providing consistent income, many dividend-paying stocks are in defensive sectors that can weather economic downturns with reduced volatility.
- Dividend-paying companies also have substantial amounts of cash, and therefore, are usually strong companies with good prospects for long-term performance.
How to Identify High Dividend-Yielding Stocks
When trying to identify stocks that pay high dividends, investors sometimes use a measure called the dividend yield. The dividend yield is a financial ratio, expressed as a percentage, that shows how much a company pays out in dividends each year relative to its stock price. The dividend yield is calculated by taking the annual dividend per share and dividing it by the price per share.
For example, if a stock trades at $25 and a company's annual dividend is $1.50, thedividend yieldis 6% ($1.50 divided by $25). You can also identify companies with high dividend yields by using a stock screening service.
Dividend Reinvestment Plans
It is common for people to reinvest the passive income from dividends back into the stock. Many companies have dividend reinvestment plans that allow investors to use dividends to buy more shares in the company. This allows investors to build a larger position in a company over time.
Many companies do not charge commissions for these additional share purchases. Some even offer discounts of one to five percent off the share price. Companies may choose to offer dividend reinvestment plans because they benefit from having a base of long-term investors who are involved in the future of the company.
Dividend Stocks Based in Defensive Sectors
Many companies that pay dividends are in defensive sectors. Defensive sectors are considered noncyclical and are therefore not as dependent on larger economic cycles. They are more likely to keep their value during periods of economic instability, and they generally have less volatility than the overall market, making them a good fit for more risk-averse investors. These companies can typically pay more than what investors could earn with U.S. Treasury bills or other types of bonds.
Common defensive sectors include food and beverage stocks, utility and housing companies, and pharmaceutical and healthcare companies. Even during times of economic uncertainty, demand for these goods doesn't typically go down because people still consume food and beverages, heat their homes, and demand medical care. Healthcare stocks like Johnson & Johnson (JNJ) are favorites of investors who are seeking dividends. On Feb. 18, 2022, the dividend yield for Johnson & Johnson was 2.63%.
Companies That Pay Dividends Are Strong Performers
Many companies that pay dividends are strong performers, and they are able to make distributions to investors because they have a great deal of cash. Companies like Proctor & Gamble and Coca-Cola are two examples of strong performing companies that pay dividends. (As of Q1 2022, Proctor & Gamble has a dividend yield of 2.23% and Coca-Cola has a dividend yield of 2.73%).
Dividend-paying stocks have been shown to deliver relatively better performance during the period 1927 to 2014. Dividend-paying stocks averaged 10.4% per year, while non-dividend-paying stocks only returned 8.5% per year during this period. Dividend-paying stocks also enjoyed lower volatility during this time period. The standard deviation for non-dividend-paying stocks was 30% during this time frame, while dividend-paying stocks only had a volatility of 18%.
Risks of Investing in Dividend-Paying Stocks
Despite all these benefits, there are still some risks involved in investing in dividend-paying stocks. They are still subject to changing prices in the marketplace. If a company experiences a downturn in its market performance, there is always a chance it will reduce the amount of its dividend or eliminate its dividend entirely.
Why Do Some Stocks Pay Dividends?
Paying dividends distributes corporate profits to shareholders. Some shareholders seek dividends for income purposes or to reinvest them back into more shares of the company. Consistent and growing dividend payments can be a positive signal that a company is financially stable and strong.
Why Don't Some Companies Pay Dividends?
Newer ventures, tech, and growth companies often prefer to reinvest their profits into expanding the company and seeking new opportunities. As a result, they refrain from paying dividends. But, due to growth expectations, they can instead return capital gains as share prices appreciate. Once a company has matured, it may begin to pay dividends (e.g., AAPL or MSFT).
Which S&P 500 Stocks Pay the Highest Dividends?
As of Q1 2022, the top 5 stocks in the S&P 500 index with the highest dividend yield included:
- AT&T (T) - 9%
- Lumen (LUMN) - 9%
- Altria (MO) - 7%
- Kinder Morgan (KMI) - 6.2%
- ONEOK (OKE) - 5.5%
FAQs
Dividend investing can be a great investment strategy. Dividend stocks have historically outperformed the S&P 500 with less volatility. That's because dividend stocks provide two sources of return: regular income from dividend payments and capital appreciation of the stock price. This total return can add up over time.
What are the advantages of dividend yields? ›
With dividend yield, investors can evaluate the possible profit for every dollar invested, and analyze the potential risks of investing in a company. If you are into trading stocks, and shares, make sure to do it with a trading company with access to many global exchanges.
What is the advantage of stock dividend? ›
Conservation of Cash Resources: One of the primary merits of stock dividends is their ability to allow companies to conserve cash. Companies retain valuable financial resources by distributing additional shares instead of direct cash payouts.
Can you make money with dividend stocks? ›
They can help generate income during retirement or earlier and can also be reinvested to increase your total investment return. Consider owning dividend-paying companies through a low-cost fund or ETF in a tax-advantaged account as part of your long-term investment plan.
How do you benefit from dividends? ›
Five of the primary reasons why dividends matter for investors include the fact they substantially increase stock investing profits, provide an extra metric for fundamental analysis, reduce overall portfolio risk, offer tax advantages, and help to preserve the purchasing power of capital.
What are the pros and cons of dividend stocks? ›
The Pros & Cons Of Dividend Stock Investing
- Pro #1: Insulation From The Stock Market. ...
- Pro #2: Varied Fluctuation. ...
- Pro #3: Dividends Can Provide A Reliable Income Stream. ...
- Con #1: Less Potential For Massive Gains. ...
- Con #2: Disconnect Between Dividends & Business Growth. ...
- Con #3: High Yield Dividend Traps. ...
- Further Reading.
A high dividend yield can be appealing since you're getting more income per dollar invested, but a high yield isn't always a positive thing. It could mean that the company's stock price has been falling or dividend payments have been increasing at a higher rate than the company's earnings.
What are the disadvantages of a high dividend yield? ›
Sometimes high yield can be misleading since it may indicate a falling stock price instead of an increase in dividend payment. This indicates that the company may have financial difficulties, or the financial market may perceive the stock as less valuable.
How do high yield dividend stocks work? ›
The dividend yield tells us how much a company pays out in dividends relative to its share price. The higher the yield, the more you can make. But keep in mind that lower stock performance inflates the yield and that higher payouts may not be sustainable.
How do you take advantage of dividends? ›
Basically, an investor or trader purchases shares of the stock before the ex-dividend date and sells the shares on the ex-dividend date or any time thereafter. If the share price does fall after the dividend announcement, the investor may wait until the price bounces back to its original value.
In conclusion, paying dividends can have both advantages and disadvantages for a company. While it can attract investors, foster shareholder loyalty, and provide a steady income stream, it also comes with an opportunity cost and market expectations.
What is a 100% stock dividend? ›
Simply put, 100% stock dividend is 1:1 or 1 for 1 bonus share, as explained above, if you held 100 shares after 1:1 bonus you would have 200 shares (100 original, another 100 as bonus). The impact on the stock price is that the price becomes 1/2 the price of the stock before bonus (supply has doubled).
How much dividend stock do I need to make $1000 a month? ›
In a market that generates a 2% annual yield, you would need to invest $600,000 up front in order to reliably generate $12,000 per year (or $1,000 per month) in dividend payments.
How much money do I need to generate $2000 a month? ›
Earning $2,000 in monthly passive income sounds unbelievable but is achievable through dividend investing. However, the investment amount required to produce the desired income is considerable. To make $2,000 in dividend income, the investment amount and rate of return must be $400,000 and 6%, respectively.
How to make $1000 a month passive income? ›
Passive Income: 7 Ways To Make an Extra $1,000 a Month
- Buy US Treasuries. U.S. Treasuries are still paying attractive yields on short-term investments. ...
- Rent Out Your Yard. ...
- Rent Out Your Car. ...
- Rental Real Estate. ...
- Publish an E-Book. ...
- Become an Affiliate. ...
- Sell an Online Course. ...
- Bottom Line.
High-dividend stocks can offer investors income that rises over time. BKE and ABR are some of the top dividend stocks by yield right now. A high dividend yield isn't always a good thing — some are unsustainable, and others are just the result of a low stock price.
Is high dividend payout good? ›
A high dividend yield can be appealing since you're getting more income per dollar invested, but a high yield isn't always a positive thing. It could mean that the company's stock price has been falling or dividend payments have been increasing at a higher rate than the company's earnings.
Why dividend stocks are better than growth? ›
Dividend stock is more closely related to companies with steady cash flows, and there is no major capital expenditure. Growth stocks have a possibility of growth as the companies' future projections and significant capital expenditure will give them a return over a longer period.
Do dividends increase the value of a stock? ›
Stock Dividends
After the declaration of a stock dividend, the stock's price often increases; however, because a stock dividend increases the number of shares outstanding while the value of the company remains stable, it dilutes the book value per common share, and the stock price is reduced accordingly.
