With non-dividend yielding stocks, you have to sole depend on capital appreciation of the stock price to get ahead. Admittedly, you could latch onto a great stock and ride it up to the moon, but more than likely, this will not be the case.
So today, I’m going to talk about the advantages of stocks that do yield a dividend. Perhaps a good example would be McDonalds (MCD), it has a decent yield (3.3%) and a chance for stock price appreciation to boot.
In Volatile Markets
When there is scandal or a major concern in the country (or world), stock prices get pummeled. This can create stress and even temporarily depress investors. Currently, there is instability in Egypt that has caused the stock market to decline by 166 points this past Friday. While I’m very concerned about this, having dividend yielding stock takes some of the edge off of the stress about the stock market.
Why, you might ask?
Because for the most part, dividends that stocks pay out aren’t determined by current events. Temporary drops in the stock market do not affect the dividend payout by the companies that elect to pay a dividend. Mainly profits and executive decisions are what determine what the company will pay out as a dividend (at least at the better companies). Some companies (like REITs) are required to pay out around 90% of their profits for the year to be classified as a REIT (Real Estate Investment Trusts).
Since most dividends are paid out quarterly, current news is immaterial and may have resolved by the time that the dividend payout amount is determined.
Another positive value is that fact that the dividend payouts reduce the downward action of the dividend yielding, stocks price. People are less apt to give up the juicy dividend, so the decline of the price of the stock moves slowly. The reason for the slow downward movement of the stock price is because if there is a drop in the stock price, the dividend yield become more appealing because the payout percentage will be higher. This naturally motivates people to jump in and grab hold of that great percentage yield before the stock price starts to go up again!
Caveat!
Just because a stock pays a dividend, doesn’t mean that they are still viable! Do the proper research to make sure that the dividend paying stock is a solid investment (don’t by any typewriter stocks!).
As an alternative to purchasing individual dividend paying stocks, Nicole at “Grumpy Rumblings of the Untenured” suggests and go out and buy a mutual fund that is oriented towards paying out a dividend or actually only purchases dividend paying stocks (watch out for high fees though). This way you reap the rewards while a professional manages your dividend portfolio.
-MR
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Disclosure, I do own a very small position in McDonalds stock.
I love my dividend funds for all the reasons you cited, but of course we have discussed this in comments before so you knew this already. I love that you did this write up though!
Thanks,
It’s pretty obvious and generally know, but I needed some confirmation that buying dividend stocks was a great move. I’m sure most people realize these reasons, but I still thought I would throw it out there are as reminder to readers 🙂
Index fund! Not just any mutual fund! Some ETFs will also spit out dividends. I don’t buy high fee mutual funds. I have the indexes and ETFs set to drip. But they can be undripped if necessary.
Thanks for linking to us! I do love my dividends. Especially the ones from the single stock that I will probably never give up, even if it goes bankrupt again.
I prefer ETFs… I kept it simple…
If you’d like, throw me the ones that you prefer and I’d do an update at the bottom of this post.
I wish I would have focused more on dividends earlier in my investing life. I am having fun building a portfolio though. Now if I just had more money to invest with…
More money would be nice!!!
I’ve had dividend stocks since I was a wee lad, but they were boring to me back then… but not now!!!
I try to balance it out between no dividend stocks and dividend stocks…
“Dividends that stocks pay out aren’t determined by current events.” That’s why I love my dividends! 🙂
However, I happen to love my typewriter, and I love printed books. Therefore, I am going to bury my head in the sand, and pretend I didn’t read your comment (and its implications) about typewriter stocks. 😛
hee hee, actually if you clicked the link on typewriters, it goes to one company that is still surviving!
Both my wife and I like printed books best too!
Dividends rule (at least today) 🙂
Dividend stocks and mutual funds should be a part of your portfolio, but all of it. Asset allocation is still important!
The more the merrier 🙂
I actually have both too…
There was a time when paying dividends was the norm!
But then that changed when companies started believing they can better manage the cash than giving it out to the shareholders.
I wish Apple would share some of the cash it is sitting on!
I agree, the shareholders should share in the companies successes!
Hello!
Well, we paid off our debt (except for our mortgage) last year, and our emergency fund is just about fully funded (by the end of this month), so this article is timely for me as I want to start investing with our extra savings.
Hi Amanda!
Dividends have a lot of advantages that are worth looking into…
You’ve got my convinced. I’m going to make a special account just for dividend funds just to see what it does. I plan on having some cash by March, so I’ve got some time yet.
Good deal 🙂
I like to save up enough money, then transfer a decent size chuck of money into the fund or stock at one time.
Hi MR, good writeup on the positives of holding divided stocks in a down market — as long as they keep those div rates steady.
I used to have more REITs than I do now, but I’m looking at a couple now. I used to hold CBL, but got irritated and sold after they slashed their payout when the stock price tanked in 2009.
Getting paid while you wait for the market to turn greatly reduces the stress of being invested in a down market.
I look forward to the day where my dividends provide my monthly income tax free! On the other hand to get there, I will have to come out with a lot of capital 🙂