by Jana Swenson
The most visible and most understandable way to judge a stock’s performance is by the rate of growth of its share price. It’s easy to focus only on capital gains, but one often-overlooked aspect of investing is dividends. For investors looking to combine the potential for market growth with income, dividend investing is an attractive strategy to consider.
Dividends are one indicator of a company’s health. By issuing a dividend, a company is exhibiting its healthy cash flow and signaling that it believes its growth is sustainable.
Dividend-issuing stocks typically offer less volatility than do growth stocks, because the dividends they pay are based on the company’s profitability, not market perceptions. In a bear market, this can be especially attractive, as dividend-paying companies may continue to provide a return while other growth-oriented stocks are declining. Dividends also help encourage stability in ownership and lower turnover, as investors are more likely to hold onto the stock during difficult times in order to receive the dividend.
In dividend investing, look for stocks that have a track record of consistently increasing their dividends. These are usually strong, stable companies that have self-imposed discipline to continue to perform well and earn a profit year in and year out. Dividends offer a means of keeping a company’s management in check, helping encourage sound, responsible decision-making. Most companies that issue dividends are very reluctant to either decrease or eliminate their dividends, as that sends a negative message to the investing public which could possibly result in a sell-off of the stock.
Maintaining and increasing dividend payments requires consistent earnings growth. Looking at a company’s earnings growth over time can help you determine if it will consistently offer dividends in the future. However, it should be noted that changes in market conditions or a company’s financial condition may impact the company’s ability to continue to pay dividends, and companies may also choose to discontinue dividend payments.
Dividend investing may be an especially good strategy for baby boomers to adopt as they near retirement. Finding and investing in stocks that not only offer a solid dividend, but also increase their dividend payments can help provide retirement income without having to sell off assets. And in order to outpace the rate of inflation, it generally makes sense for retirees to include some equities among their holdings.
For more information on dividend investing, please contact your financial advisor today.
Jana Swenson is a Vice President/Investments with Stifel, Nicolaus & Company, Incorporated, Member SIPC and New York Stock Exchange. She is based in the Murrieta office, located at 25220 Hancock Avenue, and can be reached by calling (951) 461-7220.