Your Guide To Dividend-Paying Stocks

Dividends can offer an investor the “best of both worlds!”  An investor can earn both capital appreciation (gains) and, also, dividend income on their stocks! 

What Are Dividends?

Dividends are a cash payment to shareholders.  They are a company’s distribution of profits as a reward for being a stockholder.  Dividend-paying stocks provide an investor with a steady stream of “passive” income which makes them an excellent source of income for retirement. Normally, a company that pays dividends is financially healthy and making money!  Many dividend-paying companies are strong established companies with management having high expectations for the company’s future earnings.  

And, today, dividend-paying stocks can pay you more money than the interest you are receiving in your bank accounts!  Why earn 1% interest on your money, in a savings account at a bank, when you could earn 3%, 4%, or even 6% with a dividend paying growth stock? In addition to the dividend, you also want to pay attention to the growth potential of the stock.  Aim for also earning capital appreciation on your dividend paying stocks! “A win-win situation for the investor!”

When a company pays its’ shareholders dividends they are reducing their retained earnings and cash.  Retained earnings are on the company’s balance sheet and should, preferably, be positive.  Companies have the choice of paying their shareholders dividends or they can choose to retain the monies in order to grow their businesses. 

When Are Dividends Paid?

Dividends are paid quarterly. These dates are important to remember with dividends:  the declaration date, record date, ex-dividend date, and the payment date. 

The declaration date is when the directors of the company announce the dividend.  The record date is when the investor must own the shares in order to be eligible for the dividends. The ex-dividend date is when you are no longer entitled to receive the dividends and the payment date is self-explanatory.

It is important when seeking dividend-paying stocks, to find a company that has a consistent history of raising their dividends. The famous portfolio manager, Peter Lynch, states:  “The dividend is such an important factor in the success of many stocks that you could hardly go wrong by making an entire portfolio of companies that have raised their dividends for 10 or 20 years in a row.”  

Dividend increases are a good sign that a company’s earnings are growing and that management has confidence in the company’s future!   A large number of companies will raise their dividends every year. 

What Is The Dividend Aristocrats List?

For a list of companies that have raised their dividends for 25 plus years check out “Dividends Aristocrats.”   This list is composed of selected company’s stocks listed on the S&P 500 Index.  These companies are normally large. stable and established, companies. 

Be sure to look at the appropriate year’s list in which you are investing.  For example, in 2019 there were 57 companies listed on the Dividend Aristocrats list.  However, in 2020 there were 66 companies on this list. The number and types of companies listed can change annually. 

Companies Can Lower Or Eliminate Their Dividends

Keep in mind, though, that companies can lower, or eliminate, their dividends altogether!  For example, financial hardships can force companies to cut or totally eliminate their dividends. Investors do not like to see their dividends decreased or cut-out!  Because of this, many mature dividend-paying companies think twice before ceasing their dividend payments. 

Companies know that lowering, or eliminating, their dividends would disappoint their investors.  Doing this would, also, negatively affect the company’s stock price going forward! 

What Are Some Good Dividend Paying Companies?

Several examples of good dividend-paying companies are Microsoft, Exxon Mobil, Apple, JPMorgan Chase, and AT & T.  These companies pay out billions of dividends per year to shareholders. For example, AT&T (stock symbol T), as of this writing, has a current high-dividend yield of 6.28.

REIT’S (Real Estate Investment Trusts) are also good dividend-paying companies.  REIT’S allow you to own a “liquid” stake in real estate.  These companies are required by law to pay out “high” dividends. REIT’s operate on the stock exchanges just like common stocks. 

 There are two types of REIT’S: Equity and Mortgage REIT’S.  “Mortgage” REIT’S tend to pay out higher dividends. Some exposure to REIT’S also helps the investor in keeping their portfolios diversified.  

Many utility companies, also, pay good dividends and many increase their dividends annually.  These companies are good for investors that seek current income. However, many utility companies do not increase their dividends rapidly over a longer-term horizon. 

Should Your Reinvest Your Dividends? 

In order to grow your stock investments, you should strive to reinvest your dividends. Dividends can be reinvested back into more shares of stock.  The dividend reinvestment plan (DRIP) helps you to grow your wealth.  I strongly recommend not receiving your dividend income in cash.  Have your brokerage firm automatically reinvest it back into your company’s stocks.

A dividend reinvestment plan allows you to purchase additional (or, fractional shares) in your companies.  Reinvesting your dividends gives you the advantage of compound interest over time and serves to increase the number of shares you own.  

Beware Of High Dividend Paying Companies

Some companies will pay high dividends in order to entice you to purchase their stock.  They do this when their earnings may not be “up to par”, and, without this dividend, the investor ordinarily would not purchase their stock.  Hence, it is always important to study the company’s fundamentals (statistics) before investing in its stock.  Make sure you also see some growth potential in the dividend-paying company!

Be careful, however, with these high-dividend-paying companies!  For example, a dividend yield above 10% could signify a company that is in trouble.  So, proceed with caution with these companies! If the dividend is too high, the company could also discontinue this high payout in the future.

In conclusion, owning dividend-paying companies is definitely an advantage for the long-term investor.  Long-term, rising dividends will increase your portfolio’s total returns and are a great way to earn passive income! However, the investor should make sure the company is a quality company, preferably with decent growth, and, also, with a long and consistent history of paying out dividends. 

An investor also should seek a company that raises their dividends!  It is also to their advantage to reinvest their dividends for “additional” shares of stock instead of receiving the dividends in cash.  The more you reinvest your dividends…the more your share ownership grows!

I love dividends and the steady income associated with them and enjoy watching mine grow each year!  I aim for stocks that pay “above-average” dividend yields (the dividend yield is the annual cash dividend per share divided by the current price of the company’s stock).  In addition, the company I invest in must have decent growth potential and good management.  I  make sure the company has a long history of dividend payments.  I also reinvest my dividends for additional shares of stock.