Why dividends will continue to be an important part of your portfolio…
Investing in stocks is a good way to grow wealth in the long-run. With interest rates at their current levels, it is generally the best way to achieve long-term goals such as retirement and education. As we’ve written in the past, there are many ways to achieve your goals. For this article specifically, we would like to provide you with why we feel that dividend paying stocks should continue to be a part of your portfolio.
If you’re not familiar with the concept, dividends are payments issued to stockholders as a way to distribute earnings back to the investors. Dividends are typically paid quarterly, though they can be paid at different intervals throughout the year.
Stocks are often classified into two different styles of investing, growth or value. A growth stock is typically expected to grow at an above average rate, but as a result will typically not have as large of a dividend because these companies are reinvesting their earnings back into the company to accelerate growth. A dividend paying stock, on the other hand, is typically classified as a value stock which is a stock that trades at a price below its valuation and typically has a high dividend yield. Over the last 10 years, growth stocks have outperformed dividend paying stocks, but that hasn’t always been the case as evidenced by the graph below.
If you are investing for the long-run and would like to have a diversified approach to investing, here is why we think dividend payers will continue to be an important component of your portfolio even with the recent out-performance by growth stocks:
- Dividends are a good indicator of a company’s strength. The balance sheet and management’s confidence in the company are two factors that determine how investors value the stock.
- Dividends can provide a cushion during stock market declines. Investments that pay income have tended to be more stable, so dividends play a critical role. Even in tough periods like now, there are select companies across various sectors such as Apple, Costco, Procter & Gamble, and United Health that have increased their dividends.
- Throughout the history of investing, there will continue to be investors who seek income producing investments. With low bond yields and interest rates now falling below 1%, it has become difficult to find investments producing income yields higher than dividend paying equities.
As most of you know, not all dividend payers are created equal. There have been periods where certain dividend stocks have suspended or cut those payments to preserve capital. There have been numerous companies that have taken this path recently as well. It is important to be selective in choosing great reputable companies with a history of growing earnings and their dividends.
When choosing which investments are right for your portfolio, it will depend on your individual circumstances and will continue to change throughout your life. If you would like to chat more about the information above or how your portfolio should be constructed to achieve your goals, please reach out to us directly!
Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Dividends are not guaranteed and must be authorized by the company’s board of directors. Opinions expressed in the above article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice.
Securities offered through Raymond James Financial Services, Inc., member FINRA / SIPC Investment advisory services offered through Raymond James Financial Service Advisors, Inc. Confluence Financial Partners is not a registered broker/dealer, and is independent of Raymond James Financial Services.