Consider these challenges facing investors:
- Interest rates are still low.
- Inflationary pressure is growing by the day.
- Our country is involved in three Middle East wars.
- Budget deficits are everywhere…and growing.
- Housing shows scant signs of improvement.
- Per barrel oil prices recently hit $110.
These challenges and others have contributed to a noticeable increase in market volatility, and that has placed dividend-paying stocks squarely back in the spotlight.
Long valued for defensive characteristics, their combination of steady income and capital appreciation has delivered consistent and strong returns over the longer-term. Here are six reasons to consider dividend-paying stocks:
- Stronger Total Return – Dividend-paying stocks offer potential for share appreciation and cash income. Combined, when dividends are reinvested, total return is significantly greater than price appreciation alone: 9.4% vs. 5.2% since December 31, 1929.
- Indicator of Corporate Health – A company’s ability to pay dividends over time provides some measure of tangible evidence of that company’s overall financial health. In addition, dividends enhance earnings transparency and place a certain level of financial discipline on management.
- Lower Relative Volatility – When equity prices decline, cash dividends help buffer portfolio losses; moreover, stocks with higher dividend yields tend to generate stronger returns…with less risk.
- Higher Returns Independent of Interest Rate Movements – No one really knows what the Fed will do and when! Historically, dividend-paying stocks have outpaced their non-paying brethren, and today, many stocks offer dividends that are significantly greater than interest paid by high-quality bonds.
- Downside Protection During Turbulent Cycles – Just as dividend-paying stocks tend to outperform non-dividend paying stocks in a bull market, the same is generally true during a bear market.
- The Tax Man Cometh – Congress recently extended many of the Bush tax cuts, and that includes a continuation of the favorable dividend tax rate of 15%. This further enhances after-tax returns for certain affluent and other tax-sensitive investors.
In summary, investors are faced with growing market volatility, low interest rates, increasing geopolitical risk, and other threats to economic growth. For some investors, dividend-paying stocks are a good solution.
Talk to your Wealth Manager or Financial Advisor!