Investors should pay attention to stocks with strong dividend yields. Since the financial crisis of 2008, U.S. Treasurys have been at historic lows. This period of low interest rates has made it difficult to generate income by holding government debt. This has left investors looking to for decent dividends to bring income to their portfolios. Many dividend-paying stocks are in defensive sectors that can weather economic downturns with reduced volatility. Often, dividend-paying companies have substantial amounts of cash; therefore, they are strong companies with good prospects for long-term performance, listing just one of the many benefits of high-dividend yield stocks.
Dividend Yields as Consistent Income
The dividend yield is a financial measure that shows how much per share a company pays out a year in dividends on a percentage basis. The dividend yield is calculated by taking the annual dividend per share divided by the price per share. This gives a percentage as the dividend yield, as most companies pay dividends on a quarterly basis.
Dividends can provide a steady source of income for investors. This passive income can be used to spend or reinvest back into the stock, which is a common practice. Investors who are nearing retirement or are already retired many gravitate toward dividend stocks as a source of income, provided they are not volatile choices. Dividend-paying stocks allow investors to profit in two manners. First, through appreciation in the price of the stock, and secondly, through distributions made by the company.
Many companies have dividend reinvestment plans that allow investors to use dividends to buy more shares in the company. This allows investors to slowly build a larger position in a company over time. Many companies do not charge commissions for these additional share purchases. Some even offer discounts of 1 to 5% off the share price. Companies benefit from such plans by having a base of long-term investors who are involved in the future of the company.
Based in Defensive Sectors
Many companies that pay dividends are in defensive sectors. Defensive sectors are seen as noncyclical and are not as dependent on larger economic cycles. These stocks have a perception of keeping their value during periods of economic instability. They generally have less volatility than the overall market, which can be good for more risk-averse investors. They can pay more than investors might otherwise receive with U.S. Treasurys or other types of bonds. Therefore, they are good additions to portfolios.
Common defensive sectors include food and beverage stocks, utility and housing companies and pharmaceutical and healthcare companies. Even during times of economic uncertainty, people still need to eat food and drink beverages. They also need to keep the lights on with electricity and heat their homes. People get sick and need medical care during all economic periods, and healthcare stocks like Johnson & Johnson (JNJ) are perennial favorites of high-dividend lovers, paying 2.63% annualy.
Many companies that pay dividends are strong performers and able to make distributions to investors since they have a great deal of cash. They are good stocks to include in a portfolio for this reason. Some companies that exemplify this are Proctor & Gamble (PG) and Coca-Cola (KO) which pay 3.94% and 3.5% annual dividends.
Strong companies generally perform better in the long run. A 2015 Forbes article shows dividend-paying stocks have delivered better performance from 1927 to 2014. Dividend-paying stocks averaged 10.4% per year, while nondividend-paying stocks only paid 8.5% per year during this period. Dividend-paying stocks also enjoyed lower volatility. The standard deviation for nondividend-paying stocks was 30% during this time frame, while dividend-paying stocks only had a volatility of 18%.
Risks of Dividends
Despite all these benefits, there are risks in investing in dividend-paying stocks. They are still subject to changing prices in the marketplace. If a company experiences a downturn in performance, there is always a chance it will cut its dividend or issues no dividend at all. Some argue that companies that pay dividends are missing out on opportunities to reinvest in their businesses or seek new opportunities.