With non-dividend yielding stocks, you have to sole depend on capital appreciation of the stock price to get ahead. Admittedly, you could latch onto a great stock and ride it up to the moon, but more than likely, this will not be the case.
So today, I’m going to talk about the advantages of stocks that do yield a dividend. Perhaps a good example would be McDonalds (MCD), it has a decent yield (3.3%) and a chance for stock price appreciation to boot.
In Volatile Markets
When there is scandal or a major concern in the country (or world), stock prices get pummeled. This can create stress and even temporarily depress investors. Currently, there is instability in Egypt that has caused the stock market to decline by 166 points this past Friday. While I’m very concerned about this, having dividend yielding stock takes some of the edge off of the stress about the stock market.
Why, you might ask?
Because for the most part, dividends that stocks pay out aren’t determined by current events. Temporary drops in the stock market do not affect the dividend payout by the companies that elect to pay a dividend. Mainly profits and executive decisions are what determine what the company will pay out as a dividend (at least at the better companies). Some companies (like REITs) are required to pay out around 90% of their profits for the year to be classified as a REIT (Real Estate Investment Trusts).
Since most dividends are paid out quarterly, current news is immaterial and may have resolved by the time that the dividend payout amount is determined.
Another positive value is that fact that the dividend payouts reduce the downward action of the dividend yielding, stocks price. People are less apt to give up the juicy dividend, so the decline of the price of the stock moves slowly. The reason for the slow downward movement of the stock price is because if there is a drop in the stock price, the dividend yield become more appealing because the payout percentage will be higher. This naturally motivates people to jump in and grab hold of that great percentage yield before the stock price starts to go up again!
Caveat!
Just because a stock pays a dividend, doesn’t mean that they are still viable! Do the proper research to make sure that the dividend paying stock is a solid investment (don’t by any typewriter stocks!).
As an alternative to purchasing individual dividend paying stocks, Nicole at “Grumpy Rumblings of the Untenured” suggests and go out and buy a mutual fund that is oriented towards paying out a dividend or actually only purchases dividend paying stocks (watch out for high fees though). This way you reap the rewards while a professional manages your dividend portfolio.
-MR
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Disclosure, I do own a very small position in McDonalds stock.