Should you invest in dividend-paying stocks?
Stocks are one of the most popular investments, but many investors forget to consider the benefits that come with owning a stock that pays dividends. See what they are below.
by Aline Barbosa
In a volatile market, they can be a very profitable source of passive income.
When it comes to stock trading, one of the most well known strategies for success comes in the form of a commonly used phrase: “buy low, sell high”. However, there is another way people can make money in the stock market, and it’s through dividend. But what exactly are dividends? In short, they offer a way for big companies to pay their investors a share of their profits. For shareholders, it means that each share of stock they own in a company entitles them to receive those dividends.
Most companies pay out dividends in cash or additional company stock. The payments are regularly scheduled in a monthly, quarterly or annually fashion. Because of that, investors can think of dividend stocks as an alternative to earn passive income.
Daniel Milan, a managing partner of Cornerstone Financial Services believes that investors with growing dividends from premium quality companies can make a noteworthy impact on their portfolios. He says that Einstein was right when he said that compound interest was the eighth wonder of the world. That is because reinvested dividends provide growth, and a much bigger profit than just market returns.
Because of today’s market conditions, dividend-paying stocks are becoming more and more part of the conversation. Why? Simply because not only do they provide a steady income, but they also protect the investor money against rising inflation. If you consider just how bad inflation is across America currently, having a few dividend-paying stocks in your portfolio can benefit you in the long run.
How can dividend-paying stocks hinder inflation?
Big companies with a history of consistently paying dividends each year to their shareholders have a large advantage that many don’t in an inflationary environment. They can usually weather and benefit from increasing prices.
Clark Kendall, the president and CEO at Kendall Capital says that the best part for stock investors is that as products and service prices increase due to inflation, so does a company’s revenue, earnings and dividends. Therefore, they’ll receive more profit. Kendall goes on to mention a few companies that provide dividends, like Kellogg, IBM, Johnson & Johnson and Procter & Gamble.
According to him, they are great when it comes to protecting investors’ purchasing power whenever the prices of goods and services rise. He then adds that as interest rates go up, it’s important to focus on the valuations of the companies you have a stake in. And, most importantly, to have a stake in good companies.
Milan is a little more specific than Kendall. The managing partner recommends building a portfolio of stocks that have a strong cash flow. That means stocks that yield between 3% to 4%, or even more. They also need to consistently grow dividends between 5% and 10% annually. According to Milan, these are the kinds of companies you should focus on.
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Dividends benefit with inflation
Mike Schenk, deputy chief advocacy officer and chief economist at the Credit Union Association agrees with Kendall and Milan. He believes that there are many companies in the market with high-dividend stocks that have adopted business models that seem to hold up well every time there’s a rise in prices. And that will eventually fuel their profits.
Schenk says that no matter the state of the economy, consumers still have to drive to work, eat and heat their homes, even when prices are on the rise. That means that companies in the natural resources segment, energy sector and in the food and consumer staples segment will generally benefit from inflation. That is because strong pricing power and cost management allows them to raise prices while maintaining demand. Automatically, that will boost their profits.
Mike Schenk’s observations are not unfounded. Historically, dividend payments account for roughly more than 40% of stock market returns. That said, during high inflationary times, investors can benefit hugely from having a diversified portfolio that includes dividend-paying stocks.
An important reminder for investors
Schenk believes that the average investor should absolutely invest in stocks that present dividend growth. However, he reiterates that any investment decision must be made with caution. That is because during periods of rising inflation, rebalancing a portfolio and responding to events that are currently happening can be very expensive. Since inflation pressures have been increasing for a while, many high-dividend stocks are already at a value that reflect that exact development.
He says that the best advice he can give is to research, build a diversified portfolio and avoid timing the market in order to shop around. Nowadays it is possible to purchase stocks and easily build a portfolio using stock trading platforms. He suggests a few popular ones in the market like Ally Invest, Vanguard, TD Ameritrade, Fidelity and E*TRADE. For investors who are after a simple interface, an investing app like Robinhood is also a solid choice.
It’s also important to note that when it comes to profiting from dividends, slow and steady wins the race. Milan believes that the two key factors for success are discipline and patience. Even though they are not as exciting or in ample supply for many investors, they are very important to keep in mind. Looking back at dividend growing stocks, they offer less volatility and have outperformed high-yield stocks in the past.
So, should you invest in dividend-paying stocks?
Considering the current market conditions and the rising inflation, dividend-paying stocks can add a great deal to your portfolio. However, it’s always important to consult with a professional to help you understand how these investments can benefit you the most.
Work with a financial advisor to make a more conscious decision and where to look for opportunities to invest. Usually they can assist you with things you might miss otherwise. But if you want to speed things along, we can help. By following the link below, you’ll find an easy step-by-step guide of how to open a Robinhood Investing account.
How to apply for Robinhood Investing
This step-by-step guide will take you by the hand as you open your Robinhood account to get your Robinhood card.
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