6 Reasons to Buy Dividend-Paying Stocks
About 90 percent of the long-term returns of the S&P 500 can be linked to dividends
Market risk is weighing on the minds of many investors these days. And who could blame them, given the market's twists and turns over the past few years?
While stocks are always going to be riskier than bonds, it's possible to invest more conservatively in the stock market by buying dividend-paying stocks, which can provide a cushion for investors during tough times.
Here are six reasons to consider adding dividend-paying stocks to your portfolio.
These stocks pay a cash return (usually quarterly) regardless of whether their share price is up or down. "Dividends can
rise and fall with economic conditions," says
Instead of trying to time the market by moving in and out of stocks, Peters says, investors should focus on buying solid dividend-payers and holding onto them over a long period of time. "You make one trade and hopefully that's a stock that you don't ever have to sell -- or if you do sell it, it's going to be years down the road. And in the meantime you've been collecting a fair amount of dividend income," he says. Not all dividend-paying stock are sure bets, but Peters argues that investors are much better off investing in dividend payers than stocks that offer little yield.
Dividend payers tend to be solid companies
If a company is able to pay a dividend on a consistent basis, it has a good amount of cash on hand. Strong cash flows are often a sign of a mature company that's stable and competitive in its industry. Such companies also tend to carry less debt. "You just really wind up with a better class of company when you're looking at a dividend-paying stock, especially if it's a higher yielding stock," Peters says.
Some stocks are yielding more than bonds
It's rare, but it happens. In a sign of the times, some companies have recently begun to issue new 10-year bonds with lower yields than their current stock dividend. Peters points to a recent offering by
The market's long-term returns come mostly from dividends
Daniel Peris, manager of
Federated Strategic Value Dividend (SVAAX) says dividends account for about 90 percent of
High yielding stocks are often misunderstood
Sometimes investors shun high yielding stocks because they're concerned that the company won't be able to continue to finance the dividend. High yielding stocks are similar to high-yield bonds, which are considered riskier than investment-grade debt because the chances that the issuer could potentially default on its debt are higher. Peris admits that there are times when a high yielding stock is actually under distress, but there are other times when that stock may be mispriced by the markets. High yielding stocks are often undervalued, Peris says, which leaves investors with an attractive buying opportunity.
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