Why You Should Invest in Dividend-Paying Stocks
They offer some stability and income for today's volatile and low-rate environment.
In today's environment, investors searching for higher yields in the market may also encounter a greater deal of volatility. Like many investments, low-risk bonds often bring low returns, and this dilemma will only increase as interest rates continue to rise.
With so much uncertainty out there, one option is to turn to well-established stocks that, over time, have traditionally paid dividends to their shareholders. Granted, these usually aren't the up-and-coming investment opportunities television personalities talk about on financial and business networks. But even if they don't generate a lot of buzz, established dividend-paying stocks have an appeal for several reasons.
There's no guarantee a stock will perform as well as it did in the past, but mainstays that have kept a steady presence in the market for decades may be less susceptible to volatility than fast-rising stocks associated with a startup.
Investors choosing the dividend-paying stock route can also choose to back companies that are based in the United States, but do business in several other nations, giving them global exposure. For example, people drink Coca-Cola (symbol KO) in America of course—but they also drink it around the globe in Albania, Algeria, Angola, Antigua, Argentina, Armenia, Australia, Austria and scores of other nations. Investors take note. Companies with a worldwide presence aren't as severely impacted when a single nation enters a recession or faces a more severe economic downturn.
Even when the market is down as a whole, investors are typically less likely to sell dividend-paying stocks because, in the long run, they are more likely to bounce back and continue generating income. With so many investors holding on to big-name stocks, such as Coca-Cola or McDonald's (MCD), the total return of that holding is boosted as well.
Since so many investors count on receiving dividends from these types of stocks, the companies that offer them are, more often than not, pretty conservative when it comes to how they conduct their operations. Because they pay dividends to expectant shareholders, these companies may be more diligent with their investments, business decisions, asset management and the creation and marketing of their various products.
Established companies are far more likely to offer dividend-paying stocks. They don't have to consistently re-invest their profits into their company the way non-established companies do. This makes traditional dividend-paying stocks appealing for investors of all ages, especially for those nearing retirement age. Even younger investors, who may take on more explosive, high-paying stocks because they have more time to recover from losses, could benefit by investing in established companies.
Established, dividend-paying stocks can often lead to tax benefits as well. Investors with a dividend-stock strategy may find that nonqualified brokerage accounts can be more tax effective than qualified accounts. Investors will still pay taxes on the dividends, of course, but nonqualified accounts are taxed at a more favorable capital gains rate.
Dividend-paying stocks remain an excellent and reliable investment opportunity that consistently offer yield. They're a stable option for investors in an increasingly volatile market and usually prove to be strong long-term investments. Incorporating these stocks should be part of most investors' wealth management plans.
Tony Zabiegala helped found Strategic Wealth Partners and serves as vice president. He is an Investment Adviser Representative and licensed insurance professional. He lives in North Royalton, Ohio, with his wife, Melissa.
Kevin Derby contributed to this article.
About the Author
Founder and Vice President, Strategic Wealth Partners
Tony Zabiegala helped found Strategic Wealth Partners and serves as vice president. He is an Investment Adviser Representative and licensed insurance professional. He believes in providing clients with the highest level of proactive wealth management guidance possible. Zabiegala spends most of his days developing innovative long-term financial strategies, one client at a time. He holds a B.S. in Civil Engineering from Cleveland State University.